Covid heralds dramatic change for retail and office working

The Covid pandemic has disrupted the way business works as much as it has disrupted life in general. As the number of infections grew governments and businesses across the globe shut down physical work sites in an attempt to reduce the spread of infection.

As with retail, so with office work, the pandemic has not actually brought a change in direction, just more of the same, it was heading that way before. Covid has merely accelerated existing trends by several years, and then some. From bricks and mortar to online shopping, and a shift to working from home, or working flexibly on the move, the change over the last 4 months has been staggering.

Around 40% of workers are still based working at home and online retail sales jumped from under 20% in February to 33% at the peak (ONS), before dropping back a little since. These swings have serious implications for landlords and property investors; whether they remain permanent or temporary, or what’s more likely, something in between, the direction of travel is evident and too stark to ignore:

1. City centres such as London, Manchester and Birmingham, plus the UK economy as a whole will suffer – a PwC study finds that £15bn (1% GDP) could be wiped from the UK economy with the loss of coffee shops, cleaning jobs, service workers etc, and the likes of Pret A Manger laying off 3,000 staff is just a start.
2. At the same time landlords in urban centres may benefit as smaller stores and “hub-offices”, where staff can meet-up in small teams, are returning to properties in demand.
3. Large commercial landlords are finding that their retail and some office property values are being decimated, with tenants in serious arrears with their rents. Write offs will be commonplace as overall less than half the rents due have been collected since lockdown, and as landlords realise a smaller amount collected is better than nothing at all.
4. Many commercial landlords are now contemplating turnover linked rents with all the problems that will bring in terms of landlord-tenant relationship trust, transparency, more administration and the uncertainty of property valuations – a major problem for pension funds that need certainty investing in property.

Retail & Leisure

Retail and leisure landlords are concerned that rent arrears will build-up to a level that not only puts their own loan covenants in peril, it will be impossible for their tenants to pay off the debt, even when payments are stretched-out over a long period of time.

Some landlords will be thinking about whether they want to forfeit leases after the business rates holiday and the eviction moratorium end, but this in itself is a trap: taking back a vacant commercial property, if there’s no prospect of re-letting in the short-term, becomes a liability for the owner.

Landlords could easily face a higher financial burden by taking back the property before the lease ends because they not only become liable for business rates, insurance rates usually double in cost with an empty unit, and there’s the added worry and cost of security and a lot more administration work for the landlord managing services and utilises etc.

Where there has been a lease assignment some previous occupiers may be in for a nasty shock if they are “on the hook” under an authorised guarantee agreement, which means they will find themselves liable to cover the rent if the new tenant defaults om payments.

As lock-down started and these changes became evident, the belief that large-scale adoption of online shopping, and working from home, signalled a dramatic and permanent shift is quite understandable. But the true long-term impact is as yet unknown, but likely to be somewhat less severe than feared.

Whilst few retailers are likely to survive online only, the so called omni-channel model is likely to catch on – a mixture of a bricks and mortar and online sales, giving customers the best of both worlds.

Officer Workers

Likewise, most office workers are unlikely to spend all their working lives at home as the effects of the virus recede. There are some real negatives that working from home presents, aside form the obvious ones of lack of social contact, office gossip and the productive networking effects of being with others in a team.

Homeworking tends to extend outside normal working hours and even into weekends, and many companies will want to employ “employee monitoring software” such as Time Doctor or Teramind to ensure that productivity is maintained, a scenario likely to lead to mental health issues in some.

So, in both cases – shopping and homeworking – a compromise is the most likely outcome. It is thought likely that long-term there will be a gradual drift back to the office, though that’s not to say there won’t be less need for offices housing thousands, as a hybrid model takes on a new life.

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