Lease lengths: has the tide turned?

Since 2000 Nelson Bakewell and IPD Occupiers have charted trends in lease lengths in industrial property.

At the time of publishing the last analysis (2004) the UK letting market was at a crossroads.

On one hand, the demand/supply balance was beginning to swing in the landlord’s favour; on the other the Government was considering legislation to coerce landlords into granting shorter leases.

The Government didn’t legislate, but what has happened to lease lengths in the interim?

Downward trend decelerates

Over the survey period (1999-2005) average lease lengths have reduced by 5%.

The previous survey (2003) identified an overall reduction of 17% from 1999, which means that the strong downward trend in historic lease lengths in the early 2000s has been reversed in recent years with the overall average increasing by 15% since 2003.

This reversal can be explained.

Reduced impact of 25-year leases

Historic lease profiles during 1999 – 2003 were dominated by legacy 25-year leases granted during the 1980s.

The sample would have been strongly influenced by older leases getting shorter by effluxion of time.

These late 1980s leases now have less than 10 years to run and in future we can expect to witness more volatility as the impact of the 25-year lease wanes.

Hi-tech and financial services continue trend

On a sector-by-sector basis, the picture varies considerably.

Four sectors (Hi-Tech, Construction, Financial Services and Manufacturing) show a consistent and continued reduction in lease lengths over the period with overall reductions of 20-30%.

In contrast, the other sectors (including Business Services, Retail and Telecoms) all show a sharp reversal of the trend in 2003, although no sector yet has historic lease lengths longer than they did in 1999.

Flexibility maintained

Overall the average length of new leases has consistently declined from 11.1 years to 8.6 years – a reduction of 22%.

The long-term trend of falling new lease lengths stalled in 2005.

The overall reduction during this period was negligible and five sectors actually witnessed an increase in average new lease lengths.

Nevertheless, occupiers are continuing to secure increasingly flexible terms with a diminishing number of tenants signing leases for longer than 10 years.

Impact of increased demand?

Nelson Bakewell’s 2006 Occupier Survey identifies that 42% of companies currently have expansion plans.

With over 70% of corporate occupiers now reporting vacancy rates below 10% the demand for new space is likely to increase.

As lease lengths begin to rise again and demand for property increases, the question is whether supply will determine lease length or other issues will override market forces.

Business influence strong

In conclusion, improving business confidence, a growing economy and falling supply of property has halted, and in some sectors reversed, the trend towards shorter new leases.

The length of historic leases has increased to 11.8 years since 2003 (10.3) and is now considerably longer than the business planning cycle of most occupiers.

The trend in new lease lengths over the past five years has demonstrated that the market is not the only determining factor - business needs have also had a significant impact.