Corporate tenants now have a strong hand in rent negotiations as commercial landlords struggle to fill space in a difficult market

Months before the credit crunch raised the cost of borrowing, the commercial property market was already seeing capital values fall as the result of a natural market correction.

Now the rising cost of borrowing, a surplus of available space in some areas and a slowing UK economy have added to these difficulties and the value of commercial property has plummeted.

It’s bad news for existing investors and landlords but good news for corporate tenants, who now have more space to choose from and consequently hold a strong hand in rental negotiations.

Falling demand

A recent survey by the Royal Institution of Chartered Surveyors (RICS) revealed that, during the first quarter of 2008, demand for commercial space fell at the fastest pace for more than six years and to the lowest level in eight years.

The study found that available space rose in the office sector for the first time in four and a half years, while available retail and office space rose at the fastest pace on record.

It’s not the case everywhere: the first three major shopping centres to open in 2008 – Victoria Square, Belfast; Eden, High Wycombe; and Grand Arcade, Cambridge – all achieved more than 80% occupancy in the first quarter. However, there will be a big test later in the year for the remaining 10 major shopping centres that are still to open.

A RICS spokesman says: “Surveyors now expect rents to fall in both the office and industrial sectors. In the retail market, declines in rents are expected to double in the coming quarter.”

Mat Oakley, Head of Research at commercial property agents Savills, says: “Capital values have fallen by between 10% and 15% in the past 12 months, and that is simply because the market was overpriced. It’s completely unrelated to the credit crunch.

“I think we are now through the worst of it and we expect premium capital values to stabilise towards the back end of this year. From a corporate occupier’s point of view, they want to know if their rent bill is going to go up or down and whether there is going to be property for them to occupy.

“Given that the UK economy is slowing, it will probably be a more tenant-friendly market over the next couple of years. Landlords are accepting the fact that tenants are going to be scarce. They will need to work harder to retain them.”

Green buildings

With this in mind and the environmental performance of commercial buildings growing in importance, now could also be a good time to negotiate rents on greener premises.

“Every corporate wants to be green and they want their buildings to be green as well. The question is, will they have to pay more for green buildings?” says Oakley

Already in the office sector and increasingly in retail, companies want their premises assessed as good or excellent under BREEAM (Building Research Establishment Environmental Assessment Method). The impact of this next great issue for the commercial property sector remains to be seen.

Conditions have rarely been better for corporate tenants to negotiate a better contract, so whether it’s a lower cost or greater environmental performance that is needed, now could well be the time to strike a deal.

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