Colin O’Reilly, sales director for investor solutions at MRI Software
It has become clear in the last two months that, despite the continued rollout of COVID-19 vaccines across the globe the emergence of new Coronavirus variants means that additional lockdowns, safety restrictions and ongoing social distancing measures will likely last for months. All of these will continue to impact businesses across a range of sectors, which means that there won’t be a return to the ‘old normal’ any time soon.
Despite the commercial real estate sector facing a long road to recovery, the good news is that we are already seeing signs of landlords showing flexibility and working with tenants to navigate the crisis, with an increasing number offering rent reductions and rent deferrals as they prepared to move into 2021.
Data from 150,000 leases reveals surge in unpaid rent
According to anonymised 2020 data from over 150,000 live leases managed through MRI Software’s enterprise property management and accounting software platform, during the pandemic, the proportion of outstanding rent payments in the commercial sector (retail, shopping malls, logistics, warehouses and office spaces) surged.
In March, when the UK government introduced the first nationwide lockdown, the proportion of outstanding rent payments in the commercial sector began to surge, increasing from 19% of total rent invoiced to 33% in September (when the actual unpaid total on the Horizon database alone reached a peak of £387 million) before hitting 58% in October (equal to £204 million on Horizon).
Positive signs of landlord-tenant cooperation
The data also revealed, key positives. The figures indicate that both commercial landlords and tenants have been working together to ensure their long-term mutual success by adopting flexible leasing arrangements that ease the pressures of ongoing restrictions and depressed market conditions.
For March through June 2020, there were 30% more rent reductions than during the same period in 2019. The number of rent reductions increased by 46% in March, 82% in April, 27% in May and 11% in June compared to the same months in 2019.
The data also showed landlords giving tenants more flexibility, as the average duration of new leases was 52 months between March to June – a decrease from 69 months for the same period the previous year.
The changing shape of commercial property
While working with tenants to protect their viability as renters – and also helping to safeguard their own long-term interests – many landlords are also starting to look at how their commercial property portfolios are evolving through the crisis and making adjustments. As well as cooperating with tenants, more landlords are and should be looking for ways to diversify the way their holdings are used and exploring new opportunities, such as mixed commercial developments that include residential space.
Turning traditional commercial properties into campus-style redevelopments that combine a range of functions such as retail units, coworking spaces, rental housing, student accommodation and/or senior living represents a valuable opportunity many owners are increasingly exploring. Previous research from MRI showed that, before the pandemic, two-thirds of property professionals believed that former retail premises could be the UK’s biggest untapped resource for new residential development.
The power of PropTech and data
In addition to having a profound impact on the shape of the commercial property sector, the pandemic and lockdowns have underlined the need for the use of data and digital technologies in more effectively investing and mapping out strategies for investors, landlords and corporate occupiers. Many owners and tenants have turned to AI-driven lease abstraction solutions to give them a strong read across broad lease portfolios, providing insights into where they stand with respect to their rights and responsibilities – either as landlords or renters of commercial properties.
The fact is the strategic use of digital technologies was already emerging as a focus for commercial owners and occupiers, but the pandemic has brought to the forefront the need for technology to aid in property management. The use of PropTech and data is proving to be critical for firms in the property sector rethinking their portfolios and revamping their approaches.
Digital solutions will help provide a route to success in the aftermath. These technologies will allow landlords and tenants alike to take the decisive, data-driven actions needed to meet the challenges that have resulted from the health crisis and other unforeseen hurdles in future. What’s more, with effective tools and practices in place, businesses can not only overcome many of the issues that have arisen as a result of the pandemic but can use the insights at their disposal to find new opportunities in the post-COVID world.
