Sarem Eddie Kerman on Emerging Commercial Property Trends

Sarem Eddie Kerman is Investment Director at London-based Pelican Partners, a private equity and real estate investment firm. 

In the UK, hospitality is one of the hardest hit sectors by the pandemic. And this, of course, has a knock-on impact on the commercial property sector. 

Covering everything from food outlets, restaurants and cafes to accommodation providers, hospitality is a major contributor to the UK’s GDP. In 2019, the sector contributed £59.3 billion in gross value (around 3% of the economic output of the country as a whole. 

The hospitality sector and commercial property trends

According to UK Government figures, on 1 January 2020 hospitality businesses accounted for 3.7% of all businesses in the country (223,045 businesses). And from these businesses, 137,225 employed other people. 

So, when the pandemic hit in March 2020 and restrictions kicked in, it’s not surprising that this sector was one of the hardest hits. Trading restrictions resulted in unprecedented shutdowns of accommodation and food businesses. The severity of the impact can be seen with the figures that show economic output for the UK’s hospitality sector dropped by 90% between February 2020 and April 2020. Over the summer last year, output increased due to what turned out to be temporary relaxation of restrictions. However, from September onwards cases increased, and lockdowns kicked in. 

By March 2021, the Office for National Statistics (ONS) reported that 74% of businesses across all industry sectors were fully trading. However, within hospitality, just 43% were up and running. More than half of businesses within hospitality had completed ceased trading, compared with 24% across all other industries. 

Furthermore, a fifth of all businesses within the sector say they don’t feel their businesses can survive. So, how has this all impacted commercial property landlords? 

Commercial landlords have lost out on rent 

Figures from Remit Consulting in April 2021 show that commercial property landlords missed out on more than £5 billion in rent between March 2020 and March 2021. Properties covered by the survey include warehouses, restaurants, offices and shops. 

Lockdowns meant that many businesses simply couldn’t meet their rent commitments. Evictions were temporarily halted by the Government in a bid to support tenants, a move that has brought its own controversy with some pointing at big chains taking advantage. 

Outside of the UK, the trials of the global hospitality sector remain similar. And while many businesses acted quickly to attempt to mitigate the negative impact, some have inevitably fallen by the wayside. 

Now that the world is opening up (19 July 2021 is being touted as ‘Freedom Day’ in the UK) and restrictions are lifted, what does the sector look like? 

Investor opportunity trends emerging for commercial property 

Consumer behaviour has been drastically altered by the pandemic. Spending patterns have changed, and expectations are different. Understanding these new expectations is key to the sector recovering. 

Trust needs to be built up with consumers, but businesses will also have to become ever more flexible and agile. They must ensure that they have the financial resilience to weather any future uncertainties. 

In the UK, for example, while it appears the Government is ready to remove all restrictions in one fell swoop, rapidly rising cases and hospitalisations may well change this yet again. 

Along with office space, hospitality lockdowns have contributed to real estate as one of the sectors dealing with the most profound changes. From the rise of online shopping boosting warehousing development opportunities, to the closure of hotels affecting rents, commercial property is entering a totally different world. 

Big changes for commercial property sector 

Biggest changes impacting commercial property and creating new investor opportunities. 

1. The rise in e-commerce

Suddenly everyone needed to buy online, and that has become a permanent change in consumer spending habits. According to JLL, logistics and e-commerce specifically need to adapt quickly in order to keep up with demand. 

And e-commerce, of course, needs many times more warehouse and industrial property space than traditional logistics. Investor demand is soaring for industrial commercial property everywhere around the world, including the UK. 

There is a growing demand for properties located either in urban areas or nearby to fulfil consumer demand and expectation for same day delivery. We are seeing commercial property previously used for retail transforming into distribution hubs. Retailers want more space, and this is creating investment opportunities. 

2. Hospitality and travel 

We saw an enormous fall in travel around the world during the height of the pandemic. Of course, travel will return and come back strong, but operators must be flexible and creative in what they offer. 

Hotels with bigger rooms and more space will become more in demand. While hotel rooms shrunk by almost a third since 2010 according to data from JLL, consumer demand will ensure that they expand to provide the flexible work/exercise space that may be necessary for long-term stays. 

3. Office space

Remote working has become the watchword for most countries around the world. Now that economies are opening up, there is talk of demanding employees head back to the office. And while some undoubtedly will, there is likely to be a long-term commitment to flexible work patters from most employers. 

This will change the kind of office space needed to better cater for workplace preferences. Ventilation, space and flexible use will become a priority. It’s clear now that the idea of a totally remote corporate sector will not happen. While this became subject to debate during the height of lockdown, there are actually many reasons that employees benefit from working in offices with colleagues. 

A survey of 2,000 corporate workers across ten countries show that around 75% of respondents want to be able to work in an office in some form. It also shows that 70% think that working in the office is important to connect with managers and for team building purposes. 

So, we won’t see a total demise in commercial office investment opportunities, rather we’ll see a more creative use of space and new hybrid developments springing up.