Flight to Value
Flight to quality has been the most commonly used term in the commercial real estate industry for quite some time. Flight to quality is about tenants upgrading office premises; moving to better quality buildings, from A to Premium, B to A and so on. To make this upgrade possible, landlords have been offering quality incentives. That is the supply side.
The demand side is different. Changed utilisation rates and occupancy levels mean tenants are now leasing less space than they used to. It’s a cost thing. The continued low net absorption numbers highlight this decline in the amount of space tenants are leasing.
What comes next?
Tenants will continue to lease less space than they have historically. This will continue for some time as there is still a way to go in the evolution of space needs. There are plenty of leases with legacy space requirements still to expire.
Some landlords may reduce incentives, but the majority will remain very competitive to capture those tenants looking to lease space. The tenants no longer need or want to pay top dollar.
In essence, we are moving into the “flight to value” cycle. Economic uncertainty will only exacerbate the situation and increase the search for value.
If this persists, we may move into the flight to cost cycle sooner rather than later. We have been there before and are already seeing signs of this across all markets.
Whatever the flight, the upshot is that tenants are thinking more about their premises than they have for a long time.