COVID-19 vs. commercial real estate: who will come out of the pandemic as the winner?

by   CIJ News iDesk III
2020-11-10   14:08
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Commercial real estate has been under pressure from the coronavirus for several months now. At the beginning of the year 2020, a slight cooling of the market and reduction in demand was observed. And with the advent of March, it was clear that COVID-19 will also affect the real estate market. After the initial uncertainty, and reassessment of which operating model will pay off under the constantly changing conditions and restrictions, the situation is gradually stabilising. Today, we can evaluate which real estate market segments fared the best in the battle.

In commercial real estate, the impact of the pandemic manifests itself individually. It's mainly related to the composition of current tenants, while taking into consideration factors such as income stability, occupancy and resilience of the operation. Commercial properties fare only as well as their tenants. Specialists from the real estate consulting company 108 AGENCY have summarised their view of the impacts of the “coronacrisis” on individual segments, and came up with estimates regarding further development.

Shopping centres and recreational facilities suffered the most.
In commercial real estate, the areas significantly affected were hotels, primarily with a focus on their foreign clientele, and shopping centres, which for a long time were closed or engaged in very limited operation. Therefore, the future form of the retail market will apparently be affected to a large extent by the shift of customers to the world of e-commerce, and in the future online shopping will probably affect the occupancy of commercial space. As a result of these changes, shopping centres may change into so-called experience centres, where the customer will familiarise themselves with the product and can subsequently order it online, with express delivery, to their address. “The tough restrictions had the greatest impact on gastronomic establishments, which operated in a very limited regimen with reduced working hours, and the entire centre of Prague, which is dependent on tourism. We've also recorded cases of units in shopping centres closing. Today, it's food chains, pharmacies, alcohol retailers, hobby markets and sports equipment retailers and service centres that are faring the best,” says Jana Pavlíčková, Leasing Consultant in 108 AGENCY's Retail Division. “It will be very interesting to observe the Christmas sales, on which the future situation will depend – the sales will affect companies' viability. We'll see whether Christmas will be followed by euphoria, or disappointment, with customers becoming fearful of a “pre-war situation” leading them to spend less, and only on basic needs and services,” adds Jana Pavlíčková, 108 AGENCY.

The office market is undergoing a transformation.
The office market was probably most affected by many companies discovering that their employees can work effectively even in home office regimen. Therefore, the use of office space is gradually being optimised. “Clients don't want to be tied down for a long time, and even when they're looking for facilities in which they intend to base themselves long-term, they still want to ensure that they have a certain flexibility. At the moment, the main demand is for the rental of office space for a maximum period of 1-3 years. The trend of working from home is proving to be a success for more and more companies, which on the basis of this discovery, or due to financial reasons, are moving to smaller premises in order to reduce total office operating costs. This is also related to an ever-increasing supply of sublets of furnished offices in buildings of a high standard, which the tenants are often willing to provide under advantageous conditions. We're waiting to see how the market situation will develop in the coming year, especially in terms of rents, which for now are staying at the same level,” states Štefan Ličartovský, Office Division Consultant, 108 AGENCY.

Even in the Moravian metropolis, tendencies are manifesting themselves which are similar to those in Prague. “Apart from the relatively increasing requirements for shorter rental periods, we also encountered a case where the client is considering the future operation of the company's branch in general, and one of the possible ways is to avail of work in the form of a home office, while simultaneously reducing the size of the rented premises or moving to coworking centres. There is currently an atmosphere of waiting in the administrative real estate market. The result is the postponement of some strategic decisions, a tendency to renegotiate existing rental conditions rather than conclude new contacts, and a certain higher level of caution in business decisions. We expect that the afore-mentioned trend will continue until the situation stabilises itself from an economic and political perspective. It can be expected that rent levels will also respond to this cautious approach by tenants; nevertheless, this has not happened yet, and we haven't observed a reduction in office space rents so far,” comments Lenka Grycová, Office Consultant for the Brno and Ostrava regions, 108 AGENCY.

Industrial real estate as the winner.
In the case of the industrial and logistics market, the situation is different between real estate used for manufacturing and logistics. In the case of logistics, the situation led to an increase in demand caused by the development of e-commerce. Even here, however, development doesn't apply across-the-board. For example, the operation of e-shops which supply hair salons, restaurants and shops has stopped. In manufacturing real estate, an important role is played by the manufacturing programme. “The industrial segment was the least affected by the coronavirus crisis. A much greater decline was expected, but in the end there is no indication of it. Germany is experiencing a phenomenal boom in the industrial real estate market, and even the German economy is functioning excellently. Within the scope of our industry, the Czech Republic is linked to the German market, so we are not expecting a significant weakening,” says Jakub Holec, founder and CEO of 108 AGENCY. This is also evidenced by the largest rental transaction realised this year. Loxxess, a logistics services provider for dm-drogerie markt GmbH, signed a contract for a new hall in Bor u Tachova with an area of 68,000 sq m, which will serve as the retail customer's main distribution centre. At the same time, Loxxess has extended its lease of the existing 35,000 sq m. “Thanks to the fact that the industrial segment in Germany and Western Europe is functioning, we're not expecting a noticeable slowdown in the Czech Republic either. Greenfield plots in Prague are completely full, and the possibility of new construction is practically zero. We're still encountering problems regarding collaboration with municipalities in this area. So we're expecting a stagnation or slight increase of rents, rather than a decrease,” says Jakub Holec and estimates, “there's still room for huge distribution centres in the Czech Republic, there will be another Amazon here.”

New investment opportunities are opening up.
The demand for industrial real estate is constantly growing. Investors' viewfinders are focusing mainly on storage halls, and urban logistics play an important role. These segments maintain the market level, and open up new investment opportunities. Thanks to the development of e-commerce and related parcel logistics, demand has shifted to real estate that services these growing segments. That's why there is now an increased need to place these services, in the required quantity and quality, in easily accessible localities, and in the monitored period commercial premises increased in importance even from the investment entities' perspective. This phenomenon brought about positive ideas, and did not fulfil the fears of a market collapse and reduction in the value of commercial real estate. “Thanks to the described effect, we, as industrial real estate specialists, record demand even from funds which in the past focused primarily on office, retail or hotel transactions,” Darek Vodehnal, Senior Associate in 108 AGENCY's Investment Division, comments on the situation and adds, “investors' expectations now differ more significantly from owners' expectations. Due to the current situation, buyers want a lower price, while thanks to the segment's stability sellers have an idea of a higher price than in the past. However, we expect that the situation will return to normal in Q2 – Q3 2021, there will be greater flexibility in the realisation of transaction, and sellers' and buyers' revenue expectations will remain unchanged.” Real estate brokers' work is more demanding, in the form of the search for a compromise between supply and demand, which leads to a longer business transaction finalisation process. It is therefore necessary to monitor the development of the situation over a longer period, which will show new tendencies and offer room for further market analysis.

The final changes in the commercial real estate field, post-COVID-19, can only be guessed at. Uncertainty still reigns in the office and retail real estate sectors, and it will be interesting to monitor their development, as these two areas will face the greatest challenges. Industrial real estate, meanwhile, can generally be regarded as the most stable segment, which is resistant to the coronavirus crisis. The investment segment shows a change in the direction of interest, where investors search primarily for storage halls within the reach of cities, and new investment opportunities are therefore appearing.