Commercial property 2021 – back in the driving seat?

With February fast disappearing into the rearview mirror, what lies on the road ahead for commercial real estate in 2021?

Here are some of the trends driving the market so far, and some we expect to see fighting for pole position in the year ahead:

1. Repurposing of existing stock - many institutional landlords or owner/occupiers have found themselves with unprecedented surplus space due to Covid-19. Combined with a softening approach from planning officials, this has lead to a rethink on the potential of existing assets - John Lewis’ plans to convert almost half of its flagship Oxford Street department store into office space is a great example of this. The continued relaxation of planning laws allowing flexibility to jump between certain use classes is likely to fuel similar projects on a smaller scale.
2. Increased corporate failures - Arcadia, New Look, Debenhams, Oasis, TM Lewin, Intu Properties and Pizza Hut are just some of the household-name casualties of 2020. Further failures loom on the horizon, particularly when Covid-support mechanisms such as the business rates holiday (worth over £10 billion) come to an end. Recent figures published by EY show a staggering 583 profit warnings from UK firms to the end of 2020, the highest figure ever posted, and a roadsign of what may be to come. Some of these likely candidates for administration or CVAs occupy major square footage both in and out of city centres and the pivot towards repurposing could well see a boom in the market for distressed assets with alternative potential.
3. Tenant opportunism - on the tenant side there are a few different trends emerging. 2021 has already seen an unexpected acceleration of activity in the leisure industry, particularly among restaurant clients. While this may appear counter-intuitive given ongoing restrictions, many Covid-induced business failures have led to prime sites and new opportunities becoming available, often fully fitted out and ready to trade. For those operators with confidence in their concept, an eye on the future and cash reserves to back that up, 2021 is already offering some enticing prospects for expansion which are too good to pass.
4. Keep calm and refit - on the office front, tenants are likely to continue to opt to refurbish rather than take on new space, including repurposing to provide better social distancing when workers do eventually return to their offices.  In areas experiencing a squeeze on supply, staying put may be the only option (taking Glasgow as an example, recent figures from CBRE indicate a major shortage of Grade A space, with just over 0.02% of the city’s Grade A stock currently vacant). This creates headaches for both landlords and tenants and so many will opt (for be forced) to maintain the status quo for the time being.
5. Short-term leases - linked to the above, short-term lease activity looks set to continue. In good times landlords can usually command significantly higher rents in return for more flexible lease terms. In the current market and with prime rents under pressure, certain tenants will find themselves in a stronger negotiating position for those discussions which will no doubt lead to some interesting outcomes.
6. Bullish landlords - as a counterbalance, will we see more bullish landlords? The temporary irritancy protections brought in by the Coronavirus legislation are due to expire on 31 March 2021. Even if some of these are continued we are seeing more landlords positioning themselves to call time on non-viable tenants and either take units back to market, or repurpose them entirely.
7. Flexible rent arrangements - a push towards these are long overdue. 2021 may see the beginning of the end of the traditional upwards only rent review. Alternatives such as turnover, top up, or index linked rents are all becoming more common in the deals we are negotiating (for more insight on this see Graeme Bradshaw’s article in The Retailer). Tenants continue to make sustained efforts to secure lockdown related rent protections, a trend which is sure to continue, particularly among the big-hitters.
8. Flexible office space - increased take up is likely. I’ve written before about the attractiveness of serviced office providers like Regus when times are bad and tenants are reluctant to contribute significant capital to medium/long term fixed property costs. 2020’s various lockdowns drove flexible office occupancy rates to near-negligible levels in many major cities, leading to well documented losses across the board for providers. The sector as a whole continues to struggle, but those that weather the storm could find themselves in pole position for a bumper 2021 if lockdown restrictions are eased and businesses need a temporary base for their first steps towards recovery.
9. Non-traditional lenders - as market sentiment begins to recover we are likely to see the continued advance of such lenders into real estate markets, both domestically and globally. Even pre-pandemic this trend was accelerating, with banks starting to retrench amidst Brexit-induced economic turmoil. Nimble private debt funds who are able to react to new opportunities far more quickly than their traditional institutional competitors will lead the drive.

As we turn the corner on lockdowns, will it be a return to life in the fast lane for commercial property? We expect so, but care will still be needed to navigate the twists and turns ahead.