The Capital Gap: Why Your Office Asset Management Strategy Needs to Outgrow the 10-Year Lease

For decades, the 10+ year FRI lease has been viewed as the most secure income structure for office landlords. Long lease terms, fixed rent, and limited landlord obligations offered predictability of cash flow and a stable framework for underwriting risk.

However, that stability is increasingly being challenged. In today’s market, a successful office asset management strategy must acknowledge that this traditional model often defers risk rather than eliminating it.

Risk Hasn’t Disappeared, It’s Been Pushed to Exit

As fitted and managed offices have become the market standard, the cost profile of lease expiry has changed materially. Landlords now absorb significantly higher strip-out, redesign, and rebuild costs when space turns over. In a high-inflation environment, these costs continue to reprice upwards, concentrating capital exposure precisely at the point income stops.

Standard rent reviews are failing to protect value in this context. Because uplifts are traditionally calculated on a net effective basis and pegged to historical starting rents, they fail to track the double-digit surges in construction and labour costs. This creates a "capital gap": while income rises in small, predetermined steps, the cost to redesign for the next tenant reprices at market speed. What was once "low-risk" is now a mechanism for deferring a massive capital mismatch to the end of the term.

A Modern Office Asset Management Strategy: Shortening the Feedback Loop

A modern office asset management strategy requires a shorter feedback loop. Transitioning space into managed models allows landlords to move space more smoothly between occupiers, lowering refit intensity and reducing execution risk. Rather than concentrating risk at a single point in time, managed models spread it more evenly across the asset’s lifecycle.

Crucially, this approach allows landlords to re-base rents swiftly. By capturing market growth as it happens, rather than waiting years for a traditional review to catch up, landlords can align their income with forecast growth and real-time market performance.

How SMEs Actually Grow

These structural changes reflect a shift in occupier maturity. Many SMEs begin in coworking environments, prioritising speed and shared perks. However, as they grow, their needs evolve. They seek the autonomy of a branded headquarters with dedicated, private amenities - they have become 'grown-ups.'

Yet, despite this maturity, their need for agility remains. They are graduating into managed offices: fully fitted, self-contained spaces that provide the professional identity of a traditional lease with the flexible terms and operational support of a hospitality-led model. They want the 'big boy' office, but without the 10-year anchor that limits scalability. Growth is rarely linear, and long, inflexible lease structures increasingly conflict with how modern businesses expand.

Retention Through Continuity, Not Lock-In

In a managed model, retention is achieved through continuity rather than contractual lock-in. As SMEs grow, their space requirements evolve, but their relationship with the building does not need to reset. Occupiers can expand within the same asset through upsizing or reconfiguring adjacent space, without triggering a disruptive lease event or full refit.

Because the space is already operated and managed, growth can be delivered incrementally. This reduces friction for tenants and helps landlords retain high-potential occupiers who might otherwise be forced to leave.

From Lease Length to Operational Performance

When landlords are unable to offer shorter lease terms and customer-centric layouts, growing SMEs often exit buildings they would prefer to remain in. This creates needless void risk and weakens long-term income visibility.

Kentro’s expertise is built on navigating this new reality. Our focus is twofold. First, we partner with equity investors to acquire new assets or form Joint Ventures with existing landlords to recapitalise and reposition incumbent office buildings through an active, sustainable management mindset. Second, we support institutional landlords with comprehensive Investment Management (IM) and Development Management (DM) services across traditional, fitted, and managed office models. Across traditional, fitted, and managed office models, we help our partners shift their focus from passive lease duration to active operational performance, ensuring assets remain resilient, relevant, and highly profitable in a changing landscape.