Insight

What next for the commercial property market?

The Covid-19 Pandemic has had an unprecedented impact on individuals and companies alike. Nonetheless, businesses across the board are looking to turn a new page and confront the new realities of a market that has been substantially altered.

Our Commercial Property team at Axiom DWFM set out the most recent developments we see across the commercial real-estate market below.

If you need commercial property lawyers who not only know the law on commercial property, can draft and review leases but also understand the market and have useful connections, please do get in contact. 

Offices in the post covid era

Flexibility in employee work locations will continue to be a popular topic in 2021, with over half of companies already expecting to embrace some variant of hybrid working. The benefits of hybrid working may include a better work life balance, greater work engagement, reduced commuting time and costs. Other tangible benefits include reduced expenditure on office space, higher levels of job satisfaction and reduced absence rates.

However, in order to cater for this type of working, conscientious companies should look to repurpose space to help with collaboration, productivity and the social interaction so desperately sought by employees worldwide.

Whilst demand for office space has contracted, the expansion of permitted development rights may allow some Landlords to re-model existing space. Tenants of such spaces may seek Landlord consent to vary restrictive user clauses to enable alternative use and many are seeking substantial rent-free periods as an incentive to take up occupation.

Conversely, many small and medium size landlords are facing downward pressure from Banks and potential events of default in respect of loans. As a way of offsetting some of the pressure and as a way of securing their assets, some Landlords are insisting that Tenants put down more sizeable rent deposits and/or authorised guarantee agreements as well as insisting that some Tenants take on new reversionary leases.

In terms of high-quality property, investors continue to be confident about the long-term prospects of this type of real-estate in leading London locations, with British Land recently exchanging on a £401 million West End office portfolio, selling a 75% interest in a portfolio of 3 buildings to Allianz Real Estate.

Retail leisure and hospitality premises

Supermarkets, homeware, and DIY retailers have remained robust throughout the pandemic, but the closure of non-essential stores has placed substantial pressure on retailers’ revenue and will continue to affect performance in 2021 onwards.

This pressure will result in a preference for turnover leases and a shift towards lease structures that are shorter, and with improved flexibility for tenants.

Excess retail space and dropping values generate opportunities in the short- to medium-term for retail assets to be repurposed to include alternative uses, such as innovative pop-up retail, co-working spaces and mixed-use schemes.

Logistics and warehouses

Investor appetite will increase further in the already booming U.K. logistics sector this year following the pandemic’s permanent impact on online retail and an improved understanding of the role of warehouse space within our essential national infrastructure.

The strong demand and weakening supply of sizeable warehouses will cause rents to continue to rise for well-situated assets adjacent to cities, urban areas and other strategic “last mile delivery” hubs.  For example, recently we acted for a Client on the sale of a warehouse in central Manchester to a multi-national SPV which sold for £4m.

Commercial Property lending

Despite the general decline in other sectors of the commercial property market, there has been a consistent appetite for lending throughout the pandemic due to low interest rates. Lending activity during the pandemic has been dominated by refinancing and loan extensions which has accounted for over 55% of all new lending.

Conclusions

The first quarter of the year has been traditionally relatively subdued, but this trend has been amplified in 2021 by a scarcity of quality purchasing opportunities. However, there is significant pent-up buyer appetite from both UK and overseas investors as they await an increase in availability and deliverability of good quality assets and, for overseas buyers, an easing of travel restrictions.

Strategic collaborations between Landlords and Tenants became a hallmark of the pandemic and with recent government announcements such as the extension of the moratorium on commercial property evictions being extended to 2022, the parties who are willing to adapt and diversify will be the ones who may well retain and obtain a strategic advantage moving forward.

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