Colliers Market Report Denmark 2023

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Office - Colliers Market Report 2023

Lautrupsgade 13-15, Copenhagen Ø

Are long lease agreements up for retirement? Flexibility is another item ranking high on today’s tenant agendas in connection with lease negotiations. Firstly, the coronacrisis, secondly, the war in Ukraine, have proved that the economic conditions for running a business can change dramatically, and lightning fast. Although location remains the most important parameter when businesses are searching for new premises, flexible lease terms have become almost equally important. Historically, tenants have typically committed to a 5-10 year non-terminability period when entering into new lease agreements. However, businesses are increas ingly looking to adjust space consumption to changes in demand. In times of uncertainty in particular, swift adapt ability is key. We therefore see an increasing number of contracts completely void of tenant non-terminability, and this trend is expected to become more widespread. Landlords that understand how to adjust their business plans accordingly, accommodating tenants’ requirements, will enjoy a market advantage in the years ahead. As a result, landlords have started to make other contractual amendments to maintain the same risk profile even with out the tenant committing to a non-terminability period. Such amendments include the introduction of a mov ing-out penalty or a claim for repayment of the fitting-up costs paid by the landlord, should the tenant vacate the lease premises within a specific period. Another model, albeit so far only seen on few occasions, has the tenant pay a higher rent as a premium to the landlord in return for flexibility (no non-terminability period). The higher rent or premium is phased out over some years. The model ensures that the landlord profits in terms of higher rent

– and it incentivises the tenant to stay, all the while lease costs are gradually reduced, and the tenant retains the desired flexibility. Due to the call for increased flexibility, office hotels and multiuser offices are well-poised to gain market share as they cater to the needs of many businesses by offering a range of services as well as flexible lease agreements, with the added option of swift up- or down-scaling, should the tenant’s area requirements change. The office market has for some time witnessed mounting demand from busi nesses with flexibility requirements, and traditional office hotels like Ordnung and Regus have seen the emergence of multiple new competing concepts, including The Union by PFA andWoods by NREP, developed exactly with a focus on accommodating the new market trends. More market players are considering similar initiatives, and competition will intensify in the segment in the years ahead. For landlords with major portfolios, however, the absence of contractual commitment may seem less risky than for landlords that have fewer office lease units, and the demand for lease agreements with long commitment peri ods will continue to exist, mainly for large domicile prop erties fitted up according to the tenant’s requirements. However, the trend is that it is becoming increasingly rare for tenants to enter into lease agreements with long non-terminability periods. The standard letting strategy of the past, that is, waiting for the right domicile tenant to come along, has therefore been laid to rest by many land lords, who today increasingly consider it an added bonus if they manage to let an office property to a domicile tenant on a long-term lease agreement.