According to a recent AFR article, “Productivity growth has slumped to a 60-year low over the past decade, and productivity has gone backwards during the pandemic to 2019 levels” (https://www.afr.com/policy/economy/how-to-stop-the-productivity-timebomb-making-us-poorer-20230607-p5dele). The impacts of low productivity are not desirable and include a drop in real income and living standards, together with sustained high inflation. The solution is to increase productivity, which is easier said than done.
“In economics, productivity refers to how much output can be produced with a given set of inputs. Productivity increases when more output is produced with the same amount of inputs or when the same amount of output is produced with fewer inputs” (https://www.rba.gov.au/education/resources/explainers/pdf/productivity.pdf?v=2 ). Whilst labour productivity (LP) attracts the most attention when considering productivity, multifactor productivity (MFP) expands one’s perspective of the productivity challenge as it measures the output produced per unit of combined inputs of labour and capital. It is in this expanded perspective that it is useful to consider the impact of commercial leasing arrangements on productivity, for leasing arrangements directly impact accommodation cost and capital inputs, and these arrangements directly impact tenant enterprise and productivity.
From our perspective as an advocate for office, retail and industrial tenants, we are persuaded that commercial leasing norms have undergone very little change in recent decades and that long-standing lease norms are outdated and contribute to Australia’s low productivity. These lease norms underpin predictable passive income, such that the REITs have provided investors with natural protection against inflation, with rents and values tending to increase in line with inflation. This has supported REIT dividend growth with a reliable income stream, even during inflationary periods. Furthermore, historic lease norms have restricted tenant recovery from economic shocks as occupancy costs and tenant obligations remain unchanged in such circumstances, notwithstanding the need for flexible leasing arrangements that support tenant enterprise in good times and bad.
What we refer to as outdated commercial leasing norms are long-standing arrangements that ensure the supply side achieves predictable passive income and a favourable return for investors, together with a level of risk transfer to the tenant that mitigates landlord loss in the event that the tenant enterprise does not achieve its objectives. As business cycles continue to shorten, and as commercial tenants face diverse economic headwinds, the need for tenants to constantly adapt to meet new challenges is increasing. This ongoing adaptation requires constant review and repositioning of every aspect of an organisation’s inputs and outputs, including the structure of leasing arrangements.
As business comes before space, so today’s economic uncertainties, together with an increasingly dynamic business environment, call for more flexible tenancy arrangements that better support tenant enterprise and that facilitate productivity in changing circumstances.
About LPC & the LPC subscription service
LPC provides office, retail, and industrial occupiers with advice and services that benefit their accommodation arrangements and respective businesses. With no ties to investment property owners or leasing agents, we only represent occupiers, and our advice is free from any conflict of interest that would disadvantage an occupier. Our purpose is to help commercial occupiers optimise their accommodation and tenancy arrangements. You will find the LPC subscription service helpful when identifying key terms for renegotiation and getting to the lease you deserve.
