07 May 2020
The new normal: Commercial property after Covid 19
The impact on office space
Covid-19 has caused more people to work from home than ever before. With the technology now available, businesses are seeing how successful their employees have been at working from home. Considering this, and some of the other benefits such as an improvement in people’s well-being and lifestyles, there is now a growing idea that commuting and working in big, expensive city offices isn’t that important anymore. For example, Barclays chief executive, Jes Staley recently commented that ‘the notion of putting 7,000 people in the building may be a thing of the past’.
A result of Covid-19 could therefore be a significant change in the way that we work. Many companies may now be looking at ways to facilitate more agile working in the future and to reduce their costly office space. This could mean huge savings for businesses, but for the investors and landlords of these big offices, this move away from office space could present them with a substantial loss of income. We could therefore see more office-to-residential conversions replacing traditional office buildings.
There may also be a permanent wider impact on the economy. If less people are commuting into cities to work in offices, businesses like cafes, sandwich shops, pubs and restaurants may also feel the effects of a possible slowdown in the number of workers that their trade depends on.
Retail shops and warehouse space
The high street has been in decline for a number of years, with many well-known names closing down stores to cut costs as consumers move increasingly online.
Once the lockdown restrictions are lifted, there may be an initial flurry in footfall on the high street and in large shopping centres, as people rush out after weeks of being in confinement, however Covid-19 is unlikely to change people’s shopping habits in the long term. The decline in retail property prices is therefore likely to continue to fall rather than change direction. Although the Government has announced business rates relief for this year, this may not be enough to save retailers from the effects of the lockdown and so we may see more empty shops and office space, more conversions to residential property or specialist venues taking over these premises.
Although the demand is low for retail premises, due to the continued expansion and growth in online shopping, the demand for warehouse space is likely to continue to rise.
Leases and rent payments
The impact of Covid-19 restrictions on the economy and business has led to many tenants of commercial property asking landlords for some form of assistance with rent, as trade and income has dried up. Some tenants are asking if they can pay their rent monthly, instead of quarterly, and this may be something that continues in the coming months and years as businesses try to recover and ensure that they have enough cash flow to survive. For landlords with tenants that are really struggling, it may be that instead of terminating the lease and having the difficulty of finding a new tenant in these challenging times, that they agree to the tenant subletting part of the premises to ensure that some rent payments are made. These are all decisions that will have to continue to be negotiated between tenants and landlords as they try and work together to get through these challenging times.
There is also a likely impact on new leases or lease renewals as businesses that had plans for expansion now have to try and recover from the economic impact. They may not be in a position to go ahead with taking on leases of new premises or may decide that they cannot renew their current lease as they need to downsize to a smaller space.
Both now and in the future, tenants negotiating new leases with the landlord are likely to try and negotiate clauses that reduce their potential liability for matters caused by a global pandemic or something similar, that are out of their control. They may want a rent suspension clause so that they are protected if something like this would happen again. It is likely that the market will evolve as the issues that Covid-19 has raised are far-reaching and unprecedented.
It remains to be seen what the true impact on Covid-19 will have on the way we work, live and on business, however it is likely that we will not go back exactly to the way things were before.