The COVID-19 pandemic had a real impact on multiple industries around the world, including real estate. Real estate investment value dipped by as much as 40% (Wealth Manager) in 2020, but property owners were hopeful that this scenario would change once the lockdown was lifted.
Now that we are nearing the end of the third quarter of 2021, there have been noticeable changes observed in the real estate market, but these changes are all partially positive. What does this mean? How are the UK commercial property space owners reacting? What are the new changes? Are they permanent?
Real estate in the post-pandemic world
As expected, when the global economy crashed due to the series of lockdowns caused by the pandemic, it took the real estate industry with it. Personal property prices crashed, and there was a bigger dip observed in the commercial real estate spaces. The UK government offered subsidies and reliefs to tenants at this time as they struggled to pay timely rent due to inactive income sources, so the property owners had some leverage and they could service their debts.
Once the markets reopened and the lockdowns were slowly lifted in countries around the world, the UK real estate market observed a noticeable shift in the demand for commercial real estate spaces. The spaces that were affected the most were shopping malls and retail outlets. To adapt to the changing consumer needs, most retail brands started offering services online. They saw that it was an easy and comfortable switch for both the company and the consumer, which meant that they would not have to spend additional overhead, transportation, storage and display costs that they would normally incur if they kept a physical store. This situation caused malls to shut down permanently around the world and in the UK as well, as there was no need for it.
Similarly, other office spaces were forced to shut down, and currently, there is a surplus of commercial real estate spaces available with no company willing to lease. This is because most organizations and their employees believe that a flexible and remote working environment is what suits them best. Companies save up on operational costs and the employees are free to work from wherever they please. Only 5% (FT Adviser)of the total workforce in the UK is expected to work entirely from the office.
This creates a big problem for all the office owners. When more people adopt a remote working strategy, it reduces the demand of the office space they need; that is if they need one at all. The vacancy rate of commercial office spaces has seen a steady rise – it has increased to 7.7% (Swift Headline) in 2021, and most of these commercial spaces are office spaces. And the ones who are planning on investing in an office space want it to be sustainable, ecologically sound, and extremely modern.
The expectations out of the modern office space
There is a demand for office real estate in the UK. The 5% of people who are expected to work entirely from the office, and those who are expected to come in a few times a week or in the month, all need an office area to work from. But the space they are looking to lease is not easily available. The importance of sustainability has created a special type of requirement that didn’t really exist before in the UK real estate market.
Organizations are ethically inclined towards making the change to a more sustainable workspace. Greener office buildings are rising in demand because companies are not looking at them as something of an add-on. They are looking at it as a necessity. They want their offices to be less harmful to the environment and companies are all focused on doing their bit to fight climate change. While this may seem fantastic on paper for everyone, it is not the case for most office space owners, or those looking to invest in real estate.
They will have to upgrade their current commercial rental space to accommodate all the new requirements that these organizations are looking for to make their office space more attractive to companies. This will lead to additional expenses which may not yield the results the property owners are hoping for because there is no certainty of sale. Making this change is also not an easy feat to achieve. Buildings and commercial office spaces are fundamentally energy-intensive. The building sector observed a record high in their carbon emissions in 2019 before the pandemic, with 38% (UN Enviromint Programme) of all energy-related carbon emissions coming from the building and construction industry.
What commercial real estate spaces are organizations bidding for?
Sustainable office space is one requirement that is on the rise for commercial spaces today. Another one is the location. Before it didn’t matter where the office was located, now companies are willing to spend top dollar for a commercial office space that is in a prime and central location.
Central London has been witnessing a hike in their commercial real estate prices as more large enterprises bid for the best offices that money can buy. Organizations want to invest in real estate that will make their employees want to return to working from their offices instead of working remotely, which is why they are willing to shed the extra amount to try to make it happen.
Organizations are on the lookout for modern workspaces with great interiors, good lighting, and a look that just does not exist in older construction spaces. So while the demand for a modern building increases, the demand for the generic, run-of-the-mill office drops drastically. It is a major cause of concern for all the property owners who had invested in the space and relied on the tenant’s rent as a primary source of their income. More lots and buildings sit vacant around the UK and the property owners are finding themselves at a loss, not knowing how to proceed.
The changes in the demand for commercial real estate spaces
It isn’t all bleak in the commercial real estate sector. While the malls shut down and offices closed, there was an increase in demand for a different type of commercial real estate. As more businesses moved their operations online, their focus shifted to maintaining all their online servers and applications in a secure location. The demand for data storage centres increased, which is a trend that will continue to rise moving forward as well.
Another type of commercial real estate space that observed growth was the warehousing sector. This is primarily due to the strain on logistics and supply chain as well as the boom of the e-commerce sector. Malls had shut down, but brands still had the inventory they needed to store and sell, even if they were doing it online. This increased the demand for storage spaces for all the e-commerce stores, especially those that were operational in a large capacity around the world. Even daily groceries and household supplies can be delivered to your doorstep now, and they need storage spaces with specific requirements as well.
So, storage, warehousing and spaces to accommodate data centres are definitely on the rise and will continue to be so in 2022, which is the safest bet if one is looking for investment opportunities in the real estate sector. This investment option is actually becoming one of the most feasible long-term investment options for many because of the volatility of equity investments and the restrictions that come with investing in bonds.
What can commercial real estate property owners do?
There are three possible solutions for commercial real estate property owners who have office spaces to let. These options include the following:
Upgrade your property space
Greening up your commercial real estate space will help you as a property owner in multiple ways. You will be able to generate more income because the amenities you provide are superior to most other commercial office spaces. You will have a more sustainable approach, save companies costs in terms of energy consumption, and your office will have more modern features than it did before.
While this may seem like an appealing option, it does require a big investment from the property owner. Making an entire commercial building is a costly affair with no guaranteed returns, so this step should be taken only after creating a proper investment plan for increasing market value in the future.
Sell your commercial property space
The second option would be to sell the commercial property space you own and try to salvage the situation. If you feel like you cannot upgrade or rent out your commercial property, it would be best to sell it to the highest bidder. The UK government has supported the tenants so far with subsidies, but since the subsidies have dropped, companies are not willing to spend extra revenue on rental spaces, especially if they are performing well when they work remotely. The best option in this scenario as a property owner would be to sell, avoid paying extra property taxes, maintenance fees, and more, and cut your losses and move on.
Repurpose your commercial property space
The third option would be to repurpose the space you have to cater to the audience that needs for it. As mentioned above, there is a rising demand for storage and warehousing spaces in the UK, so if you can repurpose your commercial real estate space with minimal investment from your end to turn a profit and still own that piece of land, you should go for it.
Final Thoughts
The real estate market has been volatile ever since the COVID-19 pandemic hit. Commercial real estate property owners need to be vigilant and track market trends and use data analytics to observe any more fluctuations in the real estate market as they continue to put in regular maintenance and taxes to own their property.
