What’s the future for the UK’s commercial real estate sector?
The combined impact of Brexit and the pandemic has certainly taken its toll, but 2021 marks a historic change for the UK. Now we are officially operating apart from the EU, there is a lot of adjustment going on. Not least for supply chains and the logistics sector.
However, as the pandemic smoke clears and trade gets used to the new reality, it’s likely that economic stability will return. The main short-term impact on commercial and residential property will include rent and valuation reductions. But there are subsectors of the UK’s property sector that have been experiencing growth.
Commercial real estate subsectors will continue to thrive
Commercial real estate subsectors including warehousing and logistics are thriving, thanks in part to the pandemic. In many ways, COVID-19 has accelerated real estate trends that were already underway, including the move towards online retail and remote working.
Furthermore, Brexit has sped up the domestication of supply chains and this inward focus will continue. For many of us, the world is undergoing a profound shift, and everything is changing. From how and where we work to how and where we shop, these changes are all affecting commercial real estate. And while change inevitably leads to some for of uncertainty, it also brings huge opportunity.
At the time of writing, the UK is slowly starting to emerge from seemingly endless national lockdowns. However, there is still a long way to go before every sector is back on its feet. We will likely experience a strong economic recovery driven by consumers spending in the retail and hospitality sectors.
Low interest rates, low inflation and continued fiscal stimulus will all contribute towards economic recovery. And this means a strong medium to long term recovery for commercial real estate.
Office space will continue to adapt to COVID-19
Commercial office space take-up will continue to impact the sector. It is likely to stay relatively low through most of 2021, but even with such a large number of people working from home, some sectors are outperforming prior expectations. We’ll see a continuation of distributed working patterns, with the most likely outcome for most office workers a combination of in office and home working. Real estate landlords and employers are all looking to strike the right balance, between boosting the sector and keeping employees safe.
We’ll see the biggest and most obvious changes within the retail sector. An already week UK high street has, of course, been battered by the economic impact of months of lockdown. This is leading to higher costs and constant pressure from the competition of ecommerce.
While traditional shops have been struggling, other elements within commercial retail have been soaring. These include warehouses and supermarkets, driven by consumer demand for easy-access necessities and online purchases. Outside of these subsectors, retail will need to radically change its focus. This will manifest in an increased mixed use of assets and a general repositioning towards a different kind of urban centre.
Fundamental changes within logistics and retail
The logistics real estate sector will continue to grow as it expands to cover supply chain changes due to Brexit and the hugely increased online shopping. Consumer demand is driving this, and it’s unlikely that those who have discovered ecommerce will return to old shopping habits when the pandemic is finally under control. It’s likely that investors who have traditionally ignored logistics will move into this space, such as M&A and joint ventures.
Hospitality is one of the hardest hit sectors from the pandemic. And while there will be a sharp recovery when businesses are allowed to trade again, it’s been a long hard struggle. Some estimate that a high percentage of businesses simply won’t survive the endless barrage of challenges they’ve faed.
However, we have seen unprecedented collaboration and innovation in this sector, which bodes well for the future. There will be more creative and expansive use of real estate assets, leading to a future of collaboration, efficiency and creativity.
Economic recovery will be consumer driven
The lack of UK election in 2021 and the high Parliamentary majority of the current Government is likely to lead to more investor confidence than we’ve seen since the Brexit vote in 2016. Economic stability is badly needed, and with the vaccination rollout leading to more confidence across the board, I hope that by the ned of this year we’ll be in a better space as a country.
Commercial real estate will continue to adapt to the changes in demand from consumers and businesses. But the high level of innovation that we have witnessed since March 2020 suggests that retail and hospitality will find a way to adapt and grow.
For example, we’ve seen commercial landlords working with their tenants to release assets for alternative use. We’ve also seen investors working directly with the tenant’s business to boost its chances of success. In what could be a fundamental shift in the way that commercial real estate works, institutional investors now see the need to fund the tenant’s business to create a symbiotic support system that works for both parties.
I think we’ll see new forms of collaboration across the sector as economic recovery continues.
