Changes to the property sector: Opportunities and threats for landlords, buyers and tenants (Part One)

The landscape of the property sector over the last year has changed dramatically, with many businesses shutting their physical shops overnight last March, briefly re-opening in the run-up to Christmas and, shortly after, remaining closed for the foreseeable future.

This begs the question – what will the future of commercial (especially retail) property, in all its forms, look like for landlords, buyers and tenants? What problems may arise? And what opportunities will open? We’ve put together a list of the most important factors to take into consideration for the upcoming year; whether you’re a landlord, buyer or tenant.

In this two part article co-authored by CEO of Gerald Edelman, Richard Kleiner, and Director of Spring4, Chris Aquilina, we will focus on issues surrounding the property sector. Part One covers that of commercial property, most notably retail, whereas Part Two focuses on office spaces and the changing working environment.

Landlords

Opportunities

What should any business do in times of uncertainty? Adapt. The changing nature of the high street and retail sector means there are several opportunities for landlords with commercial property. To minimise future impacts to income, landlords should now consider merging larger retail spaces to include not only retail, but also residential and co-working spaces. In doing so, landlords can future proof their potential gains from their property. Although a seemingly daunting task, having a multi-purpose property will allow your space to be multi-functioning, meaning even during uncertain times you can have an acceptable level of certainty about your income.

Threats

Landlords in the commercial sector will undoubtedly have had tenants requesting to end or significantly change the terms of their leases due to not being able to trade because of Covid-19 restrictions. Many therefore are seeing their income hit. This is a very real threat for landlords particularly in a third national lockdown, with the inherent uncertainty as to when these sites will re-open and, even then, will the terms of the existing lease still be relevant or affordable. In such cases, landlords can potentially future proof their own income by creating, shorter and more flexible leases for many commercial sites.

The current legislation that governs the landlord and tenant relationship will, to a large extent, need some reform so as to enable both landlords and tenants to embrace the seismic changes that have taken place as a return to pre-Covid conditions is extremely unlikely to return, if ever, in the foreseeable future. In this regard it is for government to assist in hosting a consultative process across the whole sector which, hopefully, if handled correctly will form the bedrock for such legislative changes.

Buyers

The market was unsurprisingly slower in 2020 and buyers need to remain aware of the ongoing shift in commercial property trends. The types of expected tenants are set to change, which will have an impact on what both tenants and buyers are looking for in a property. Apart from some well-publicised failures, many chain retailers are projected to remain open for business but with the emphasis being very much online, with the larger (physical) stores still being prevalent in major cities and towns. Smaller, independent businesses are predicted to make a return to the local High Street. Many tenants are, or will be, looking for green and carbon-neutral buildings with shop floor space and office space, so buyers will need to consider these factors when looking at the market.

Tenants

Tenants are also changing. Many tenants, during the difficult periods of 2020, have closed their businesses or are trading at a smaller capacity and therefore have not been able to keep up with rent payments. Looking to the future, tenants everywhere are going to seek more flexibility in their leases (break clauses, turnover-geared rent levels, etc), due to the fragility of business which has been the experience of many throughout the pandemic.

Looking to the future

The changes may seem unsurprising given the previous year and the commercial spending habits it brought with it, but with retail expecting to make some sort of comeback, all parties involved in the property sector need to be aware of the likely changes as and when they occur. Keeping up to date ensures landlords, buyers, tenants and businesses are on the same page and can thrive together.