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Fisher German’s Head of Commercial, Duncan Bedhall, looks ahead to the likely changes in the office, retail, industrial and logistics markets as a result of the Covid-19 outbreak across the UK.

It is too early to provide any detailed financial predictions on the likely effect of this crisis on the commercial property market at this stage. The only thing we can say is, like all recessions and conflicts in the past, it will precipitate huge change.

In easy times, businesses and individuals become complacent with their outgoings. When the climate turns this attitude changes instantly. The focus turns quickly from revenue growth to cost cutting, and property will not be exempt from this mind set. Space requirements will be analysed, leases checked for expiries and break clauses served.

Weak companies who were already struggling will fail as they will not be able to obtain more debt and they will not pass the sustainability tests for government grants and loans.

We have seen the immediate adoption of new and not so new technologies to enable home working even among businesses who have never needed it before. How many of us were using MS Teams or Zoom to any great extent one month ago? They are now everyday necessities to enable business to continue. This change in working was already happening, but Covid-19 has accelerated it within a month, and will now most likely turbo charge it over the next year.

Environmental concerns are somewhat muffled by the size of the Coronavirus outbreak. However, there are already voices saying that this crisis has been brought upon us by a disregard for the planet. Whether this will be heeded by international leaders remains to be seen, but the real estate industry will be under considerable pressure to improve its carbon footprint when the initial dust from Covid-19 begins to settle.

With the above factors in mind, in the short term, there could well be an increase in the amount of surplus space in the market and void space in client portfolios. Owners will need to be agile to minimise these and to take advantage of new opportunities when they become available.

Offices

Many organisations have completely moved to home working over a very short time. This has necessitated the adoption of new technology in many instances. It is likely that some of these practices will continue after the lockdown has finished and this could have a significant impact on the way organisations use their offices and demand for this space moving forwards.

Initial feedback from our colleagues and partners is mixed. For detailed work, a quiet environment is relished. However, most are missing the social interaction of being in an office with the majority citing ‘colleagues’ and ‘bouncing ideas off each other’ as the predominant things they miss most of all. Younger members of the team are missing out on the mentoring and training opportunities that come from being able to shadow more experienced team members and seeking feedback on their own performance in face-to-face meetings and negotiations. For those who live alone, the social experience of working in an office is vital, and those with young families are understandably struggling to find quiet spaces to work in.

We don’t anticipate that physical offices are going anywhere as a result of Covid-19, but do predict a move to agile working as the norm - and this will have a profound effect on the office of the future. The personal workstation may disappear, and new office designs are likely to focus on areas for collaborative working, training and meeting, with quiet areas for individual work. However, many are likely to spend a proportion of the week working from home now it’s been proven possible and productive by so many firms.

Demand for office space will inevitably change and owners will need to formulate strategies for changing needs and implement these as quickly as possible.

Retail

Demand for retail property has been in decline for some years now and without doubt, this rate of decline will accelerate as a result of Covid-19. We have already seen the failure of well-known brands like Oasis, Warehouse, Debenhams, Laura Ashley and Cath Kidston, which were already suffering in advance of this crisis.

The lockdown across the UK has benefitted many online retailers as much as it has disadvantaged the traditional high street stores and retail parks. Jeff Bezos, founder of Amazon, has seen the value of his shareholding in Amazon jump by $24 billion since the start of the Covid-19 crisis and Amazon has recruited thousands more workers to respond to the demand in online shopping.

We are not just looking at those retailers who sell physical goods though; consider how much stronger those that also provide intellectual property will be, given our current living situations. Music. Films. Books. All can be delivered over the internet at a little cost and a huge profit. Not forgetting the digital platforms we have already mentioned like Zoom and MS Teams, who have officially shown the world their value. These online retailers will have so many advantages over the traditional shop during the recovery period. Such huge financial power, combined with the intimate knowledge of their customers’ habits, will drive further sales to them at the expense of High Street equivalents.

So, what could be the future of traditional shopping?

Less sales area could be needed. Marginal retailers could fail and not reopen after the current crisis. Tertiary and secondary shopping areas may need to be repurposed to accommodate broader needs. We see significant opportunities for residential development within city centres. Will obsolete shopping centres become brownfield residential sites, and traditional shops converted to apartments?

With more people living in town and city centres the High Street, there will be more opportunities for social interaction and events. Small scale food retail and artisan producers could return after an absence of decades.

There may be more demand for more flexible occupation of prime retail space with retailers wanting rentals relating to turnover and the ability to take additional space or hand back surplus space as markets change.

Perhaps campaigns to save the High Street, should instead become a strategy to drive and assist its change?

‘Out of town’ retail has been equally affected by the change to the internet and the same forces will continue. There are good opportunities to change the use of these buildings to warehousing and to increase the site density in the process. Many are ideally located to providing local distribution hubs and those less well-located or configured could become housing sites or industrial estates.

We could also see rapid changes in the behaviour of the supermarket sector. Consumers have tried to switch to online ordering and delivery, but the current infrastructure has been overwhelmed despite large supermarkets increasing their capacity by 20% in a very short amount of time. It is possible that supermarkets will now have a precedent to expand e-commerce, and with this their property requirements will also change.

Don’t believe this? Too pessimistic? Look at the share price performance of Retail Property Companies over the last year, then consider that in October 2019 only 5.4% of food and 15% of all non-food was transacted online. What will this look like after the shops have been closed for six weeks?

Industrial & logistics

The industrial & logistics sector is in our opinion likely to prove the most resilient in the commercial property market. This was the case in the last recession, whilst vacancy rates did rise significantly, there was always a reasonable level of demand. Vacancy rates are currently low within our clients’ portfolios, however there is a significant risk that these will rise over the next 12 months. Weak businesses will fail, and other companies will look to rationalise their occupation in order to save cost.

Manufacturing companies have been adversely affected by long and complex global supply chains. We consider that this fragility will be addressed, which could subsequently be an advantage for the UK property market.

We also predict a positive effect on this sector as the move to online retailing accelerates. More distribution space will be needed throughout the UK including “last mile” depots in urban areas. It would not take much of a change in grocery shopping for supermarkets to need “dark stores” in every town for picking and packing. What is definite, is doing this from a traditional store is grossly inefficient and supermarkets and other similar businesses will be looking for suitable property alternatives to provide a long-term investment in this area.

Conclusions

What can we conclude from this discussion? Change is inevitable and will be faster than we have seen for a very long time – if ever before. But as businesses create their new normal post Covid-19, property will remain an integral asset and opportunities will exist in the right locations. It will be necessary for property owners to be agile and adaptive.

What can property owners do to accommodate and benefit from this change? In these times of change so many of the old strategies are still true: the tenant is a customer and should be treated as such; buildings and estates are maintained in an attractive and professional manner; empty space is refurbished and upgraded to meet tenant expectations; rentals are competitive.

In short, property owners must understand and anticipate their occupiers’ needs to provide the best quality, sustainable space they can. This will not necessarily be the cheapest, but it should be the best value for money.

If you want to find out more commercial opportunities in the UK, or discuss the options available to your business during the Covid-19 outbreak and beyond, don’t hesitate to get in touch with a member of our commercial team. Find out more here

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