Vaccines will help inject more confidence into commercial property market
Traditionally, this time of year allows for moments of reflection – providing a chance to look back over the last 12 months and consider hopes and expectations for the year ahead, writes Will Mooney, Partner, Commercial, Carter Jonas Cambridge.
2020 began with a bang. It marked the beginning of not just a new year but a new decade, and many of us were feeling optimistic. We were hopeful that political uncertainty that had clouded much of 2019 would give way to a more positive mood, with the politicians able to focus again on issues other than Brexit.
Of course, few could have predicted the circumstances in which we find ourselves. The global pandemic has seen rule books rewritten and our daily lives change in ways not seen in generations.
That said, this is a column about property and business. So, for my last piece this year, I am sticking with tradition and intend to focus on the commercial property market.
Many property sectors continue to be highly resilient, including, as highlighted by my colleague Ben last month, distribution warehousing and urban last-mile delivery. Demand for lab space also remains good.
The current cycle has not seen a speculative development boom and a lack of quality space rather than a surplus has been a feature. The market balance has thus started from a good place and this should be supportive of rents at the prime end across most commercial sectors.
The urban landscape will adapt to changing demand patterns. Whilst it is anticipated that less office and retail space will be required, there will likely be increasing pressure for space in sectors including residential, healthcare and elderly care, assisted by positive demographic trends. This means huge opportunities for change of use and adding value for secondary property.
This should be assisted by a more flexible approach to planning that we are seeing in the recent revisions to the Use Classes Order and the “Planning for the Future” White Paper on reforming the planning system.
We also expect to see greater collaboration and cooperation between stakeholders to help maintain and enhance value. This includes collaboration between high street landlords to increase the attractiveness of units to shoppers; and cooperation between landlords and tenants to agree on a path through the economic turbulence, particularly where tenants are experiencing difficulties in making rental payments.
Investment has held up relatively well this year – £32.7 billion of commercial transactions. This does not compare too unfavourably with the £38.6 billion over the same period last year.
Given the ongoing ultra-low interest rate environment, resilient property sectors, such as distribution, mixed-use, ‘alternatives’, prime opportunities and long income, will continue to be highly desirable. Commercial property yields maintain a significant gap over the risk-free rate.
A strong economic bounce-back could occur from Q2/Q3 next year, given that multiple vaccines are now confirmed as being effective against COVID-19.
It follows that business certainty should increase, allowing occupiers to start making decisions around investment.
The Q3 2020 Deloitte CFO Survey cited reducing costs and increasing cash flow as the two biggest corporate priorities (57 per cent and 48 per cent of respondents respectively), whilst only seven cited increasing capital expenditure.
Additionally, whilst Brexit will undoubtedly create challenges next year, there has been considerable uncertainty since 2016, which should now begin to lift.
We should see greater clarity over office occupier demand. COVID has enabled a substantial acceleration in the shift to remote working. However, most corporates will still require high-quality office space to foster collaboration, innovation, a sense of purpose and shared values, as well as for training and supervision.
For employees, offices fulfil the need to interact with their colleagues, socialise and build personal networks. Also, many home environments are not suitable for extended homeworking.
Working patterns should begin to settle down in the second half of next year, giving investors and developers greater certainty about investing in the sector.
The property sector also has a part to play in the coming ESG revolution, to provide workplaces, and retailing/leisure spaces that are energy-efficient, take advantage of sustainable transport nodes and provide environments that promote wellness.
Finally, history shows that economies and markets are highly adaptable and resilient. The recovery time from recessions varies – output took 2.5 years to recover following the early 1990s recession and five years following the 2008 global financial crisis.
Given recent good news on vaccine development, this recovery could be relatively rapid. Some jobs, industries and ways of working will be very different, and recovery will not be without its challenges.
Of course, recessions are highly unwelcome, but the economic cycle is sadly an inevitable feature of market economies - the hope is that this recovery will also come with a productivity improvement.
I hope I have demonstrated that, despite the many challenges that we are facing, there are solutions and opportunities out there, and reasons to remain positive. If you would like to discuss any of your property needs, Carter Jonas’ commercial, planning, development, residential and rural teams are here to help.