How has Covid-19 shaped the future of the commercial property sector?

Mar 11

How has Covid-19 impacted the commercial property sector? We asked Holden Smith co-founder and residential and commercial property expert, James Smith, about that the challenges the commercial property sector has experienced during the pandemic, how space is being used in different ways, how the sector is likely to develop, and what commercial landlords can do to put themselves in the best position for the future.

What are some of the main challenges the commercial property sector has experienced because of the pandemic?

James: The commercial property market has been significantly impacted by Covid-19. The most obvious effect has been the shift to working patterns that have led to many companies wanting to reduce their office space as employees have worked from home. This was a necessity during the main imposed lockdowns as it was not safe to work in an office, but as we come out the other side, many businesses still have a reduced need for space as they look to blend home and office working moving forward.

This reduction in the need for office space has led to many businesses trying to negotiate their way out of leases early, and it has proved difficult for landlords to enforce the terms of their leases due to the emergency legislation that was introduced.

Which sectors have been worst affected, and which have remained largely robust, and why?

James: Demand for new space has been low in the retail sector, largely because non-essential shops were closed during lockdown so the last thing on the mind of a tenant was expanding or taking on larger or new premises. Office space is currently a worry to many commercial landlords and we are experiencing a period of uncertainty over the future of the office as we know it, as the country establishes its new normal. Will people want or need to go back to the office, or have they become established working from home?

I do think there will be a shift back to office-based working though as some industries, especially those in the creative space, thrive off working in a collaborative environment which you just don’t get working from home permanently. As a middle ground, I also believe there will be a growing interest in buildings that can be used to house flexible work spaces and hot-desking, especially as people who are new to working from home permanently look to break up their weekly routine without the commitment of a permanent desk or office space.

The pandemic also bolstered our love for online shopping, and warehouse and distribution centre space is becoming very sought after. Brexit and the pandemic have shaken up the supply chain and have created a surge in demand for warehouse space in the UK, but figures from the UK Warehousing Association showed UK warehouse capacity was running at sub 3% last year, with three quarters of their members stating their space was full to capacity back in 2019. There’s a big opportunity here for landlords.

How has the pandemic affected prices/ usage/ leases/ sales?

James: The market definitely stagnated at the end of last year. Businesses were hesitant to make decisions and, understandably, wanted to wait to understand what the ‘new normal’ looked like. As a result – as with any uncertainty - the market was slow. This in turn affected prices for office space which saw a downturn, however warehouse space is still in demand, bringing the price up.

However, since the new year, confidence levels have risen again as the economy begins to get back on its feet and the vaccination drive is proving successful. People and businesses definitely seem to have more confidence in committing to decisions. Companies are seemingly thinking ‘outside the box’ and flexible working space with shared meeting rooms and communal areas seem to becoming the norm.

Now we are starting to emerge from the pandemic, is there any sign of an uplift with the end in sight?

James: Definitely. Commercial property is massively sensitive to the economy. As the economy recovers, so does the market.

I’ve no doubt there will be fall out from landlords looking to enforce the terms of their leases once relief under emergency legislation ends, so it will be interesting to see the tactics used and whether landlords are rigid in enforcing the terms of their leases or if there is more flexibility given.

What more could be done to help the commercial property sector?

James: During the pandemic, tenants and businesses were aided by emergency legislation against forfeiture and landlords enforcing their remedies under commercial leases. While obviously a brilliant mechanism to support the tenant, it somewhat further prevented commercial landlords investing as they were hampered by limited remedies for none-payment of rent.

There will need to be a balance struck and appropriate remedies for non-payment of rent achieved, otherwise investment into the commercial property sector could be hampered.

There also needs to be creative thinking and collaboration, and landlords need to be receptive to altering leases to ensure tenants simply stop paying rent. Rather than this being legislation, I think open and honest discussion between landlord and tenant needs to be at the forefront of any efforts.

How can commercial property owners put themselves in the best position for the future?

James: Have a good professional team around you and - in these current times - negotiate, negotiate, negotiate!

It is incredibly difficult to enforce the terms of a lease at the moment, so in my opinion landlords are best trying to compromise in the short-term for a long-term gain. Admittedly, this may not always be possible - and no doubt some tenants are using the current legislation to their advantage - however, in most situations it is imperative to have a solid working relationship with tenants and if landlords are in a position to help by providing some short-term relief, this will definitely reap rewards in the long term. Usually, a good commercial property agent will be able to assist in that negotiation.

How do you see the commercial property sector developing in the next year? Five years?

James: I would think that flexibility would be at the forefront of every commercial lease discussion, and prospective tenants will want this. The businesses that have suffered the most through the pandemic are the ones with the highest fixed costs, and rent is generally at the top of that list. Any company finance director worth their salt will be thinking at the back of their mind about what happens if we ever see a situation like the last year again, and if we do, they will want the flexibility to reduce rent during that period.