Home Real Estate What Does The Future Of The Commercial Property Market Look Like 6 Months Into The Coronavirus Crisis?

What Does The Future Of The Commercial Property Market Look Like 6 Months Into The Coronavirus Crisis?

by Jonathan Adams
Commercial Property Market

It’s fair to say that the of all the sectors that have been impacted by the Covid-19 pandemic, the commercial property market has been among the most affected. Offices emptied during lockdown as white-collar employees worked remotely.

Many shops were also forced to close for a period and since reopening report lower footfall as large sections of the public stick to online retail where practical as they attempt to maintain some level of social distancing. Pubs, restaurants and other public leisure and hospitality venues were badly hit during the first lockdown over spring and have borne the brunt of new measures being introduced as we head into autumn.

Opinion on whether office work will return to its pre-coronavirus status when the pandemic finally passes, presumably and fingers crossed at some point in 2021, is very much split. Some market analysts and observers believe remote work, or at least a hybrid of home and office work, is here to stay. Because employees prefer it and companies can save money on office space, reassured that productivity didn’t fallen off a cliff over the few months work-from-home was enforced.

Others are convinced we have short memories and life, including office life, will return to pretty much how it was before March 2020. And that while work-from-home was manageable for a limited period of time, it would eventually have a negative impact on important ‘soft’ factors such as building professional relationships, team spirit and identifying with company culture. And on a practical level, creative collaboration or working through tough decisions ultimately works much better when there is physical face-to-face contact.

Bars, restaurants, hotels, cinemas and other public hospitality and leisure venues? Most of us would probably agree we miss being able to freely socialise and make use of these spaces and would like to think we will again do so much as before.

There has to be greater fear for commercial property used for retail, especially in traditional city centre or ‘high street’ locations. The trend towards online retail taking a growing share of pie was already very much in place. Bricks-and-mortar retail still dominated but its market share being eroded was certainly making it increasingly difficult for retailers to make the business model work. Especially in prime locations with sky high rents.

With that trend now accelerated, it seems inevitable that the retail property market is forever changed. But how much? And the office and hospitality and leisure sectors of the commercial property market?

It’s an important question for investors that are exposed to the commercial property market, either through direct ownership or commercial property funds and REITs. At this point, any predictions on the long-term future of the commercial property market are inevitably still speculative. But six months into the Covid-19 pandemic and counting, at least some of the repercussions for the sector are also that little bit clearer than they were as we entered this period.

The Post-Pandemic Office Market

In recent days and weeks there has been mixed news on how major companies see the future of the office, which will of course have a direct impact at the premium end. On the positive front, Google is expanding its London office footprint. The internet giant is reportedly in ‘advanced discussions’ to add 70,000 sq ft. to its £1 billion London HQ, by taking up additional space nearby as well as to expand its lease at Central St. Giles by another 10 years.

That’s despite telling staff they don’t need to be in their offices for at least another year and chief executive Sundar Pichai saying that while Google still believes in the value of office-based collaboration and work, it will offer employees a future hybrid model with more work-from-home time if they wish.

Amazon is also expanding its office footprint internationally, especially in North America. Apple has said it is unlikely it will reopen its offices before the end of this year but is also still generally committed to at least a hybrid model that will involve employees going to offices post-pandemic.

Twitter has been most decisive in veering in the other direction, saying publicly that from now on employees will be free to work from wherever they choose. While still keeping office premises on the table as an option.

But is big tech a good gauge for the commercial office market as a whole? They are among the handful of sectors to have largely benefited from the accelerated move online in recent months. And can afford to pay for sparsely inhabited sprawling offices. Most other companies won’t be able to afford that luxury. If they are paying for office space, they will want it to be used.

Big tech often sets trends that smaller and more traditional companies follow. Advertising giant WPP has given its staff a choice over the past couple of months and says only 3% are regularly heading into their office. City legal firm Linklaters has also offered its employees freedom to choose for the foreseeable future. But even big tech seems split on the way forward and is likely to change its mind a couple of times over the next few years.

Most market analysts are of the opinion that poorer quality offices lower down the food chain will suffer most as the market restructures itself, with rents and values falling. Some assets may no longer be commercially viable as office spaces.

There is also an argument that central London properties will lose value because so many workers have long, expensive commutes into them that they no longer want or are often willing to make. At least not 5 days a week. Others point to the fact that, historically, no one has won by betting against the central London commercial property market and that it will survive and thrive again. And as already mentioned, the tenants of prime office properties are usually those most able to afford keeping them on while offering employees greater flexibility around how much time they spend in them.

With all that in mind, investors with exposure to the office market will be perhaps less worried than those reliant on retail and hospitality tenants to keep up rent payments. But should take a close look at the kind of office properties they are exposed to and how resilient they are likely to be in a changed environment.

There will be hurt, at least in the short term. IWG, the parent company of short-term office spaces company Regus, last week threatened to place Regus into insolvency, wiping out £790 million in lease guarantees unless its landlords agree to deep rent cuts.

The Post-Pandemic Retail and Leisure Property Market

The Economist recently wrote on how Crown Estates, which manages the Queen’s property portfolio, which includes “17 provincial shopping and leisure centres”, recently wrote down their value by 17%. The Investment Property Forum, and industry body, recently conducted a survey predicted that the capital values of commercial property would drop by 12% in 2020. Shopping centres, thought respondents, would be the worst hit sector, down 20% or more.

Funds and REITs exclusively invested in retail and leisure properties are certainly in trouble and some may fail. Investors in these funds may have to seriously consider when to cut their losses. Pension funds and insurance companies will almost certainly take a hit.

It will be perhaps another year before there is greater clarity around the sustainable values of office properties and those in the hospitality and leisure sectors. Bricks-and-mortar retail will not vanish but it will shrink as a sector and generally probably won’t be able to support the level of rents paid in the past.

The good news is, if The Economist’s final prediction proves accurate, is that the commercial property sector will adapt, even if pain is inevitable. But that the extent of the hurt is “unlikely to be on the scale of 2007-09”.

Important
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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