The commercial property market during 2020 has been difficult to predict and even more difficult to navigate. There has been significant concern about the future of commercial property investment, particularly as a result of the government’s decisions regarding the economy during the coronavirus pandemic. The value of the commercial property market has been under question, with investors considering whether it’s viable in the long-term due to the concerns surrounding retail and office spaces.
The changes to people’s personal and work circumstances have caused the commercial property market some challenges. The forced closure of all but essential business has led to many tenants vacating their office spaces or shortening their contracts to reduce costs. Retail and leisure businesses have experienced a loss of income, whether partial or full, due to the effects of the nationwide lockdown.
Many have been forced to close their properties due to the drastic decrease in footfall and struggle to generate revenue. A loss of income has led to a large number of tenants being unable to fill their contractual rent obligations. As a result, landlords are also losing money as they struggle to keep their commercial properties generating income.
New agreements between landlords and tenants
Landlords and tenants are facing their own challenges when it comes to commercial property. The government’s decisions regarding the moratorium is just one of the challenges causing friction in the sector. The government introduced an extension of the moratorium, a scheme that prevents landlords from forcing tenants to pay rent between March and December 2020.
When the moratorium is eventually lifted, tenants who have been granted a break from paying rent will face a demand from landlords wanting these payments made, as well as having to pay staff full wages once the furlough scheme ends. This is a great concern for tenants who must consider their future with the commercial property they pay for, and landlords for the commercial property they invest in.
Moving forward, lenders and landlords are naturally asking tenants more information about their purposes with a commercial property. Short contracts and loss of income are unattractive for landlords who must also generate income. Landlords may struggle to fill vacant properties where demand for physical retail and office spaces has reduced.
This could be detrimental to the commercial property market with large numbers of properties emptying at a time when finding another tenant as a replacement is difficult. Many landlords are coming to agreements with tenants to forgive rent arrears or pay rent at a reduced rate to ensure some money is being contributed per month.
Reduced demand for traditional office spaces
The pandemic has led to considerations about the future of office spaces and traditional work environments. The government recommending all businesses with the means to work from home to do so has resulted in office spaces becoming empty rather quickly. As some businesses return to the workplace, they may be reviewing the size of office space they need.
While the demand for offices won’t disappear, many organisations are looking to downsize their existing office spaces to suit a smaller team working in the office while the rest of employees work remotely. For commercial offices, investing in new large scale properties may be unappealing, but investing in the refurbishment of existing office spaces may be more attractive.
As well as reconsidering the size and layout of office spaces, many tenants are looking to move out of city centres and into more suburban areas. Working from home and redundancies means a central location is no longer needed for practical purposes. Decentralised properties often enable tenants to acquire a more cost-effective space, allowing businesses to reduce cost outgoings.
Questions over physical retail and leisure premises
Retail businesses have been forced to close for long periods of time during the pandemic. Businesses experienced a significant decrease in footfall as members of the public comply with government guidelines and remain at home. People have relied heavily on online shopping to maintain social distancing, avoid queuing and crowds. Pubs and restaurants were also badly impacted by the effects of the virus. Many have managed to reopen and reestablish their business but will once again feel the hit as further measures come in the autumn and winter of 2020.
These commercial premises have had to close permanently or experience long periods of time unoccupied. With little to no business coming in, tenants have had to forfeit their physical properties to save costs and survive the pandemic. As the demand for physical retail spaces decreases and online shopping increases, the future of high street retail is under question.
Businesses may require shorter contracts and smaller premises, as well as a change to when rent is due and how it’s calculated. Especially in town and city centres, retail businesses are struggling to see the value of investing in physical premises when the future of the high street is unknown.
Commercial property compared to residential property
There remains, as always, a very large demand for residential properties. A recession and falling house prices have led to benefits and challenges for movers and first-time buyers. However, in the backend of 2020, there is still so much uncertainty around people’s employment circumstances. It remains difficult to predict where demand for residential property is going to be this year and in 2021.
As businesses implore workers to work from home, the opportunity to move out of the city centre is attractive. House prices in suburban areas may increase as people look to move away from the city for more room, a garden and home office. This may all change depending on the further impact of the government’s decisions on the economy due to the pandemic.
The future of the commercial property market is uncertain. As businesses make redundancies and remain working from home, the demand for traditional office spaces is decreasing. Retail and leisure premises may look to downsize, shorten contracts or close completely as the future of the high street is unknown. Landlords may have to shift their investment from new developments to refurbishing existing office spaces to accommodate new business needs.