What’s the outlook for UK commercial property, post pandemic & Brexit?

The pandemic has had a devastating impact on commercial property, with lockdowns, social distancing, working from home (WFH), all accelerating the move to online and home deliveries. The likes of Tesco, Ocado and the other big supermarket deliveries were the saviour of the public during the worst dark days of lockdown, and they boosted one of the few property sectors to gain directly from Covid warehousing.

Shops, restaurants and leisure businesses suffered the most, with the demise of the high street and its negative impact on commercial property accelerated and continuing apace. Reduced footfall in some towns and cities reduced some property rents and values by as much a 50%, and despite the easing of restrictions values will be slow to recover.

Hot on the heals of Brexit and the pandemic came the war in Ukraine, exacerbating an already dire economic outlook – energy and food price hikes with steadily increasing inflation now look to slow the economy even more, at lease for the foreseeable future.

A partial recovery

Before the war in Europe, and a couple of years on from the start of the pandemic, investors were again turning to the commercial property market. Towns and cities throughout the UK have come back to life, though a long way from pre-pandemic levels – thousands of workers are still working from home and the fuel crises will exacerbate this.

Working from home here to stay

Around 40% of UK working adults were said to be WFH at some time in their week and despite the efforts of employers (private and public) to encourage staff back to the office, the WFH lifestyle is likely to continue and to some degree will probably become permanent.

Labour shortages mean that employers are faced with an employees’ market, which means employers will be forced to adopt strategies to attract staff and talent. With employees attending the office for a few days a week, businesses will need to think about how they adapt their premises to provide their staff with best possible space to carry on their work – Covid safe, environmentally friendly and offering the best possible spaces for work collaboration.

Demand for more faculties

As the economy does go into recover mode, and right now that looks a little way off, all this has major implications for landlords. Companies will be competing for offices with the right employee facilities, even the likes of in-house gyms or café, in the larger buildings.

Businesses looking to increase the size of their workforce will be looking for suitable commercial premises which have the floorspace and faculties they will need for expansion – the modern offices will probably need more floor space per employee that pre-pandemic, so fewer staff in the office does not necessarily mean that companies will need smaller offices.

Investors in commercial property need to be mindful of these key elements: improving space and facilities in the light of Covid and meeting the latest and future environmental standards (MEES) – all domestic and commercial buildings available to buy or rent in the UK must currently have an Energy Performance Certificate and achieve a minimum EPC rating of E.

The Government’s plans were for as many homes and commercial buildings as possible to have an EPC rating of C by 2035, where practical, affordable and cost effective. However, more recent soundings from Government, and following COP 26, it is now being proposed that ratings should rise to C or above for all newly rented properties from the start of 2025. These changes if the come would be phased in, with existing tenancies given until 2028 to comply. It is also likely that once new regulations apply, the penalties for not having a valid EPC could rise from £5000 to £30,000.

Re-purposing and re-configuring

There will be opportunities for those landlords who adapt their premises to the changing nature of the demand for office, retail, leisure and residential space. Despite many businesses offering hybrid working, and the economic headwinds businesses face, it is said that 80% of businesses are planning to increase their workforce, and the number of people attending the office over the next 12 to 18 months. According to Savills, there will be a growing demand for prime office space, a key trend in the commercial property market.

According to the accounting consultancy, Deloitte, a necessary conjunct to hybrid working (part home, part office) will be an increasing use of technology, which allows safe remote working, and maintaining the highest security for company data. Buildings will need to be wired and equipped for collaboration tools and video conferencing facilities that can connect people nationally and around the world.

In some cases, tenants will expect landlords to provide this technology, and competition for tenants may compel them to do so. It will require planning and investment from commercial property investors with the possible implementation of smart technology in office spaces. This will allow businesses to seamlessly switch between online and in-office working as well as providing total building security.

Repurposing has become a buzz-word amount property agents and landlords. With many vacant buildings, particularly around UK high streets, banks, offices and department stores, investors are recognising the potential of converting commercial properties into more profitable uses.

There has been a growing trend of converting these premises into hotels, leisure and residential premises, and many high street buildings on a mixed uses basis.

These properties can be converted to include shops or restaurants at ground level, improving the flexibility, profitability and value of the original building. As such a trend is emerging with landlords turning disused office and retail space which might include gyms, bars or other types of commercial units.

Campus Development is the current term used to describe developments that contains a number of buildings with supporting ancillary uses, operated as a total integrated package with facilities including outdoor space, parking, access, building design, landscaping and design aesthetics. In areas with high footfall, this could prove highly lucrative.

Other trends afoot

The demand for storage space as gone through the roof: as businesses struggle with supply chain issues – just in time delivery has suffered greatly with pandemic shortages and now the war in Ukraine – a trend has emerged for vacant commercial space, offices and retail premises to be converted for storage facilities.

The pandemic changed the landscape of the distribution industry and accelerated the growth of the distribution hubs and warehousing. Covid had a big impacted on distributors’ technology investment plans and this trend continues as the economy enters a post-pandemic phase. With a new normal coalescing, customer demands could be permanently changed, so a technological transformation is the likely result. According to ONS statistics, online sales have been accounting for approaching 40% of sales in the pandemic years.

Retail & office goes local

The decline on the high street has not just arrived with Covid, it’s been a long-term trend. However, WFH and convenience (local) shopping has seen something of a revival, post pandemic. During lockdowns, suburban areas have enjoyed relative success at the expense of some of the big supermarkets, town and city high streets and large shopping centres. People favoured staying close to home, avoiding large crowds and using their smaller shops over larger supermarkets. They have also had more time and flexibility with the remote working trend, giving people more time to visit their local shops on a more regular basis.

Many local independent shops have have given exceptional service during Covid and many have managed to maintain their levels of footfall despite the difficulties. This trend looks likely to continue post-pandemic, in many locations.

The reconfiguration of some high streets in enlightened towns and cities, with pedestrianisation and ample free parking, has allowed cafes, restaurants and other leisure faculties to offer outdoor seating and to grow revenue, as well as increasing healthy footfall for other commercial uses.

As independent businesses grow, opportunities are arising for some smaller commercial landlords to pick up bargain properties with the potential for re-purposing conversions. In these towns and suburbs, where buoyancy is retuning, the demand for localised retail spaces is set to rise. With this revival come opportunities for commercial to residential and mixed use conversions on a smaller urban and high-street based scale.

The trends afoot in the commercial property markets both large and small show that commercial property investing, though down, is by no means out, and the future, as the economic cycle works through, looks decidedly more optimistic.

Further reading:

The post-pandemic outlook of the UK commercial property market

Commercial property: the post-pandemic landscape

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