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News release

Australia

How should your lease negotiation strategy shift or adapt as a result of Activity Based Working? (ABW)

Jones Lang LaSalle White Paper examines implications of ABW on the way tenants negotiate leases for their office accommodation


AUSTRALIA, 19 SEPTEMBER 2012 – Activity Based Working (ABW) has been a buzz-word in corporate real estate for more than 2 years now.  It is here to stay, as evidenced by a recent Jones Lang LaSalle survey of real estate professionals in Asia Pacific, which found 30% had implemented activity based work style arrangements and reported it was working well, while 36% said they would like to try it.

But what are the implications for the real estate sector of this new way of working?
 
A White Paper by Jones Lang LaSalle examining the implementation of this alternative workplace model over the past 24 months reveals that ABW may be changing the way tenants negotiate their leases with landlords, due to the flexibility benefits of ABW.
 
An author of the White Paper, Tony Wyllie, Head of Tenant Representation & Corporate Consulting, Australia said, “Corporate occupiers have sought flexibility in their lease accommodation to enable them to respond to changes in business cycles. This has traditionally been achieved by negotiating medium term leases with several option terms as well as negotiating in  long-term lease mechanisms to deal with expansion and contraction throughout the lease term. 
 
“However this level of lease flexibility came at a cost to secure such rights for expansion and contraction.
 
“The desire for flexibility has been driven by the difficultly in being able to accurately forecast future headcount for the business to meet changing business cycles.  This provides limitations for corporate real estate teams in their planning and strategy and means they need to negotiate options for flexibility.
 
“This is no longer the case with an ABW strategy.  Organisations are able to achieve this flexibility through the workplace model, and as a result may opt to take even longer term leases. 
 
“ABW by its very nature affords the organisation flexibility in space utilisation and means there is no need for shorter term leases or rights for contraction or expansion options in a lease negotiation strategy.

“The ability to add and contract headcount without expanding or shrinking floor space is a welcome reprieve for corporate real estate teams.
 
“Negotiating longer term leases can also result in a better incentive, a more simple lease structure and a more attractive rental level as occupiers are able to offer the landlord security of income.
 
“Thus the lease negotiation process may be less focused on getting the right expansion and contraction options, but rather on doing the best financial deal and not having to worry about building in flexibility
 
“Now that the Corporate Real Estate Executive has achieved the ever availing objective of flexibility in accommodation on longer term leases without the added cost, the Accounting fraternity is proposing new accounting changes which will require leases obligations to be recorded on balance that may drive us back to the shorter lease term.  Watch this space as new global lease accounting  standards are implemented,” said Mr Wyllie.
 
Designed to improve transparency and eliminate off-balance sheet obligations, the new regulations being introduced by the U.S. Financial Accounting Standards Board (FASB) and its counterpart, the International Accounting Standards Board (IASB) will fundamentally alter the impact of leases on organisations’ income statements and balance sheets.