Jan

Life for commercial landlords is going to go through a sea change…

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Life is tough from commercial landlords at present, but there are things they can do to improve their chances as we enter a New Year, and still further Covid restrictions.

Covid has changed the dynamics of letting commercial property, especially if its on the high street or offices. It’s only in certain retail park locations and warehousing / distribution centres where some commercial landlords have seen booming demand.

Home deliveries and Internet sales have benefited these asset classes, but home working and the continued decline of an already suffering high street have, in combination, put pressure on town centres, transport links and landlords holding these kinds of investments.

What can landlords do to help themselves?

Businesses only survive and thrive if they are comprehensively meeting their customers’ needs and demands; their needs must be satisfied if property owners are themselves to benefit, so it’s accurately identifying and providing for these needs that counts.

The much touted shift to permanent home working, once we get through the worst of this pandemic, is almost certainly exaggerated, but there will undoubtedly be a shift, possibly to a hybrid style of home / office working. It doesn’t take the prophesising talent of a Nostradamus to see that there will eventually be a compromise: creative work involves team working, so working people will always need to come together in offices.

Likewise, not everyone wants to shop on the internet. People like to browse, to try on clothes and to shop in nice places where they can eat and drink coffee and be entertained. The high street is suffering but it’s far from dead. We may well see a concentration of activity in certain cities and towns that can adapt, while other town centres may have to move away from pure retail and office activity.

Landlords cannot be too complacent; they need to accept that in most cases it’s no longer a case of providing a square footage of space that simply brings in a rental income stream ad infinitum. It needs to be worked at, first to identify a need, and secondly to provide what is needed given the advantages and the constraints of location. Marketing is far more than selling a product, it’s about doing just those things and then effectively promoting the asset to likely occupiers.

When the dynamics of the market change we need to change our mindset with them. We are likely to be faced with continual and accelerating change of one sort or another into the future. As we face this virus, and the technology changes on the way, the way we live, work and play will not be the same again.

Not only will landlords need to reassess what they are offering to the market, they will need to re-think the way that they manage it, and that may mean taking on more risk and more work. Letting and forgetting has been the norm with commercial property in the past. With a full repairing and insuring lease landlords have had the luxury of risk-free clear returns over very long lease periods, 15, 20 and even 25 year leases were the norm in the past. Those days have gone for most locations.

After this latest pandemic episode, many retail tenants are demanding risk sharing in the form of turnover rents, rents tied to the profitability of a store or other business. This arrangement involves landlords in quite a bit of extra management and accounting work, and it also requires a good degree of trust between landlords and tenants, if the arrangement is to be successful.

After the Covid lockdowns, premises will need to be virus free, safe and secure. Those landlords who are agile enough to provide this level of safety will reap the benefit. Whereas office space pre-Covid was moving increasingly to open plan and shared work-stations, Covid safety requires individual office work spaces, possibly even a move back to single offices, and really good ventilation systems.

Internet connectivity and gigabit broadband with advanced internet, national and international communications devices goes without saying, these will be vital business tools of the future. The “work-from-anywhere” culture is upon us and is not going away, but work teams will still need a base to come together and communicate face to face. Studies have shown that creativity comes from co-mingling and it occurs randomly, it’s unlikely to be at its most effective over Zoom.

Offices are already being adapted with radical changes to space, taking out desks and providing sitting and lounge spaces, collaboration zones, coffee areas and even roof top garden and exercise space. First second and their floor offices, and increased stair access, may become premium office space as staff avoid using lifts.

Retail store space likewise will need a total re-think. Spacing of walkways and displays, fitting rooms, toilets and refreshments areas will all need to be made safe. And as with offices this will result in the need for more space, not less. As with offices, all these areas will need highly adequate ventilation. Simple extractor fans will no longer prove adequate when full flow floor to ceiling systems are available.

Property owners will need to be proactive in marketing their space, acting like business owners who are selling a product to their customers, adopting a new mindset with the sole aim of ‘winning’ tenants.

Future tenants may well come with their own fitting out, technology and design preferences. They will want lease lengths shortening, and there could be a continual need for change and adaptability. But for those landlords willing to provide this, the rewards will be there.

Landlords of the future will have to be more proactive and attentive, and to work harder to gain that competitive edge over their competitors; it will mean treating tenants as paying customers whose needs have to be satisfied in order to keep the space occupied and the rents coming in.

For a long time, and unlike most businesses, commercial property investment has been a landlord’s market, a take it or leave it “sit back and let the rents roll in” business which in many cases has led to complacency. It looks like we’re in for big changes in the future.

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