Short Leases: Big (And Risky) Opportunities

For decades, leasing a new office was a leap of faith: you could test-drive a car, but not test out a 20,000-square-foot office. Leases typically ran 5 to 10 years, trending longer for bigger spaces.

But yet another mainstay of the business world is now being disrupted. The length of UK office leases has been nearly halved since the pandemic, plummeting to an average of just 2.8 years, and creating a new dilemma for firms. The shorter leases give companies a chance to make a change if they need more or less space quickly—but they can disrupt corporate culture and lead to high rents. “Companies are definitely trying to keep their options open,” says Ben Sturnham, UK sector leader for real estate at Korn Ferry, “but I don’t think their strategy is yet fully defined.”

Pre-pandemic, grade A office rentals were considered an excellent business, even with long lease times. “All the blue-chip companies wanted to be in grade A offices in major European gateways,” says Sturnham. Now, firms see long leases as risk exposure for a variety of reasons. For one thing, return-to-office plans are still works in progress, so the real-estate needs of many firms are uncertain. Plus, keeping up with business needs and competitors is always a challenging endeavor.

At the same time, experts caution that for many firms, short leases are not necessarily ideal. A year’s tenancy can fly by, causing disruption to companies’ efforts to foster corporate culture and identity. Depending on the fine print, the landlord can potentially raise rent significantly in subsequent years, and rental rates for grade A real estate remain high. “It’s still a competitive space,” says real-estate expert James Keen, a senior client partner at Korn Ferry.

Experts say the only answer for now is for firms to make a new analysis of long-term versus short-term outlooks. Employee morale must be weighed carefully, since moving offices after a year or two can upset workers. If budget is a cardinal concern, short leases may be the most optimal; even if those lease costs rise over time, “they’re always easier to justify on a short-term basis,” says Keen.

The shake-up in leases comes as offices themselves have become much more dynamic—more social and more ESG-centric, with often inclusive amenities like family spaces, fitness rooms, and low-stimulation areas with dimmer lighting and reduced noise. So far, the business world has smiled on companies that offer flexible office arrangements. “They’re the flavor of the month,” says Sturnham.

Learn more about Korn Ferry’s Real Estate consulting capabilities. 

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