Where is Commercial Property headed after Covid?

The impact of Covid has been a rapid reduction in tenant demand for space, and when demand is reduced and supply remains the same there’s only one economic outcome – property values and rents will decline.

Across the world negative sentiment weighs on demand and drives structural change faster, as demonstrated by the thisweekinFM.com’s (Facilities Management) latest Global Commercial Property Monitor.

This global indicator, which gauges the sentiment of occupiers and investors, shows a dramatic fall in demand for space, especially in Europe, but this fall still remains above the record low it reached during Global Financial Crisis.

Investors expect to see this trend continue over the next year with further falls in capital values and rents across the world. Retail has taken a really big hit through lock-downs and the enforced move on-line for the consumer. Some retailers have commented that the pandemic has accelerated the move online by up to 5 years. E-commerce was already a challenge, Covid has made it an existential threat to the high street retailer.

Retail rents in some cases have taken a huge hit with 50% reductions in some cases. This puts property owners at serious risk of loan defaults, witness the recent Intu administration and the complete leasing re-think that Hammerson is going through to save itself.

With the current work-from-home situation offices too are experiencing a deteriorating outlook for rents and property values. On the other hand, with the boom in home deliveries, industrials and logistics investments have really come into their own.

RICS Chief Economist, Simon Rubinsohn, has been cited as saying:

“As the economic impact of COVID-19 has deepened, so too has the impact on commercial real estate. Sentiment among investors and occupiers has naturally weakened, with broad acceptance that rental and capital values will fall over the next year.

“What is clear, however, is that there will be no going back to the old normal, even after a protracted economic recovery and significant government interventions. Underlying trends have been accelerated by lockdowns, whether the global rise of ecommerce or remote working, coming to the fore, changing the nature of demand for many “traditional” commercial assets. We will see investors, landlords and tenants continue to adapt to a new reality – not least, in their approaches to office space.”

The Future for Offices

Writing for thisweekinFM.com, Paul Bagust, Global Property Standards Director at RICS, has commented on the rapidly changing face of commercial offices and how this may impact on the demand for city-centre space.

Bagust highlights three probable outcomes:

• organisations will reduce their overall property footprint,
• there will likely be a shift in location from urban to suburban
• organisations will in future place a greater emphasis on the health and well-being of workers. This could mean more attention paid to the in-work facilities provided for staff, and a more flexible approach presenteeism, allowing some home working to reduce travel and give staff a better quality of family life.

Some real estate professionals are predicting a 10 plus per cent reduction in office space footprints over the coming couple of years, with all the implications this shift has for rents and capital values in city centres. High rise blocks with thousands of workers in them are clearly problematic when you have to contend with Covid, even if the world gets back to near normal. But this view is not unanimous, some believe that ultimately there will be little change.

As always, predictions don’t always pan out or changes become a mixture, a hybrid of the old and the new. Businesses cannot operate with everyone at home, but they can certainly manage with less staff in the office at one time, certainly less time than they are used to being in the office all of the time. This new form of working with reduced travel, health and quality of life for more staff at home also has implications for mass transit systems.

As Paul Bagust says:

“The commercial office sector is under pressure, but the ‘death of the office’ has been called far too prematurely. Yes, many organisations are re-thinking their footprints and questioning the need for such large spaces in city centres – especially in the current economic climate and with the proven efficacy of remote working. But rather than disappear, office use will evolve. Property strategies will be increasingly data-led, based around the performance of buildings, and how they add value to and support the productivity of employees.”

What about Retail?

The high street was already under pressure even before anyone heard of COVID-19. Retail stores were closing at an unprecedented rate and prominent high street names, long established brands such as Debenhams were going into administration. Even mobile phone shops, ubiquitous on Britain’s high streets, were closing down. The effect of this on rent levels and property values is axiomatic, but what does all this mean for the future shape of the high street and shopping centres for 2021 and beyond?

Its not just the Oxford Streets of this world that will be affected by these structural changes: most of the retail market in the UK is in the regional cities, the larger towns and market towns around these hubs, right down to the local village store and post office – these will all come under immense pressure in a post Covid world, even if we get back to “normal”, or near normal.

Consumers are unlikely to revert back to their old shopping habits entirely having experienced the convenience of online shopping and home deliveries. During lock-down people were spending in the local stores they could access easily, supermarkets and local convenience stores, but after that often the bulk of their purchases were online.

Amazon has continued to consolidate its near monopolistic position and is the preferred option for many consumers, while the likes of Tesco and the other supermarkets have seen experiential growth in home deliveries, at a cost to themselves through eroded margins.

What are the likely outcomes?

• more customers than ever are likely to become competent at ordering online and will drift to online shopping given increasingly efficient deliver systems and convenience.
• Fulfilment cost for online retailers is a significant issue, therefore only those retailers creating significant sales volumes are likely to prosper with this.
• With many footfall creating destination stores disappearing, other high street retailers around them will suffer accordingly.
• Manufacturers are gearing themselves up for direct internet sales and home deliveries direct to the consumer, cutting out the retailer entirely, a process knows as disintermediation.
• The Covid lock-down has ignited the entrepreneurial spirit of many of the small retailers, particularly in food and drink. They have moved swiftly to fulfil orders locally and go online to keep their doors open and staff employed.

As with offices there is likely to be a short-term and a long-term effect on retail, retail property values and rents. Without a doubt businesses without some form of online presence and delivery options will suffer in the future, but delivery services have a cost, they erode margins.

As the effects of Covid recede, and we have to assume they will, even if full “normal” never returns, people will likely still want to shop in a store, for the visuals, for the choice and for the experience. It’s up to the retailer to provide the attraction, the desire to visit and a good all round customer experience, in other words they will need to work harder.

So again, as with offices, some sort of hybrid system is likely to emerge, but retailers will be faced with severe competitive pressures, high streets are likely to undergo dramatic physical change, perhaps with fewer stores and more residential, and very likely, retail and office property investors will need to be highly innovative and entrepreneurial to survive.

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