Commercial Property – “This time next year….”
21 April 2020
The law can be a very useful tool to help you achieve an objective. In a pre COVID 19 economic climate there was a healthy landlord and tenant market and forfeiture was a useful tool to achieve the objective of being paid rent. As we have set out in previous articles this tool is currently temporarily suspended.
In this article we ignore the legal tools and invite you to consider what the market for high street retail and office space, whether in town or in rural developments, will look like in the future and whether these segments of the market will fundamentally change. There are several issues to consider and we have considered a few of them.
It looks as if the lockdown will continue throughout April, with the distinct risk that it will continue well into May (and possibly beyond). Economic growth will not happen and the figures released from France this week indicate a 1.5% fall in GDP for each week of lockdown. It is inevitable that the economic damage of the lockdown will cause businesses to fail. Accordingly a reasonable assumption to make is that there will be less demand for leases and adopting the laws of supply v demand rents will fall. But will the effect on each sector be the same? There are different factors affecting each sector.
Non-food high street retailers are being hit very badly by the lockdown. They have no mechanism through which to sell their goods. They are also suffering from consumers increasing their spending on-line. This consumer trend is likely to increase. Their property costs are higher than on-line retailers and staff costs are probably also higher as a percentage of turnover. These four factors will inevitably cause a significant number of retailers to cease trading leaving landlords with empty properties. For those that survive trading will continue to be challenging.
On the optimistic premise that government wants and is prepared to take steps to try to ensure thriving town and city centres which have more local jobs rather than large warehouse on-line retailers using robots with few staff maybe the taxation system should make the cost of on-line retailing more expensive to take away the competitive advantage?
Another solution to help these retailers could be to reduce rates, but is that necessarily the right thing to do if the result is that "slack" is taken up by rent. For example, in normal market conditions if rates are reduced the law of supply and demand would see rents increase. Reducing rates on the high street might appear to be an easy win but will it simply have the effect of helping landlords? If the market is to be manipulated through the rates system maybe the answer is to increase rates on the out-of-town retail parks and warehouses?
The current scale of the requirement to work from home is also likely to have significant long term consequences. Firms will have seen that it can work on scale that only a few firms previously tried before. Hot desking and office rotas could, and for the environmental pollution benefits perhaps should, become the norm. Our experience has shown that technology works. It may not be perfect and, of course, the current circumstances are extreme but does everyone need all their office space? The effects may be longer term when leases come to an end and less space is required. Less space equals less demand and historically less demand means lower prices. But people are social animals and full time working from home creates its own difficulties. Not everyone has the necessary space or the desire to work mainly from home so office space will still be required, but perhaps not to the current extent.
Landlords are currently dealing with requests for rent holidays and other arrangements. These are difficult times for business and creative solutions are required. There is no "one size fits all" solution as each relationship has unique issues. If you would like to discuss your situation please do not hesitate to contact either Peter Bourke or Mike Ellis or use the enquiry form below.
Crystal ball gazing can be a fun exercise but the consequences of COVID 19 are likely to be very significant indeed.