The Covid-19 Pandemic has had an unprecedented impact on individuals and companies alike. It has changed the way we interact with each other, our environment and the real -estate market in its entirety. Our market observation on the Commercial Property market in summary is as follows:-
Logistics & Warehouses
There has been consistent and growing demand for modern logistics. Investor appetite will increase further in the already booming U.K. logistics sector this year following the pandemic’s permanent impact on online retail and an improved understanding of the role of warehouse space within our essential national infrastructure.
The strong demand and weakening supply of sizeable warehouses will cause rents to continue to rise for well-situated assets adjacent to cities, urban areas and other strategic “last mile delivery” hubs.
Office
Prime assets are expected to outperform due to stable demand prospects. There is a continued focus on strong urban locations with competition in the short, medium and long term.
Whilst demand for office space has contracted, the expansion of permitted development rights may allow some Landlords to re-model existing space. There is an abundant supply of building stock that is currently not fit for purpose and if Landlords are seeking to maximise yields and capital values, significant capital expenditure by Landlords will be required to bring in the most attractive tenants. Tenants of such spaces may seek Landlord consent to vary restrictive user clauses to enable alternative use and many are seeking substantial rent-free periods as an incentive to take up occupation.
Conversely, many small and medium size landlords are facing downward pressure from Banks and potential events of default in respect of loans. As a way of offsetting some of the pressure and as a way of securing their assets, some Landlords are insisting that Tenants put down more sizeable rent deposits and/or authorised guarantee agreements as well as insisting that some Tenants take on new reversionary leases.
Retail Leisure & Hospitality
The pandemic has had a devastating effect on the leisure and hospitality sector with the long-term effects still to be determined. Excess retail space and dropping values generate opportunities in the short- to medium-term for retail assets to be repurposed to include alternative uses, such as innovative pop-up retail, co-working spaces and mixed-use schemes.
Conclusion:
For some sectors such as high street retail, the pandemic has compounded pre-existing issues. Covid -19 has undoubtedly accelerated the long term-trend that has faced our retail stores for the last five years. Social distancing has increased e-commerce and reinforced consumer habits. One can expect to see increased level of distress and a flurry of CVA’s as operators seek to restructure their business.
Similarly, while co-working/co-living has seen an increase in popularity within the last few years with big operators such as the Office Group, Regus or WeWork attempting to redefine the office space, short-term income and long-term liabilities will result in more volatile cash flows and growth is anticipated to slow down in the medium-term.
Conversely, statistics from market commentators reveal that industrial investment volumes in logistics overtook retail for the first time in 2019, attracting a total of £196 billion globally which represents a sixfold increase from 2009. Logistics is continuing to gain momentum and is now the third most-asset class after office and residential and second within the commercial real estate space, accounting for almost 20% of all global property investment in the first half of last year.
Only time will tell how the market will react in the long term….
