Thanks to periodic shutdowns, ever-changing restrictions and stay-at-home orders, the commercial property industry has experienced unpredictable changes over the past year and a half. With the shift towards ecommerce drastically ramping up and high street retail struggling even more, the market is heavily out of balance, presenting challenges for current investors and those looking to get involved.
However, the future isn’t all doom and gloom and the evidence from early 2021 is promising. With transactions rising by 115% in the first quarter of 2021 compared with Q1 of last year and a 55% rise on the 10-year average, the commercial real estate market seems to be making a strong recovery from the challenges of Covid-19.
Although a sustained moratorium on evictions in the commercial sector might be causing frustration for retail landlords who won’t have received rent for the past year, this shouldn’t deter would-be investors from entering into the market.
So, where to invest and what are the challenges?
Offices
With an estimated 30% of office workers not expected to return to the office full-time and the collapse of high street giants like Debenhams and Topshop, commercial retail is pitching considerably in one direction.
While office space will still be a welcome alternative to working from home for the majority, the size of the space needed will likely reduce. This may create challenges for investors seeking renters but there are opportunities to be found.
2020 saw the birth of more companies than in previous years, mainly thanks to redundancies and the furlough scheme encouraging entrepreneurs to start their businesses from home. For many of these small ventures, office space may be the next step after using the home working period to establish themselves. Though offices may be getting smaller, this could provide opportunities to host more tenants in the same amount of space.
Logistics
During 2020, ecommerce saw an almost 35% yearly increase in sales figures and represented more than 30% of all UK sales, up from 21% in 2019. This has translated into a need for more warehouse and logistics space across the country as online retailers scramble to fulfil the orders that have been pouring in.
Colliers International expects industrial space and warehouses to record the highest increase in rental value over the next four years, especially where supply is low like in London and the South East.
While rental growths in these areas could continue to grow at rapid rates, experts believe that other areas more popular with industrial space may have already reached peak value. This shows that, to get the most from this area of the market, paying attention to supply and demand is vital.
Retail
While physical shopping has sharply declined and struggled to recover thanks to the pandemic, this doesn’t mean there are no opportunities in this sector. Changes to the Use Classes Order now means that retail properties can be repurposed more easily, allowing high street space to change its use depending on the needs of prospective occupiers. With high street space becoming more experiential, there may be more success to be found in letting to a gym in a space that was once a clothes shop.
However, there are some experts who believe that these opportunities are still not that numerous. William Matthews of Knight Frank believes that the least attractive retail properties are often in places with little demand for other services or areas of high unemployment, so there are still risks to be considered in retail space.
Outside the City
This year, research found that suburban growth surpassed city growth in the commercial sector for the first time in a decade. The shift is considered to be due to workers wanting to return to the office but not willing to return to the major cities.
Not only does this show that appetite for office space will begin to grow again once home working orders end, but this also highlights an interesting shift in the market that investors may be able to capitalise on.
Though so many predictions forecast the end of London office space, investors must consider this an opportunity for office space elsewhere. Rightmove research in early 2021 found that Cornwall overtook London as the most searched location for UK movers which could suggest that office space will become more atomised across the country as major businesses adapt to their workers’ new patterns of life.
Commercial vs residential property
Another important thing to consider when planning property investment is the potential for long-term returns. Given that commercial properties typically have leases of five years over the typical one year in residential property, there is opportunity for investors to see better long-term returns with incumbent tenants.
Though there are commercial property owners experiencing difficulties with unpaying tenants, the expected exit from Covid restrictions should hopefully encourage strong recovery for most commercial sectors. In fact, data from Savills this year shows that even high street retail has seen a growth in yield.
