Finding a new gear?

Weak economic growth forecasts for the UK mean that occupiers retain a focus on cost control. Many occupiers are using the conservative economic environment as an opportunity to re-gear leases rather than move to new accommodation.

Indeed, there is much evidence of re-gearing activity in the markets recently. In regional office markets examples include;

• The Spectrum Building in Glasgow, where lease renewals have been agreed on over 40,000 sq ft in advance of extensive refurbishments.
• In Southampton Skandia have re-geared for 15 years term certain.
• At One Kingsway, in Cardiff there are a series of lease restructures under way – where occupiers have or are exploring extending lease terms in return for incentives.

While in London;

• Schroders, who did have an active 250,000 sq ft requirement, have decided to stay and re-gear at their HQ in Gresham street.
• Oracle have just re-geared on 60,000 sq ft at the Helicon
• PRA are currently re-gearing with IVG on 150,000 sq ft as part of the deal with JP Morgan on 20 Moorgate.

As well as long term re-gearing, we are also seeing a trend for restructuring for shorter renewal periods i.e. three/ five years. With lead-in times for big pre-let deals of up to five years, a short term re-gear can provide temporary relief to imminent lease expiries. Schroders are a recent case in-point, They have withdrawn from their longer term relocation requirement and extended their current lease with flexibility post 2018. Other examples include PwC, CMS Cameron McKenna, CPS, LCH Clearnet.

Longer term re-gears can also offer major opportunities for occupiers and landlords. But it is important to note that these deals have to work financially for both parties as some occupiers think that every landlord is distressed – which isn’t the case.  Landlords generally need to see a capital enhancement and are usually prepared to share this with the tenant.

Upside benefits for occupiers include:

• negotiating break clauses and extending lease terms to gain rental holidays or capital payments,
• altering lease language to build in flexibility to sub-let or assign,
• contributions towards refurbishment works,
• caps on service charge,
• removal or the reinstatement of dilapidations liabilities.
• Avoidance of cap ex and moving upheaval

As our Offices 2020 research programme has outlined (landlords will need to form stronger partnerships with occupiers and this will raise the opportunities for more favourable lease extensions, re-gears and in-situ refurbishment to drive workplace change and enhance in-use sustainability credentials. This presents upside to Landlords too, via an opportunity to upgrade secondary assets in the absence of a sustained development pipeline.

However these re-gears are also storing up obsolescence as they can delay refurbishment and new specifications being added

There is no doubt that re-gearing will remain central to occupier behaviour over the next few years as corporate occupiers remain intently focused upon spotting cost saving opportunities.  Furthermore, with around 16.8 million sq ft of known lease events over 2013 and 2014 it is inevitable that such a tactic will be in even greater evidence.