Office leases: to end or to extend?

8th July 2021

Having office space in one of the capital’s most prestigious postcodes has historically typified financial services firms in London. For those businesses in the sector, premises costs generally tend to be the largest overhead after personnel costs. In some cases, office costs comprise as much as 20% of overheads.

Given the operational nature of the financial services sector, when the Government imposed stay at home restrictions as a result of the COVID-19 pandemic, after some initial disruption, the industry was not significantly impacted. It was initially anticipated that investment managers would return to the ‘norm’ of working from the office once restrictions eased, however over the past 15 months we have witnessed numerous leases being terminated or expiring without renewal, with a view to promote virtual working environments which were surprisingly successful throughout the pandemic. Less drastically, some firms have simply downsized their office space, in order to maintain a physical office but recognising a desire to continue to work remotely to some extent. For those who are starting to think about this now, the decision is not one to be taken lightly, and the short-term financial gains should be weighed up against long-term strategy.

The financial benefits of terminating an office lease are clear, with immediate cash savings and a welcome boost to profits. Management should, however, consider why they have an office space and whether there are effective alternatives as Government restrictions ease and we return to in-person attendance at meetings. For example, taking on a virtual office arrangement to use meeting space in prime locations can cost as little as a few hundred pounds per month.

The consensus, from various surveys over the last year, appears to be that employees do not want to return to office working on a full-time basis. But is this conducive to a positive working environment and maintenance of firm culture, and are staff as effective at home as they are in the office? Does it make sense to retain your pre-pandemic office layout, or is there value in reviewing the use of that space and creating a more flexible solution in the existing office? Are there future issues which have not yet been identified from our period of home-working, such as skills gaps in the sector amongst more junior team members?

If management decide to renew or to find alternative office space, the ongoing situation should put firms in a strong position when negotiating terms with landlords, and as such, shorter lease terms, earlier break clauses or lease incentives such as rent-free periods could therefore all be possible.

Whatever the decision, it appears that there are potential savings to be made from both options.

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