The impact of the pandemic on the commercial property sector - and its future

Peter Foxall, commercial property solicitor and expert at Holden Smith

As the remaining restrictions are lifted and we learn to live with coronavirus, we speak to Peter Foxall, commercial property solicitor at Holden Smith, about the impact of the pandemic on the commercial property sector and his thoughts on its future.

In your experience as a commercial property solicitor, what was the initial impact of pandemic on the commercial property sector?

When the pandemic began in 2020, the uncertainty caused understandable and almost immediate panic amid commercial tenants and landlords over one main issue; how the rent would be paid. This was especially the case in retail and hospitality, where tenant income stopped virtually overnight because of lockdown. Retail had seen a decline in rental growth pre-pandemic due to the ongoing change in consumer buying habits, but this then transcended into office space as working from home kicked in.

Landlords were put in a difficult position and many faced uncertainty around the viability of their tenants and their capital asset - the building they own - was stagnating with the threat of having to find suitable new tenants. Many landlords had to be creative in respect of their usage and lease terms, and also have difficult discussions with their banks about mortgage repayment terms.

You work with commercial landlords every day. How does the land feel to be lying now within commercial property?

Landlords of industrial buildings, with or without associated office space, seem to be finding it relatively easy to find tenants, whereas retail is more difficult. However, things have changed significantly in the last two years, and the commercial property market in its simplest terms is driven by tenants and the types of properties they require.

The ongoing move away from bricks and mortar stores to online shopping and home delivery has only been accelerated by the pandemic, and as such the demand for warehouse space has sky-rocketed. More than 50.5 million sq ft of new space was leased in 2020 – 12 million more than the previous record year in 2016.

The growing popularity of pop-up events, stores and experience-led marketing by brands also means more companies utilising premises for much shorter periods of time. This is often done under a ‘meanwhile’ lease; a temporary lease granted to tenants such as local voluntary or charitable groups, which permits the use of a vacant business property temporarily for a non-commercial purpose, while explicitly recognising that the landlord is looking for a tenant that will take a commercial lease of the premises. It is important to make sure that any short-term occupation is properly documented so you can get the property back once you find a long-term tenant.  Your solicitor will be able to advise you on a suitable lease document.

It is sometimes forgotten that landlords often have loan repayments, and without rent coming in, these cannot be paid. This has led to many being creative in terms of how they use for their property; some have explored conversions to residential, while others have looked at creating serviced offices with shorter lease terms which give tenants greater flexibility.

Others have explored different lease types, such as turnover based leases where rent is based on the tenant’s commercial success, which can be great for collaborative thinking between landlord and tenant as both parties stand to benefit.

What do commercial property landlords and owners need to be aware of to be successful in the next 6 – 12 months?

 Make sure that the premises are in an appropriate condition for their intended use by the tenant. Most tenants do not want to pay for a Rolls Royce building if a lesser standard (and therefore, cost) will suffice, but neither will they be happy if the premises does not fit their image or intended use.

 It is usually beneficial for landlords and tenants to discuss their respective requirements at an early stage to avoid having to iron out misunderstandings when a commercial property solicitor becomes involved.

Are you a commercial property landlord looking for legal support with your portfolio? Contact the Holden Smith team on hello@holdensmith.co.uk or call 01484 55 66 77.