THE RACE FOR SPACE

22 CUSHMAN & WAKEFIELD 23 RACE FOR SPACE LANDLORD SURVEY ANALYSIS LANDLORD INTERVIEW ANALYSIS “WE NEED TO APPEAL TO THE BROADEST GROUP OF TENANTS. THE BUILDING NEEDS TO BE FLEXIBLE FOR THE FUTURE IN EVERY SENSE.” A Central London Landlord “OCCUPIERS CAN’T PREDICTWHERE THEIRBUSINESSWILL BE IN 3 YEARS’ TIME, LET ALONE 10 OR 15. SOWHEN IT COMES TO THEMMAKINGA COMMITMENT, THEY WILLWANT SOME FORMOF FLEXIBILITY.” A Central London Landlord Source: Cushman & Wakefield As can be seen from the landlord responses we collected in figure 17, there are clearly diverging perceptions of the pre- let market, leading to different strategies from the landlords we interviewed. Whilst most respondents agreed that pre-letting has increased as a trend in recent years, not all landlords we spoke to were making specific changes to their portfolios in order to attract pre-let tenants. Landlords were also split on whether pre-letting had an impact on building design, although several explained that they felt their buildings didn’t need any significant changes in order to accommodate greater volumes of pre- letting deals. Despite the continued appetite for space from flexible workplace providers, over 40% of respondents said that they would not consider pre-letting to a flexible provider. Whilst some of these responses were linked to the negative perception of some operators’ business models, many landlords we spoke to are now operating their own flexible platform, which means they don’t need to lease space to a third party. As more landlords continue to explore ways they can facilitate the provision of flexible space within their portfolio, we could see a scenario where third-party operators are excluded entirely from the pre-let market. That said, some landlords may seek to partner with a provider rather than set up their own product. Either way, we anticipate that most pre-let schemes will contain a significant flexible element going forward. The majority of the landlords we interviewed said that they had not needed to increase the incentives they offered prospective tenants in order to attract them to commit to a pre-let. Many of the respondents explained that in most situations there was competition for space, meaning that there was no need to offer a more generous package. Also, some of the pre-let schemes we discussed were in non-core locations, meaning that the relative cost-savings in comparison to more established locations alleviated the need for discounted rents or increased rent-free packages. The respondents were unanimous in their plans to acquire or develop more space over the next 3-5 years and were adjusting their strategies in order to attract as wide a profile of tenants as possible. All stated that this commitment was happening despite the ongoing uncertainty surround Brexit. As part of the interview, we asked the respondents to rank their selection criteria for pre-let tenants in terms of importance (see figure 18). This was in a hypothetical situation where there were multiple prospective tenants looking at the same space. The main finding was that a strong covenant is still important for landlords, although interestingly it was only marginally more important than the tenant already being within the portfolio. This was something that our interviewees felt very strongly about, and that they would accommodate an existing tenant wherever possible. Less important relative to the other two criteria were tenant brand and their potential for growth. Whilst most of our respondents placed some importance on both these factors, they explained that they felt that they would have less of an impact on their decision in a pre- letting scenario. Looking to the future, now that we are seeing a higher number of smaller pre-lets with shorter leases, particularly whilst schemes are under construction, we might see landlords place a greater emphasis a tenant’s potential to grow. This could become fundamental to creating a vibrant occupier ecosystem, especially in emerging locations. Have you noticed an increase in pre-letting in recent years? Have you noticed an increased need to incentivise occupiers to commit to pre-lets? Would/have you pre-let to a flexible workplace provider? Are you making changes to your portfolio to attract pre-let tenants? Does pre-letting impact building design? Do you plan to acquire/develop more space in the next 3-5 years for pre-let delivery? 86% 14% Brand 17 % Potential for growth 16 % Tenant already in portfolio 33 % Covenant strength 34 % Source: Cushman & Wakefield Figure 18 Pre-let tenant selection priorities Figure 17 “FOROCCUPIERS IT’S ACHALLENGE BECAUSE THERE’S NOT AHUGE AMOUNT OF OPTIONSOUT THERE. IT IS A VERY DIFFERENT SCENARIO TO THEGFC.” A Central London Landlord 71% 29% 86% 14% 57% 43% 57% 43% 100% No Yes