State of the market – the commercial property sector and the COVID pandemic


July 2020

A large proportion of commercial property has lain empty during the coronavirus pandemic, certain sectors have been forced to close and the UK population had been told to ‘work from home where possible’. Consequently, speculation is rife about the future need for physical work-spaces given the relative success achieved in flexible/home-working.

We spoke to a selection of commercial property professionals to ask about their experiences since lockdown easing measures have started to come into play and their projections for the future of the market.

For Andrew Crabbie, Head of Commercial Real Estate at Mayfair Law Firm Forsters the importance of having a physical office has been reinforced. Building a firm culture, team interaction, including the training and development of the junior lawyers simply cannot be replaced by the virtual world in his opinion. He sees the big challenge as being recruitment, with new candidates not only interviewing the business but also, the premises in which the business sits. Moving forward, this will be judged on the wellbeing and safety as well as the quality and location of the premises.

The team at Forsters had initially a healthy stream of commercial property work in the pipeline before COVID-19 struck which has seen them through up to now. Broadly, there is currently a lack of product in the market, with distressed property yet to make an appearance due in part to the Government grants/loans and the furlough scheme. Most commercial property owners are now concentrating on the next rent collection dates with many landlords (and Banks) taking the hit for the Government protection measures introduced for tenants.

For Stuart Bradney, owner of Carbon FC, the development side of his client base are ‘very active’ however, sellers are looking for too much money and the buyers (who are generally savvy entrepreneurs or owner-managers) will not go above and beyond the asking price. Unlike the residential market, Stuart says that commercial lenders were very slow to move on their propositions and there was a general mis-understanding of the Government loans and buy-to-let mortgage holidays and that this has resulted in some commercial landlords being affected by tenants who are not paying. ‘It’s a tough market’ says Bradney and he is often advising his clients to ‘hold on and not panic’ as the commercial market will recover over time albeit changes will inevitably occur. Investors need to be ready for such events and it is important to seek help and guidance when there is either a problem or a potential problem looming. By doing nothing, investors risk sleep-walking into an avoidable issue especially if we experience another potential turn in the market (i.e. a second lockdown). Opportunities will inevitable present themselves when economic cycles start to evolve.

Sarah Gardener, Head of Real Estate & Construction for Shaw Gibbs adds ‘Commercial landlords have a big weight on their shoulders with regards to rent deferrals and payment holidays being demanded by their tenants. Many who have existing debt have had to rearrange this with lenders or look to other forms of support. They hold these properties to generate a return on investment and this is not being realised now’. Liquidity and balance-sheet resilience have become of prime importance. Sarah’s main advice to her landlord clients has been to target a blended approach with their tenants in order to avoid full rent deferrals where possible. Agreements between the landlord and tenant in order to keep collecting some cash and avoid the tenant having a debt they may never be able to catch up on are preferable to all parties. She predicts that we will see an increase of ‘partnerships’ between landlords and tenants similar to the recent Company Voluntary Arrangement (CVA) between AllSaints UK and US where the retailer has agreed with the majority of their landlords that they would move to turnover-rent in order to protect the long-term viability of the brand.

The coronavirus has ‘pressed the forward-wind button; what was due to happen in five years in the High Street and the retail sector generally has happened in 10 weeks’ says Crabbie. Weaker businesses and certain sectors (principally retail, leisure and F&B) have been pushed over the edge whereas for others which are relevant and resilient, there is an evolving boom. Logistics and warehousing to facilitate home delivery and care homes (once they have recovered from the pandemic) and retirement homes are some of the areas which he can see thriving. The private rental sector will be strong, and he can see an acceleration in the emerging trend of mixed-use premises for example, distribution hubs with residential property above or in an adjacent block. He is confident that the commercial real estate market will come back strongly with ‘huge amounts of money out there and interest rates at a historic low’. Banks and financial institutions are in a stronger position now than they were in the 2008 financial crisis.

In a similar fashion to Andrew, Jon Silversides, Commercial Property Partner for national property agent Carter Jonas spent the first five-six weeks of lockdown moving legacy work over the line as well as being involved with the practicalities of the operational aspects of the business, such as the health and safety of staff and clients. The last four weeks have seen an increase in commercial activity within some but not all sectors and he is hopeful that this will continue into the traditionally quieter period of July and August.

Jon comments: ‘whilst it doesn’t take a rocket science to figure out that there will be an effect on office space in the future’ taking our business as an example, we still need to meet colleagues and clients alike as well as mentor junior members of staff, so there will remain a need for offices. There is uncertainty out there as occupiers seek to work out their new working practices, a process that may well take some months’ says Jon however transactional activity is continuing albeit in lower volumes and at a slower pace.

He has seen an encouraging amount of interest in smaller industrial-stock with companies remaining interested to buy this kind of premises outright. The industrial/logistics sector says Jon is so far faring well as not only is it easier to social distance in a warehouse environment but there has been an increase in demand from the online retail sector in particular. Over time he believes that retail outlets will begin to be repurposed for new uses, a process that was already under review pre-COVID and that some geographies are likely to benefit from a potential exodus from London.

One particular source of encouragement for the Oxfordshire market is the knowledge sector where interest has not been dissimilar to the pre-COVID market with some occupiers still needing a physical site as they have a requirement for laboratory/R&D space. For example, the Oxfordshire ‘knowledge spine’ which encompasses the science, technology and innovation clusters of the county are still attracting significant attention, not least because of the companies who spin-out of Oxford University and the halo-effect of the development of the COVID vaccine at the Jenner Institute and the numerous science and tech companies who have pivoted in order to help with the health and economic recovery of the UK.

Oxford Technology Park Oxford Technology Park (OTP) a new development in North Oxford opposite Oxford Airport has been designed to house and nurture such innovative, Science, and Technology based businesses, a good strategic move for Oxford which has a lack of commercial property-stock. OTP were expecting to hold a breaking-ground ceremony at the end of March until the pandemic halted proceedings. Placi Espejo, the Head of Business Development for the site says the ground is now ready and construction on Buildings 1 & 3 is starting again imminently. She is still receiving a high-volume of enquiries, but these are quite varied in terms of sizes to those received pre-lockdown. ‘We have been having a larger number of enquiries for smaller spaces than before’ says Placi, this is no issue for OTP as they have designed the units to be flexible and adaptable to the market. Building One for example, can be split into smaller units for spin-out companies or/and house large wet laboratory space if required.

The development includes a Premier Inn and Beefeater which opened in January. Both had a period of extremely positive trading pre-lockdown as their target demographic includes the nearby motor park, Oxford Airport, the already many existing business units along Langford Lane and A44 corridor, including the visitor economy of Woodstock. The beauty of being at an early construction phase for the technology park is that they are now able to adjust the build accordingly and take social-distancing and health and safety into consideration instead of having to retrospectively change the buildings. ‘Commercial property will now need to add value in relation to health and wellbeing plus flexibility, social and lifestyle improvements’ states Espejo ‘We have all experienced a hiatus in which we have had to contend with traffic, rush hours and packed public transport. People are coming out of COVID with more deep-meaning to their lives and they will want their employers to mirror this. At the Oxford Technology Park we are looking forward to building a community and a home for science, technology and innovative companies and their employees.”. In thoughts that echo Jon’s, Placi predicts that Oxford’s positioning as one of the two geographies who are leading globally on the COVID vaccine means that there will be more interest in commercial property for research facilities, R&D, science and technology.

The coronavirus has ‘pressed the forward-wind button’ (Andrew Crabbie, Forsters) across many aspects of our lives. High Street retailers who were previously struggling to keep ahead of the innovation-curve have found themselves without enough income and surplus stock without the required infrastructure or e-commerce capabilities to move it. Companies who were not prepared with their IT systems for employees to work from home have found it hard to maintain their operational service levels and those in unmanageable debt situations are reaching tipping-point. ‘Nobody was expecting a bio-crisis’ says Placi Espejo of Oxford Technology Park, with all disaster recovery plans being concentrated on cyber or terrorist attacks however, with change, comes opportunity – the strong and emerging sectors of the economy have now been accelerated as the forerunners. Whilst we will see some commercial property falling by the way-side, intelligent re-thinking of the space we have can hopefully enable the sector to upward curve we are now witnessing in the residential side of the market.