Average commercial lease lengths in the UK dropped to 27.4 months in June, an 18-month low, according to CREDIA, the Commercial Real Estate index by Re-Leased. CREDIA is a new monthly index that draws on aggregated data from over 20,000 leases in the UK.
The index tracks the 3-month rolling average of new leases signed, excluding coworking and flexible space leases. It reveals the coronavirus pandemic has escalated the trend for shorter leases and the pressure on long-term security of income for landlords.
In May, the average fell below 30 months for the first time since the start of 2019, and continued downwards into June, which saw an 18-month low compared to a high of 48 months in January last year.
|Month/year||Av. lease length (months)|
Tom Wallace, Re-Leased’s CEO, said “Before coronavirus there was already a tenant driven shift towards greater flexibility. Average lease lengths had been steadily declining for a number of years. 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 3-months to February 2020 to June 2020, 10 months has come off the average term. That’s a pronounced drop over a 3-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 latest CREDIA Index also reveals there is a high potential vacancy risk in the UK. Currently, 37.7% of tenancies are on a periodic lease, with an absence of an agreed expiry. From a legal standpoint, these tenants can vacate as they like.
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 who have the higher ability to end a lease on short notice, and not larger corporate occupiers.”
The CREDIA Index is a real-time tool and has been launched to provide greater transparency and insight into the health of the commercial real estate market. The index focuses on occupier performance, leasing trends and national averages to uncover market conditions across asset classes. It combines more than 15 metrics and an industry-wide view of how commercial leases are performing over time, including the impact of COVID-19, enabling commercial landlords, property managers and investors to easily benchmark their own portfolio’s key performance indicators against the wider market.