Rise in regears in the office sector can be a win-win-win for occupiers and landlords (and advisers)

Amidst escalating costs and occupancy uncertainty, the quest for quality office space in Scotland can be quite the challenge. New lease requirements are often at the top end of the market, driven by large tech companies and businesses with significant ESG investments, further limiting the availability of affordable office space for other potential occupiers. Therefore, with limited supply and high demand, many office occupiers might be wise to stay put and re-negotiate rather than search for new premises.

In Glasgow, for instance, there is currently as much as 750,000 sq ft of occupier demand still looking for office accommodation due to a shortage of quality options . Additionally, the take-up of office space in Glasgow city centre reached 177,514 sq ft in H1 2024, a 32% increase on H1 2023 figures. However, this is likely to remain below the long-term five-year average due to the lack of good quality supply.

However, sitting tight doesn’t mean you have to settle for less. In fact, there is potential to renegotiate your lease terms to better align with your current needs and budget. This is where regears come into play, offering a chance to adapt your lease terms to better suit your needs, without the hassle of relocating.

A regear is a way of renegotiating and extending a commercial property lease, usually on more favourable terms for the occupier. For example, an occupier may secure a lower rent, a rent-free period, a refurbishment, or other incentives from the landlord. In return, the landlord retains a reliable tenant and maintains a guaranteed income. As part of the negotiation, the landlord might also take the opportunity to, for example, extend the overall lease term, further securing the long-term occupation of a good tenant – it’s a win-win.

While traditionally very common in the retail sector where prime locations are in demand, it has often been less common in other sectors where tenants are not tied to one specific location and can accordingly shop around. However, surveyors such as Knight Frank, Savills, and CuthbertWhite have noted a rising trend in regears in the office market. In Edinburgh, for instance, renewed leases have recently outpaced new leases, with regears contributing a significant portion to total leasing activity. This shift reflects the increasing pressure on businesses to find cost-effective solutions without relocating. Additionally, Grade A office rents in Edinburgh have risen by nearly 10 %, remaining significantly higher than lower-grade office spaces, further driving occupiers to renegotiate rather than move.

This shift is driven by several factors:

• Cost of moving: The financial burden of relocating can be significant, including dilapidations on existing premises, moving expenses, fit-out costs, and potential business disruption.

• Economic pressures: The cost of living, construction cost inflation and energy crises are adding financial pressures on businesses, making the stability of staying put more appealing.

• Familiarity: Sticking with a known location and landlord can provide a sense of stability and predictability for the occupier and their people.

Regears are particularly beneficial in today’s market conditions where office occupiers want more flexibility in their accommodation as they adapt to the increasingly popular hybrid working model. By regearing their leases, they can optimise their space utilisation, reduce their overheads, and future-proof their operations.

Regearing a commercial property lease needs to be a collaborative process between a landlord, occupier, and their respective advisers that requires trust, communication, and expertise. Appreciating that both parties need to get something out of the deal is key. The role of the advisor is to seamlessly coordinate all aspects, ensuring that both parties are aligned and working towards that mutually beneficial outcome. For example, a tenant might negotiate a new deal instead of exercising a break clause, resulting in cheaper rent and a better deal for the tenant. This arrangement helps landlords avoid the financial and operational disruption of tenant turnover, making regears a more cost-effective and secure option.

While regears offer many benefits, there are potential drawbacks, and they might not be for everyone. Existing office spaces may require upgrades to meet current standards. For instance, older Grade A offices may lack the energy efficiency or amenities that modern tenants now expect, pushing some to consider newer developments despite the cost savings of a regear.

With rising demand for Grade A office spaces and increasing pressure on businesses to optimise their space, regears offer a flexible way for occupiers to adapt to current market conditions.

As the office landscape evolves, regears will continue to be a key tool for tenants and landlords alike. Proactive engagement and working in partnership in these negotiations will help both parties adapt to changing needs and secure flexible, mutually beneficial agreements.