There is no doubt that the COVID-19 pandemic has forced companies to fast-track their agile working plans. In a matter of weeks, many businesses adapted from mainly office / on-site based working to the majority of people working from home. Under normal circumstances, such major changes could be expected to take many months or years to implement. The result is that, for many, working from home has now become a way of life and there may be certain silver linings for some.
The impact of the pandemic so far
However, the impact of businesses realising that they really can operate largely remotely, together with the impact of the pandemic more generally on the economy, has had a profound effect on the commercial real estate market. Many businesses are reducing their need for office and other working space, whilst at the same time many industries, particularly retail and hospitality, are suffering. Household names such as Pizza Express, Pizza Hut, Peacocks, Harveys Furniture and TM Lewin are entering into CVAs or other insolvency regimes as a result which has had a knock on effect to numerous shops and other commercial units being closed across the country.
In short, many businesses have been actively working on reducing their physical space/footprint by serving notice to quit their premises, together with exercising more options to break leases early. The consequence of this is that as leases come to an end, landlords’ claims for damages for dilapidations and failures to repair are triggered.
In late summer, as the country began to move out of lockdown and into the ‘new abnormal’ companies began to transform the space they planned to retain with many taking the opportunity to change traditional office space into new “hubs” offering more scope for collaboration, flexible and project working. Then, as plans were coalescing, the second wave of the pandemic has hit the country and many parts of the economy are now under the further national restrictions.
So what can we expect the impact of Lockdown 2.0 on the commercial real estate market to be?
Certainty is what businesses crave and if the current four week measures stay as planned then many would be able to make plans to ride out the inevitable further economic pain to be inflicted. However, given that the lockdown might well be extended (and further restrictions may endure into 2021), it is reasonable to expect businesses to adapt by further trimming back their space requirements. This will leading to further issues around tenant exit labilities as previously mentioned - a greater move to businesses taking short term flexible agreements where their leases are up for renewal, and a shift to serviced office space which can often be handed back at short notice.
The risk of further ‘lockdowns’ in the future is likely to see the transition to using prime office space as “hubs” for projects / collaboration set to be continue and whilst it’s unlikely that businesses will forgo physical space completely, this change of use is likely to be permanent.
How does the future look for commercial real estate?
There are some silver linings for the market and many businesses have seized opportunities and adapted to the market forces quickly and successfully. For example, a number of logistics companies and online retailers have moved to snap up out of town and almost suburban sites as their demand continues to rocket. Amazon is leading the charge and is understood to be looking for at least 40 new parcel hubs across the UK, many of these may be outside of London and the South East. These units could be on traditional industrial parks or even a repurposed retail unit on the outskirts of towns or cities, providing some welcome (albeit limited) relief for regional economies hardest hit
Similarly, as demand for office and retail space in our city centre declines, there is a noticeable shift towards such space being repurposed or redeveloped into high end residential apartments, hotels and private student accommodation. This is likely to engender a rise in development disputes, and rights of light / restrictive covenant cases are on the rise. More importantly, savvy property owners / investors can seek to benefit from this shift and would be well advised to consider the opportunities presented now.
The only certainty at the moment however, is that change is going to continue. Flexibility is key and businesses which are able to rapidly adapt to finding new ways to serve their core customers and clients are those which will thrive.
For further information on any of the issues raised in their article or other property disputes, contact James Fownes or another member of the property litigation team in your local office.
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