Many investors are exposed to the commercial property market, which was hit hard by the coronavirus pandemic, but the sector has demonstrated its adaptability.
At BB&J Commercial, we interact with commercial properties every day. From local shops to warehouses packed with parcels, commercial real estate plays an integral part in the UK economy and is one of the oldest assets.
As coronavirus swept through the UK, shops dropped their shutters, offices closed, and hospitality venues struggled to stay afloat. Almost overnight we saw landlord’s income streams provided by rent subside.
Many landlords were facing the prospect of empty properties and long periods without rent payments. It had led some investors to consider whether this impact was temporary or if it signals a greater shift in confidence in the sector.
Retail was heavily impacted by COVID-19 as non-essential vendors opened and closed their doors in the last year. And as we know, retail was in some trouble before COVID-19 happened.
The sector had been damaged by the 2008 global financial crisis and the increase in online shopping. However, research shows confidence that there is a long-term space for bricks-and-mortar retail, but cautions show there are certainly too many of them.
In addition, the research pointed to the significant changes in high streets during the last decade and the transition towards the service provision, such as nail bars, coffee shops and yoga studios to name a few. It stated that retail adapts quite well to changes in demand and there will be continued demand for the sort of things you cannot buy over the internet.
While retail can adapt to consumer demand, creative solutions are still required to repurpose some retail properties. This has been supported by the relaxation of planning laws in July 2020, which simplifies the conversion of retail to restaurant, office, or residential use.
Many had hoped that vacant high street shops would be converted into much-needed new homes. However, not all retail properties have alternative use. For example, purpose-built shopping centres are not easy to repurpose.
No Leisure in Lockdown
If retail’s decline was well underway pre-pandemic, leisure was performing effectively, although with some mixed fortune. Despite the leisure sector benefitting from the trend towards spending on experiences, particular leisurely activities such as food and beverage have struggled.
However, there is confidence that leisure businesses who can weather the COVID-19 storm could trade positively once allowed. There are many signs that show households willingness to return to pubs and restaurants. And as remaining virus restrictions are removed, there is plenty of opportunities for spending to pick up again.
Pubs and restaurants that have been able to reopen safely have witnessed strong demand, with some insights suggesting that sites that reopened on April 12 to that equivalent day in 2019 saw they were up by 58.6%. Meanwhile, PureGym logged a million workouts across their 240 sites in the first week of April’s reopening.
The insight report stated that the physical experience and online environment simply cannot be replicated. In attractive locations such as affluent market towns, suburbs with strong residential catchment, major city centres and tourist destinations, where consumers have reason to leave their home, continue to see leisure property as a growth area going forward.
Data has shown that suburbs have been more resilient than city centres because of COVID changes. There was a doughnut effect, as city centres hollowed out by office closures and the impacts on retail and leisure. As workplaces offered more flexible working and evaluated the importance of the office to their business, non-central locations may continue to benefit.
Mark Richardson of BB&J Commercial commented: “ The so-called ‘doughnut effect is easy to understand, and is a very good analogy as to how city centres have been adversely affected by changing shopping habits, and that change has been vastly speeded up by COVID. The shake-up of planning laws was an absolutely essential measure to help ease the burden of changing the use of redundant city centre buildings. On its own however it is not enough. Planners and local authorities really do need to organise themselves to provide incentives and support for businesses looking to repurpose old bricks and mortar, such as Derby City Council have done with assisting Bam Boom Cloud to move into the city centre as their HQ offices.”
The Logistics Boom
Changing consumer habits, because of COVID-19 has meant that logistics was one of the few areas of commercial property that benefitted from the massive increase in ecommerce.
Between the years 2011 and 2019, the value of ecommerce trade mushroomed from £23 billion to £58 billion. Now, this trade has accelerated during 2020 to an eye-watering £84 billion. This shift in consumer behaviour has had a knock-on effect on real estate as there has been a huge increase in logistics warehouses and hubs.
Predictions suggest that the expansion of ecommerce could drive demand for 92 million square feet of additional warehouse space in the next three years.
The long-term challenge for many is the permanence of this boom, which remains to be seen. Whether the demand for logistics assets grows post-pandemic truly depends on how the economy rebounds and to what extent shoppers switch back to physical stores.
While the pandemic has accelerated some anticipated changes to commercial real estate, it has also shown the opportunities and adaptability of the sector, in response to a huge challenge. Alongside the growth of distribution centres to support online deliveries, the public reaction to the easements of COVID restrictions suggest that demand for experiences that cannot be delivered to a doorstep in 24 hours will increase.
Graham Bancroft, Partner at BB&J Commercial commented “we have noticed the changes in demand for commercial properties and we are very lucky to have continued business throughout multiple lockdowns. With demands constantly changing, businesses including ourselves have had to be creative in our offerings and adapt to meet the new needs.”
Mark adds: “we are at a pivotal point with commercial property investments. Whilst sectors such as industrial have remained very strong, the abandonment of large high street shops by major retailers in favour of online sales or because of insolvency has left some big voids in large units. These will be difficult to fill, and there will I think be a re-balancing of rents and values as these leases come to an end. In truth though, that has been coming for a while, and looking at the positive what we now have is an opportunity to think about repurposing many town and city centres so that they are not purely driven by retail, and maybe make them more community friendly.”
As the nation prepares itself for the next stage of lockdown lifting, investors will monitor whether COVID-forged consumer behaviour is here to stay.
Are you looking to purchase or let a commercial property? Please do not hesitate to contact BB&J Commercial and one of our team will be happy to help. We have a team of dedicated property experts who can assist with any requirements.
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