To predict such a fundamental shift in working and business behaviour this year would have required the ultimate crystal ball, so if you possess one then the question would be, why you didn’t you share it a little earlier?
It’s extremely hard, if not impossible, to plan a global pandemic into any future business plans and, realistically, you’d probably have your sanity questioned if you were sitting on the board of a firm or investment fund had you tried to.
That being said, it has now happened, and the simple fact is that one aspect of the economy that is potentially going to change the most is commercial property and how it’s used in the future.
Due to absolute necessity, the government asked everybody to begin working from home back in March, and this put an enormous amount of pressure on not just office buildings, but also high street stores and shops.
Having also been forced to close by the government, they were unable to make any money at all, and even if they had been open there was barely anybody to go shopping due to being at home. Now the high streets are slowly re-opening things don’t seem to be picking up quickly enough to keep many in business, and that represents a big problem.
As is looking increasingly likely, most people are going to continue to work from home, and most consumers are still too anxious to go out and spend as they would in normal times. So, with those challenges in mind, how does the industry need to adapt? And is it worth looking at residential property as an alternative?
If we look from now to the end of the year as the short-term, 2021 as the medium-term and beyond that as the long-term then it is important to understand what the outlook is for all three.
The short-term, in stark terms, doesn’t look good. There’s likely to be pain, and a lot of tough decisions to be made. Some commercial landlords are currently in concerning positions with rent defaults increasing on a worrying trend.
As recognised by The Economist last month, “Across the world millions of tenants have stopped paying rent, leading to chaos among shopping-mall and office landlords. In the longer term, a renewed appreciation of the threat from pandemics, and of the potential of new technologies, could lead to a sharp shift in how commercial buildings are used.”
The medium-term isn’t quite as concerning but will involve an awful lot of change. There is a simple truth with many businesses that employ office-based staff, and it’s that they prefer to have them in the office. Productivity is one thing, but the implications for businesses in having to offer home working to all employees, as well as insurance and HR processes, is likely to outweigh the benefits of home working on the whole.
That also bodes well for the long-term, however, it’s also likely that many high street businesses will fail in the meantime, and it’s a question of whether new businesses are likely to take their place, move online, or become residential.
In comparison to commercial, residential property has stayed robust and even enjoyed growth over the same period with demand increasing over the same period, with little new supply entering the market.
This has driven rental growth up and brought yields with it. In these same short-term, medium-term and long-term periods described above, residential is looking good in all three. Short-term, demand is rocketing as people start to realise they’re going to be spending considerably more time at home. In the medium-term, it’s given renters and owners a new perspective on their priorities within their homes.
In the long-term? The honest truth is that many high street businesses won’t make it, and it’s increasingly difficult to see exactly which businesses would be brave enough to replace them, at least in retail.
The likelier outcome is that those properties will be converted into residential properties to meet this new increasing demand. Regardless, it’s looking good for residential property.
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