One modest advantage some occupiers seized on during the recession was to seize the opportunity to negotiate more flexible lease terms as landlords sought to stave off vacancies and the threat of empty rates.

But as direct property markets rebounded – and the UK economy emerged from recession – over the final quarter of last year, the balance of power between landlords and occupiers has started to even out, according to IPD Occupiers director Glenn Corney.

“That window of opportunity is closing for tenants to negotiate aggressively with landlords,” says Corney. “What has come out of the economic decline has been a fundamental change in perception: landlords understand far better that they have to give tenants a more rounded package.”

A new ‘norm’ has emerged
The expectation goalposts, so to speak, have shifted. Landlords are more readily aware of the role commercial property plays for their customers, through, inter alia, environmental performance, space optimisation and cost efficiencies.

“We don’t take the view that all occupiers simply want to minimise costs – they don’t,” Corney argues. “The truth is it is more complex than that; if occupiers are reducing costs but are operating in ineffective buildings then the company’s performance will suffer. So the benefits of cost savings can be outweighed by deterioration in corporate performance. It is easy – particularly during a recession – to lose sight of this, but fundamentally it is crucial companies chose and maintain functionally effective buildings.”

IPD Occupiers – which measures circa 70,000 buildings within the benchmarked estates in the UK and France – helps companies optimise the use of their buildings to ensure they support core business operations. This is achieved by capturing key property indicators and transforming this information into robust data and meaningful metrics to compare the performance over time and against peer groups. This analysis provides the basis for effective and informed decisions which can drive efficiency savings, improve and communicate property performance to the business, senior management and key stakeholders.

A “Balanced Scorecard” approach to property performance is adopted by IPD Occupiers. Financial metrics, such as occupancy costs and capital expenditure need to be balanced with the end user building experience, argues Corney, typically from both key decision makers to employee level. “All these aspects make a difference,” says Corney.

The environmental performance of buildings, he argues, is only going to become more important over time. The question on improving this aspect of building performance is who should pay the bill? “Environmental building upgrades require long-term investment and have very uncertain paybacks,” answers Corney. “In many cases, landlords feel forced to comply with best practice out of fear their assets could become redundant or obsolete. Occupiers, on the other hand, are concerned landlords will try to pass on all costs to them. Finding a fair balance requires careful diplomacy by both parties.”

Service charges are another thorny issue between landlords and occupiers; value for money and transparency in the management of funds is increasingly under scrutiny. Lease flexibility has also improved gradually in recent years, so across the spectrum the ‘norm’ has changed. But overall, occupiers don’t want to move all the time. Average new office leases is now just six years, but the increased break clause options will unlikely tempt large corporations from relocating their headquarters regularly to target best rates, if their existing building remains effective.

Corney explains: “For core headquarters locations, most companies are still prepared to take longer leases. While there is greater lease flexibility, the real difference now is in increased differentiation – more activity at the smaller end of the market and, possibly, more co-operation on long-term environmental upgrades in larger units.”

Building performance can drive operational effectiveness
All companies are seeking competitor advantage over direct competitors; one way to do that is through operational excellence. The role corporate property plays in that, Corney says, is either in “enabling the business to generate more income – which is admittedly often difficult to prove – or a demonstrable leaner and meaner operation”.

He continues: “Our clients, in that regard, aim not just to be best in their peer group, but looking to be world class and adopt ideas from other sectors. We aim is to help commercial real estate teams look beyond their organisation and sector.”

The principal comparables are peer group and public to private sector. “One of the reasons why the Government was so keen to work with us was precisely because they wanted to benchmark their building performance against the private sector.”

Corney argued the key metrics – space optimisation and environmental performance – highlights a key divide in the public and private sectors focus. He says: “The private sector is still outperforming in their use of space, driven by a basic profit motive. However, for the Government sustainability and environmental imperatives are given equal weighting in terms of meeting internal targets. This, arguably, leaves the public sector in a position to edge a lead over the private sector in this area. The evidence for this, however, remains to be seen.”

An enduring trend likely to emerge from the rationalisation of the recession, according to Corney, is for companies to maintain a vigilant on eye the factors which make buildings perform most effectively. “The challenge from increasing outsourcing of functions will be effectively managing the performance of suppliers. Internal teams will need to add value through a greater understanding of business requirements, customer relationship management and managing through performance measurement. This is where independent performance measurement providers, such as IPD, will be invaluable.”

What is important for the internal occupier teams that remain is to have a decent set of information and benchmarks to measure out and underperformance over the long term.
Corney concludes: “Senior management should be clear from the outset: this kind of work is a long term commitment. The payback can vary considerably; some of it is short term, much more is longer term. What we help to do is crystallise what data companies need to be collecting to create a pyramid of data, devise a scorecard which enable occupiers to manage buildings more effectively and – importantly – communicate this to key stakeholders.”

To contact Glenn Corney or to enquire about the Property Performance Measurement services offered by IPD Occupiers, please click here.