With an estimated 17% of retail units and 24% of office space currently unoccupied, and little likelihood of significant short term change, the Chancellor’s Autumn Statement ushered in a new reality for the commercial property sector:

• With supply outstripping demand, and average lease length just above six years, occupiers are in the strongest position in a generation, yet remain fearful of the future.
• The IPD Lease Events Review of 2012 makes clear that occupiers are intent upon exercising break clauses as a source of leverage.
• Income return and the strength of occupier covenant will forge ahead of capital growth for the foreseeable future as the key indicators of investment performance.

Focusing on the occupier relationship

Driving this changing reality are the demands from the occupier community for far greater satisfaction from landlords in terms of building performance and support service delivery. The 2011 CoreNet occupier survey awarded landlords just 5.4 out of 10 for customer satisfaction, up 0.5 points from 2010. The relationship between landlord and occupier needs to be refocused; from one of providing a building with basic services, to a relationship built upon benchmarked performance; where occupier retention and mutual success reflect an ethos of continuous service innovation and improvement.

Customer service benchmarking programmes akin to that from the RealService Best Practice Group, provide tangible underpinning for service innovation and offer positive evidence of which investors are committed to working with their occupiers.

Occupiers will benchmark propositions

With one eye firmly focused upon cost control and predictability, the savvy occupier will employ quantified benchmarking data to directly compare alternative propositions in areas such as service charge transparency. The latest lease renewal statistics from IPD make clear that occupiers across all sectors, and particularly the office sector, will seek out the best deals and relocate to take advantage.

The market has sounded a clarion call to landlords and their property managers. Income generation and occupier covenant will take precedence during the next five years of the UK’s austerity. This presents an opportunity for those landlords willing to embrace a positive relationship with their occupiers; those unprepared to adapt are bound to suffer.

This article is part of Asset Class winter 2013