Real estate in the context of the COVID-19 pandemic
It is perhaps unavoidable that this month’s column concentrates on the main issue on everyone’s mind – the current crisis in which we find ourselves, writes Will Mooney, Partner, Carter Jonas Cambridge.
There is no getting away from it, try as we might to switch conversations to other topics, they inevitably lead back to the pandemic, and its impact on nearly every aspect of our lives – some trivial, sadly many tragic.
Given the focus of this column, it seems right to discuss the pandemic in the context of real estate. As a firm, like many other businesses in our network, we have been working hard to reassure our clients that despite lockdown, we are here.
Although physical offices are temporarily closed, teams are working and can be contacted on normal numbers and emails. Once that was established, we have had to adapt to how we support our clients and how we advise them. As well as the most pressing issues facing both landlords and occupiers, we are also dealing with long-term considerations.
Undoubtedly, the Covid-19 crisis will have a significant impact on the corporate occupier sector, at least in the short-term. When we talk of occupiers, of course, what we are really talking about are businesses with employees.
In this climate, many clients are taking a wait-and-see approach before committing to high-capital-expenditure projects, such as an office relocation, to see what impact the pandemic has on revenues and staff headcount.
I have mentioned before that real estate often represents the second largest operating cost of most businesses, after staff salaries. It is very likely then that in the coming months, some businesses will be implementing policies to downsize and reduce their exposure to property costs.
Further, developers have had to shut down construction of new office buildings which will disrupt completion timelines and office moves. A number of occupiers that have entered pre-completion of construction letting agreements are now looking to extend their leases on their existing premises to tide them over until the building that they were scheduled to move to is ready.
Whilst many landlords are working to accommodate such requests, difficulties arise when the tenant’s existing space has already been committed to another occupier.
In these circumstances, occupiers that have been affected by the delayed completion are considering alternative temporary accommodation – serviced offices being an obvious solution.
Equally, some tenants with lease expiries, that have not already committed to a contract on alternative premises, are looking to defer a planned office move and seek a short-term lease extension from their landlord. Instead, they are planning a reassessment of the business’ operational and floorspace needs later, when economic conditions become more certain.
Whilst office demand remained relatively strong before the COVID-19 crisis, the supply of quality space has been highly constrained. Construction activity has been subdued ever since the financial crisis a decade ago and has been on a downward trend over the last two years.
As a result, there is a shortage of grade A supply relative to robust demand in many markets, which will help to cushion rental falls at the prime end.
However, even a small decrease in rents could lead to buildings that might have once been considered too expensive for some occupiers, now priced at a level that is attractive enough to encourage movement.
Additionally, some landlords may well have the opportunity to restructure tenancies with their existing tenants and keep space filled and income-producing.
The longer-term impact of the enforced and potentially lengthy period of working at home for many office employees is difficult to gauge. The current situation will likely lead to a readjustment as to how many of us operate and utilise space.
It is expected to accelerate the trend towards home working and lead to businesses reviewing their operating practices. I think it may also bring into sharper focus the importance of office space as a place to communicate, share ideas, foster team spirit and corporate identity.
It is an understatement to say that the current situation is challenging. As businesses grapple with planning for their future, against a backdrop of much uncertainty and in a climate that is constantly evolving, few issues will be easy to determine. However, solutions are being found.
Whether you have a pressing concern or are trying to understand how your business may be affected, do keep asking questions and talking to people who can help.
And, as I said last month, I hope that you are all safe and sound and keeping well.