Rouzbeh Pirouz is Co-Founder and Senior Partner at London-based Pelican Partners, a real estate and private equity investment firm.
Commercial property investment, just like every other business sector, has been hit hard by COVID-19. In the UK, we’re now almost a year into the pandemic and while vaccinations are on the horizon, are far from out of the woods. So, does that mean investors should shy away from commercial property?
Short- and long-term challenges for commercial property sector
In the short-term, commercial property landlords have had to adapt to the disruption faced by their client base. With millions more people working from home compared with before the pandemic, clearly things have changed. Some larger companies have made it clear they’re going to be remote working for the foreseeable future, and others have dispensed with large office buildings no longer in use.
And while tenants’ cashflow is obviously a big concern for commercial property landlords and investors, it’s also a good time to consider the long-term ramifications of these changes.
However, while the pandemic has wrought unprecedented changes to the way we all live, work and think about the world, it’s worth remembering that commercial property investors have weathered many economic storms already. The sector hasn’t been static for decades, with commercial property dealing with structural changes. For example, the seismic changes within retail have affected this space for years.
COVID-19 has mostly simply accelerated the rate of change for already existing trends. Agile working was already increasing before the pandemic hit, particularly in the UK and Europe. Online shopping has been growing exponentially for a decade or so, borne out by the phenomenal success of global giant Amazon. Digital transformation was already underway in financial services, banking, insurance and just about everywhere else.
All of these factors existed before COVID and mean that commercial property investors are used to reacting quickly, thinking flexibly and adapting to change – no matter the scale.
Permanent changes to the way we work and commute
However, the pandemic has given all of these trends (and others) a renewed sense of urgency and importance. Many commercial property investors shifted from retail to industrial before COVID, but the biggest area for analysis right now is office space. Will working in an office really become a thing of the past?
Well, it’s unlikely. We are seeing big changes, of course, and when the dust settles on the pandemic we will likely see more. People will commute in different ways, choosing to walk and cycle rather than take the tube or train. Office buildings will spring up next to affordable housing, so that employees are much nearer. Long-distance commuting will decline.
I don’t think that there will be a total shift to offices outside of the cities, and I don’t think that the space will become completely defunct. It’s about incremental changes to behaviour and mood in response to external events.
Writing in January 2021, with the third wave and two new strains of COVID-19 ripping through the UK, employees are not yet returning the office as a body. The newest Government instructions are to work from home if at all possible, and until the vaccinations begin to take effect this will continue. But now is the time for commercial property investors to plan for the longer term.
Urban centre office space will adapt to new situation
I do not think that the office concept is dead in the water. And when millions of employees have lived yet more months confined to their homes, there will be a real movement towards going to back to pre-pandemic normal. Technology is undoubtedly the saviour of our economy and business sectors during this pandemic, but it has limits.
Zoom team calls can achieve so much and provide a vital line of communication for those who must work remotely. But video calls can never replace the creative buzz and drive of working together in person.
Young people fresh from training or university benefit from an in-person office environment. Think about everything you learned when you started your career from the people around you. Development and progress come from the unique relationships people forge in the workspace and I think that we will return to these when we can.
So, rather than see offices close down and people work from home forever, I think it’s far more likely we will see an increase in distributed working practices. This will mean agile working that includes a couple of days a week in the office and a couple at home. Or perhaps it will mean shifting office hours to stagger people’s presence. Either way, it needs a different kind of workspace.
Town centres will continue to perform well for commercial property investors throughout the pandemic and beyond. They offer centralised connectivity and amenities, without which our society can’t continue. Technology will continue to grow and impact the whole working process, with apps telling staff when to stay at home or go into the office.
Touchless space access and office booking systems are likely to come into play far more, with less emphasis of the same number of people working in the same space, day in and day out.
All of this means that there is major change in commercial property. Tenants are now demanding good locations with high quality properties. We can comfortably assume, therefore, that the days of sky-high rents for glamourous locations are no longer going to be most tenants’ priority.
Prime office space will be in easy reach of amenities and transport, without necessarily being central and crammed in with others. Companies across every sector will be more focused on affordability over the next few years, with very few exceptions.
Ethical considerations more important for investors
In addition to practical and affordable considerations, tenants, consumers, employees and clients now demand ethical spaces. Environment, social and governance (ESG) considerations were once nice add-ons for investors but are now compulsory and expected.
Commercial property investors should seek out space that is sustainable in terms of energy performance. By providing energy efficient buildings to companies to work from, investors are reducing emissions and making it more affordable for tenants. And post-COVID, there will also be much more of a clear focus on the social and wellness potential of an office space.
Work environments must be airy, full of natural light, be temperate and comfortable and provide facilities for employees. Purpose-built commercial office space should now always include energy efficient heating and lighting, along with add-ons for wellness. Gyms, yoga studios and quiet spaces for employees all work to form the office space of the near future.
Diversification is always the watchword for investors, including those looking for commercial property. Being ready for the unexpected is also key to successful returns. Always consider the following before deciding to invest:
- It’s always possible you may get back less than you invested.
- Past performance is not always a good indicator of results in the future.
- Consider how long you want to have your money in the property – for those looking for short-term returns, commercial property could be best avoided.
- Be ready for market volatility.
- Many investment opportunities come into contact with emerging markets and these are always more volatile.
- Investing in specialist funds that focus on specialist sectors will generally be more volatile than investing through a diversified trust.
- Yields are always estimated and will always fluctuate.
Urbanisation will mean investment opportunities
Nothing will empty our cities completely. Urban centres will always be where business is conducted and where young people want to work. By 2050, according to the United Nations, around twice as many people will choose to live in cities over rural areas.
By the same date, it’s expected that the UK will be around 90% urban. Infrastructure, tech, accessibility and, crucially, the best paid jobs, will always be in these kinds of areas. And the pandemic will not change this in the long term.
Making money from office space used to be predicated on getting as many workers as possible into office buildings. This has changed, most likely forever. But commercial property will adapt alongside working practices. Investment opportunities are there and will increase as we move through the vaccination process.