Commercial property sector expects more flexible lease terms in future

Almost half of survey respondents indicate an expectation of terms becoming more tenant-friendly

Rising interest rates have made the cost of borrowing and servicing property-related debt more expensive for landlords and commercial property owners. Photograph: David Dear/Getty

The Republic’s commercial real estate sector expects lease terms to become more flexible for both tenants in the future as the industry recalibrates to new post-pandemic realities.

A survey of some 250 commercial property professionals, conducted by business law firm Mason Hayes and Curran in late February, also indicates that the sector considers current rent review processes to be fair but ultimately wants better access to market data to level the playing field.

The Republic’s commercial property sector, particularly the office market, has come under pressure in the aftermath of the pandemic due to several interrelated factors. Hybrid working arrangements have eaten into demand for office take-up while many large employers — most notably in the global tech sector, which accounts for a significant proportion of office demand in Dublin — have reduced their headcount in response to shifting market dynamics.

Meanwhile, rising interest rates have made the cost of borrowing and servicing property-related debt more expensive for landlords and commercial property owners.

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Headline rents are yet to decline substantially but close to half of survey respondents said they expect commercial leases to become more flexible for tenants and landlords soon.

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However, a sizeable 46 per cent of respondents said they expect lease terms to become more tenant-friendly.

“Since Ireland legislated to end ‘upwards-only’ rent reviews in commercial leases in 2009, the rent review process has become more complex,” said Michael Doran, partner and co-head of real estate at Mason Hayes and Curran. “All parties must now agree an ‘open market rent’ that could be higher, lower or remain the same as the original amount. There are a number of factors that can affect rental value, from the strength of the market at the date of review to the assumed lease term.”

While an overwhelming 81 per cent of real estate professionals said the current rent review processes are fair, almost half said they would like better access to market data, reflecting a “move towards a more informed and data-driven negotiation process”, said Mr Doran.

Meanwhile, 61 per cent of professionals said their main goal when entering rent review negotiations was to achieve market-aligned rates while just 20 per cent said they are chiefly concerned with securing long-term occupancy.

Ian Curran

Ian Curran

Ian Curran is a Business reporter with The Irish Times