Feature: How the pandemic has impacted the commercial real estate landscape
By Paresh Raja, CEO, Market Financial Solutions
The pandemic impacted almost every industry; indeed, the commercial property market was not exempt from the repercussions of COVID-19. With the dawn of social distancing, remote working and regular lockdowns in 2020, many businesses were forced to shift their operations online, whilst shops and restaurants were forced to close. As such, one would be forgiven for expecting the commercial real estate market to still be in a period of recovery.
However, fast forward two years and the commercial real estate market has bounced back remarkably well. With public health restrictions hopefully fading in the distance, towns and cities have been given a new lease of life. As such, the commercial real estate market looks set for an influx of promising opportunities for investors. In fact, Savills predicts that investments in the commercial property space will increase by 10% in 2022.
As such, this is an opportune moment to consider the factors that have defined the last two years and the trends that have contributed to the reinvigoration of the commercial real estate market.
Navigating the challenges
It is clear that social distancing measures and stay at home orders significantly undermined the business model of commercial property assets like high street shops and restaurants, as well as office spaces, with footfall falling by 89.9% in April 2020. Consequently, official figures predicted that Britain’s high streets would suffer losses between 20% and 40% on their retail offerings as a direct result of COVID-19. Meanwhile, in the hospitality and retail sectors, 2,200 retail sites were forced to shut up shop in 2020 alone.
As mentioned, commercial office spaces were similarly impacted, as many businesses tried to leave their leases early and emergency legislation made enforcing the terms of any lease more difficult. On top of this, due to shifting working patterns of most employees during the pandemic, one survey found that the majority (73%) of decision makers planned to reduce their office spaces.
More positively, there was some relief for investors in the storage sector of the market. With supply chains damaged and online shopping booming throughout various lockdowns, storage space investments saw returns of 36%.
Has the commercial real estate market recovered?
Despite the challenges faced, the recovery of the commercial property market has been rather impressive. As the UK removed the shackles of restrictions, many investors seized the opportunities that the slow return to normality created. In fact, recent data suggests that £57 billion was pumped into the commercial market in 2021, just about passing the five-year average.
Coinciding with this, the number of sales transactions jumped from 2,698 in 2020 to 2,789 in 2021, reflecting a 3% increase. Of course, some investors might still be weary of entering the commercial arena, but the fact that demand for office space grew by 30% in Q1 2022 should offer them some encouragement.
What is driving the commercial real estate markets bounce back?
For some time, commercial property has presented investors with a potential solution for the disparity between supply and demand in the residential sector. With supply lagging, investors have turned to conversion projects like turning an old office building into flats. As such, this has partly driven the revival in the commercial market, but there are some trends that perhaps have had a greater role.
As mentioned earlier, storage units and warehouses outperformed other commercial properties during the pandemic. In 2021, the number of sales in the industrial arena rose by 28% from 699 to 892 transactions. Simultaneously, the value of these transactions grew by 57% to £16m last year. Perhaps this is relatively unsurprising, considering the online shopping boom and the need for infrastructure to fulfil the demand for storage and distribution facilities. With these numbers in mind, it is fair to say that the industrial sector has contributed significantly to the recovery of the commercial market.
Elsewhere, with 38% of UK working adults reporting they regularly work from home on a weekly basis, many employers have turned to prime office space in a bid to encourage their workforce back into the office as much as possible. As such, transactions for office space increased in 2021 by 3% and £18.2m was pumped into the sector.
Finally, retail and leisure investments have also increased and contributed to the recovery of the market, with the value of these transactions growing by 31% last year.
What role does specialist finance have to play in the revival of the commercial market?
For commercial property investors, the revival of the market is an encouraging sign of further opportunities and growth to come. However, as the market grows demand will increase and supply will dwindle, creating a more competitive market. As such, it is vital that investors are able to find financial products and solutions that can match the scope and complexity of the commercial market.
Therefore, it is obvious to me that specialist finance lenders have an important part to play. With the commercial real estate landscape becoming more competitive, investors must be able to move quickly when an opportunity arises. Thus, lenders will need to exercise agility and provide their clients with flexible financial solutions as quickly as possible. Those that do so will surely be contributing to the continued revival and long-term health of the market.