What’s next for commercial real estate?

COMMENT: The word “unprecedented” seems to have lost its meaning as it slipped into ubiquity this year, but the coronavirus and its associated impacts have disrupted London’s commercial real estate industry in a way that can only be described as unprecedented. In the midst of this disruption, it is important to distinguish between those changes which were just the acceleration of existing trends, which may be likely to continue post-Covid, and those which came as a direct and short-term response to the pandemic. While the business world largely coped well with the move to total remote working, commercial real estate inevitably slowed down this year. Leasing transactions almost disappeared, followed by investment transactions, though these later recovered into the third and fourth quarters. Appetite for investment Despite the spectacle of deserted streets, I have heard from the market that the level of investment transactions in the final quarter of the year is at the same level and in some cases greater than 2019. Even more, appetite and investment from foreign buyers remains strong. There are other reasons to be optimistic about the future of this sector. Although the majority of London workers have been working from home since March, the early idea that the office was dead, and that people would continue to work remotely has now been abandoned. The need for community, co-operation and management continues to be important to businesses and it is not achieved to the same degree from an entirely remote workforce. Speculation over the demand and subsequent demise of central commercial real estate has dragged on for decades. No matter the threat, like the commuter-friendly fringe business parks debate or more central hubs like Canary Wharf, the big trophy offices in city centres have remained vital and alluring to businesses. While the office layout and day-to-day operations may change post-pandemic, Covid-19 may have little lasting impact on London’s commercial property market. Any reduction in demand for office space due to lower usage will probably be counteracted by the increased area required per person. Interest in central city premises will remain strong into 2021 and beyond, just as it has in the past when other threats have surfaced. Retail and logistics While changes to office space have, perhaps, been the most visible shake-up, the more profound changes in the market have taken place in retail and logistics. From toilet roll shortages to the collapse of high street giants, Covid-19 has thrown the retail industry and its supply chains into the limelight. As digital shopping boomed and the need for storage and fast transport increased, logistics and last-mile facilities carried on with their own surge during the pandemic. Pricing reached unbelievable levels for what remain essentially well-located sheds. Whether these prices can be maintained when the long-term inherent site values are re-examined seems questionable. Away from e-commerce, large swathes of the retail industry have unfortunately performed poorly this year. Again, this seems to be more of an acceleration of existing trends than anything begun by the pandemic. In the past 10 months we have had what feels like a decade’s worth of capitulation for high streets, non-performing shopping centres and retail warehouse parks. There are, of course, exceptions, and prime property yields have remained a testament to the enduring resilience of ultra-desirable central London property. This October, luxury brand Chanel paid £310m for its flagship boutique store on Bond Street – £70m over the asking price. Investors will continue to buy prime property for the long term, and examples like Bond Street and Chanel will be continue to be seen as good long-term investments. The overall trend though, has been one of decline. Much of the change we have seen so far this year then has been a continuation, and perhaps, acceleration of existing realignments. The coronavirus and the unprecedented crisis have proven the London market’s ability to weather the most turbulent storms, just as it did with commuter belt business parks in the 1960s and more advanced home-working technology in the 2010s. Despite this apparent continuity in the market, we shouldn’t be complacent. The coronavirus and the roll-out of the vaccine have distracted from one factor which could usher in substantial change to London’s real estate industry: Brexit. The threat of a no-deal Brexit has been largely discounted in market pricing, but with the year we’ve had, businesses deserve more certainty. At the time of writing this, I am somewhat relieved that the EU and the UK have at least decided to continue talking until the end of the year. Surely that is a good sign? We move into 2021 without as much optimism as we did in 2020, but after a year like this one, I’m of the firm belief that things can only get better from here. John Slade is the chairman of the real estate advisory group at Duff & Phelps