Lease lengths drop to 18-month low

Average commercial lease lengths in the UK have fallen to 27.4 months in June, reflecting an 18-month low. This compares with an equivalent of 45.2 months in June last year, according to a new monthly commercial real estate index by Re-Leased. The index tracks the three-month rolling average of new leases signed, excluding co-working and flexible space leases.  In May, the average fell below 30 months for the first time since the start of 2019, to 29.4 months. Re-Leased said the coronavirus pandemic has escalated the trend for shorter leases, and the pressure on long-term security of income for landlords.  At the start of 2019, the average lease length was 48 months. This shrank to 39.5 by December. Tom Wallace, chief executive of Re-Leased, said: “The pandemic has accelerated this trend and, in a very short space of time, average lease lengths have been driven to sub 30-month averages.  “If you compare the rolling three months to February 2020 [and] to June 2020, 10 months has come off the average term. That’s a pronounced drop over a three-month period, but I expect it will see some recovery.  “Our data for July already shows the average term picking up to 29.9 months, likely reflecting renewed confidence from occupiers following the relaxing of lockdown measures in June.” The index also showed a high vacancy risk in the UK. Currently, 37.7% of tenancies are on a periodic lease, with an absence of an agreed expiry. Caleb Dunn, commercial analyst, said: “This presents a risk to landlords due to the uncertainty of future occupancy and cash flow. A rolling lease with no fixed expiry can be common, but in the current climate it exposes the landlord to scenarios where tenants can easily walk away from their premises.  “Consequently, the threat of higher vacancy rates in the short term is heightened. While this may seem alarming, it is significant to point out that that the potential vacancy risk rate only accounts for 8.3% of rent rolls, and suggests that it is smaller, independent tenants that have the higher ability to end a lease on short notice, and not larger corporate occupiers.” To send feedback, e-mail pui-guan.man@egi.co.uk or tweet @PuiGuanM or @estatesgazette Photo © Photofusion/Shutterstock