The future of retail estate owners is short-term leasing

Tom Price, Head of Site Acquisition, Sook, looks at the advantages of short-term leasing for commercial landlords.

Related topics:  Landlords,  Property,  Commercial
Tom Price | Sook
10th July 2023
"Long-term leasing, once unquestioned as the best option for retail rentals, is now being scrutinised, opening the door for less traditional models to enter"

Retail landlords, much like many others across the UK are under an immense amount of pressure, as costs continue to rise, and businesses and consumers alike aim to trim down spending. Plus, many are questioning how they can afford increases in mortgage rates.

The situation has prompted many to assess the available profits from renting and explore ways to maximise their assets. In addition to these challenges, sits the narrative of the changing high street and the consistent closure of in-person retail locations.

Retail landlords now face not only economic issues but different points of view regarding how they are willing to rent out versus what brands/suppliers want to agree to, making it more complex to find occupants.

What if there was an alternative approach? What if retail landlords could increase profits while renting to businesses that bring footfall back to high streets, and as such can provide consistent income for those they rent from?

Current operations For a long time, landlords have adhered to the same commercial model, leasing properties for multiple years.

These leases provide stability for landlords, who know the tenant will remain within the space for long and set periods of time. However, this also locks in and restricts pricing flexibility and often results in landlords facing prolonged periods of vacancy when contracts expire, and new tenants need to be found.

Additionally, in order to secure such long-term contracts, landlords frequently offer incentives such as capital contributions towards fit-out expenses or long rent-free periods to attract potential retailers, resulting in a sacrifice of net income. This traditional approach to retail rentals has been followed for over two decades, which has deterred landlords from seeking alternative options.

While the security provided by these agreements remains appealing, an increasing number of real estate owners are beginning to explore alternative models to increase their net income and align their offering more closely to the needs of today’s businesses.

A different way of thinking In recent years, new retailers with new operating models have entered the market. They offer a less traditional model of renting, whereby landlords allow a property-managers to rent out their property for shorter periods of time. Short-term rentals span days or months rather than years and do not require landlords to offer discounted rates.

In fact, research has shown that landlords can earn up to 43% more through short-term leasing. This potential increase in earnings is highly attractive to many landlords, especially as more success stories continue to emerge from this commercial model.

Furthermore, according to Savills’ 2016 report, leases ranging from six to ten years constituted approximately 55% of signed deals. However, in 2020, this percentage significantly decreased for new deals, and it was expected to continue declining as landlords acknowledge the value of short-term lets, partly due to the impact of the pandemic.

Once the viability of this alternative operating approach is recognised, the next crucial consideration is how to implement it in a manner that protects both landlords and their properties. Getting it right Consider the example of Airbnb, where homeowners choose to rent out in the short term to gain flexibility and generate higher profits.

The same principle would apply to this new retail rental method, just on a larger scale. However, similar to the Airbnb model, there is a need or an intermediary to handle bookings, enquiries and ultimately safeguard landlords against potential risks. This model has been applied to office spaces, by WeWork, and within hospitality, by Sonder, so the potential to bring it in within retail is clear.

Having a partner when implementing this method is crucial, as they can advise on potential clients for the spaces and handle the booking process on behalf of the landlord. Moreover, effective management of these properties is essential, including regular checks-in and ongoing communication regarding how the space is being used.

Businesses, such as Sook, can assign Account Managers for each property who are trained in handling spaces for short-term leasing and can provide advice on how to maximise the benefits associated with it.

For years, the process of being a retail landlord remained unchanged. However, recent changes to the high street have started to impact their business practices. Long-term leasing, once unquestioned as the best option for retail rentals, is now being scrutinised, opening the door for less traditional models to enter.

It is becoming increasingly clear that with the right partner, short-term rentals have the power to revolutionise the way retail landlords do business.

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