Mandy Hale is credited with saying, "Growth is painful. Change is painful, but nothing is as painful as staying stuck somewhere you don't belong". It is most unlikely that Mandy Hale had commercial tenants in mind for her stated passion is not leasing matters but rather to empower women to find fulfilment and purpose in their lives, a far cry from brick-and-mortar commitments. Nonetheless, her observation is fitting for commercial tenants where a lease commitment can literally result in a tenant getting stuck where they don’t belong.
What does ‘stuck where you don’t belong’ look like for a commercial tenant?
Most commercial tenants need brick-and-mortar accommodation, although this need is changing in nature and declining in scale in our current digital age. The reality is that many commercial tenants enter leasing arrangements that they regret when reality forces an acknowledgement that there is a mismatch between the location, premises, and terms one commits to and the location, premises, and commercial terms that best support one’s business during the lease term. Getting it wrong in any, or all, of these three critical landing points (location, premises, terms) moves the tenant in the direction of being stuck where they don’t belong. Let's take a closer look.
In relation to location, what was initially supportive of the business will often change during the lease term due to internal changes in strategy or external changes relating to infrastructure, labour pools, customer demographics, and shifts in economic activity. Concerning the premises, the landlord's commitment to keeping the asset refreshed and current will impact suitability, as will the building's efficiency and layout. The commercial terms are hugely impactful as inflexible provisions will restrict expansion or contraction requirements and burden the tenant with escalations and rental obligations that are not aligned with the changing utility value required by the tenant.
Why is your accommodation strategy more important today than it was in the past
In years gone by business models were relatively constant with predictable brick-and-mortar requirements. This is not the case today. The digital age continues to accelerate change in business models as companies adapt to the impacts of technology advances on customers and employees. As internet applications and AI are increasingly embedded in the way we think and shop and work, so business cycles are getting shorter and shorter, needing ongoing strategy updates to stay in the game. These strategic changes directly impact a business’ brick-and-mortar requirements, thereby increasing business risk when a commercial tenant commits to a long-term lease with inflexible provisions that limit the business response to change.
This is the context that needs a step-change in the attention that management give to accommodation strategy, and this applies to all commercial tenants including office, retail, and industrial tenants. A location can quite easily become less (or more) desirable over the lease term for many reasons including the impact of WFH, infrastructure changes, shifts in labour pools, changes to shopping habits, the impact of strategic reviews, and a great many other factors. This also applies to the leased premises as the actual building may become more suited or less suited to the business purpose over the lease term. This suitability will be affected by many factors including building efficiency, building appeal, changes in business strategy, and the ability to adapt internal use to changing requirements. Even more impactful is the negotiated landing point for the commercial terms. The long-standing commercial leasing norm is long lease terms with inflexible provisions that protect risk-free income for the landlord and that restrict tenant adaptation to change in business strategy. With the tenant’s growing need to regularly update business strategy, which inevitably changes brick-and-mortar requirements, these long-standing lease norms increase the tenant’s business risk. This is evident in the growing number of business insolvencies where inflexible lease arrangements are a significant contributor to a business failing the going concern test.
Mitigating the risk of being stuck where you don’t belong
The question is how best to mitigate the risk of getting stuck where you don’t belong.
An important mitigating activity is for management to ensure that the business’ accommodation strategy is updated annually, having regard to a review of business requirements and business risks and, how these may impact accommodation strategy, and having regard to the commercial real estate outlook and the external trends which influence accommodation requirements. This update helps early identification of risks inherent in existing accommodation commitments, whilst also informing future accommodation requirements and what location(s), premises characteristics and commercial terms would best support the business into the future. It is significant to note that the pandemic did not initiate WFH or online shopping, but that the factors driving these activities were well-established prior to the pandemic. Technology advances, increasing commuter times, lifestyle focus, the impact of commuting on productivity, the need to reduce carbon emissions, and related trends were all in place before the pandemic and those businesses that continually revised their accommodation strategy were well placed to navigate the pandemic.
Who is LPC and how we help to futureproof your accommodation arrangements?
LPC is a conflict-free advisor to commercial tenants across Australia and New Zealand. We facilitate strategic review of accommodation strategy, represent occupiers to secure best-fit accommodation arrangements, provide a lease management service to multi-site occupiers, and oversee fit-out and relocation for clients. Contact us to help with your accommodation strategy review.
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