Office landlords risk closure despite rent hikes

05 July 2024 Consultancy.uk 3 min. read
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A chorus of tiny violins is playing for commercial landlords across the country, with the news one-third are struggling with rising debt repayments. A new study from infinitSpace also found more than one-in-seven believe their buildings are at risk of closing by 2029, amid affordability concerns.

From early in the first lockdown in 2020, commercial landlords were banned from exercising most of the usual remedies available to them to enforce rent arrears that fell due during the period of the pandemic, as a measure to protect tenant businesses. The banned remedies included forfeiture of leases due to rent arrears (although not on other grounds); commercial rent arrears recovery using bailiffs, unless the arrears were sufficiently large to have included a period pre-Covid-19; and statutory demands and winding up petitions against tenants based on rent arrears (but for corporate tenants only).

With those plans having since become ancient history, with the UK forging ahead with its policy of ‘living with Covid’, landlords have looked to push home their advantage once more. According to one study from BNP Paribas, this saw office rentals in Britain’s biggest cities expand at their fastest annual rate in more than two decades – even amid the working-from-home revolution, and a dearth of high-quality office space. With companies having seen there is actually an alternative to office working, and many facilities in not-so-great condition, landlords are charging exponentially more for less.

Many office landlords are struggling with inflation and higher lending costs

This is occurring at a time when huge cost-spikes have made business less profitable across the economy, and reduced the consumer spending power many office tenants depend upon for their success. So, it might be hard to find someone who would be sympathetic to the news that many UK office landlords are having troubles of their own. But according to a new, independent survey of 250 UK office landlords commissioned by workspace provider infinitSpace, that is precisely what is happening.

Wybo Wijnbergen, CEO of infinitSpace, explained, "Office landlords are facing a worrying array of financial challenges. The high cost of borrowing has put immense pressure on the industry, only compounded by high inflation, which has made operational costs difficult to manage. So, it’s no surprise that many feel uncertainty about the current state of affairs for their portfolios.”

Illustrating the extent of those issues in the sector, infinitSpace found that 48% of landlords – almost half – were finding high inflation was making their properties’ operational costs harder to manage. Meanwhile, a quarter said their office buildings were not currently generating a profit – contributing to 31% struggling to meet rising debt payments in the UK’s higher-interest economy.

Clearly many landlords currently feel they can simply pass the buck to their tenants, by hiking rents when the time comes to renew contracts. At the same time, they seem to still be confident that new tenants will simply have no choice but to accept their terms. Illustrating this, 50% said that they were still confident of their financial performance in the next five years – and a majority of 61% thought occupancy rates would increase over that same period.

However, not all landlords were so sure. With shifts away from the office space still lingering after the lockdown period, 20% were “unsure” if they could pay off the debt secured on their commercial properties in the future. And 14% therefore added their buildings were at risk of closing in the coming five years, due to affordability concerns. The jury is out on how sympathetic the public will be, should that day come.