Covid-19: Where are we now? A Real Estate perspective.

When I last put pen to paper with my thoughts on the Covid-19 crisis, we were a mere one month into lockdown and still acclimatising to working from home, frantically ordering home office equipment and getting used to a new ‘normal’. We are now a week away from non-essential shops re-opening, the infection rate appears to be in significant decline and we dare to hope that elements of our previous working and non-working lives may be closer to returning.

It is noticeable that whilst you would reach contacts with one call in the early lockdown days, people seem busier, less focused on the shock of what is happening and more on how to get their businesses back on track. From a real estate perspective, much of the debate that I wrote of previously remains unresolved. The hope for a quick recovery feels more likely to be cautious with commentators pointing towards a ‘U’ shaped recovery as the more likely outcome. Investors will want to assess where values are and any first movers are likely to be led by opportunity than any pent up aspirations to be active. That said, opportunity funds are positioning themselves and there is expectation from some that transactions led by distress may not be infinitely far away.

Much has happened in the past weeks, but opinion on the economic impact and trading for the rest of 2020 and even 2021 remains divided. Back in January we hoped for a halcyon year, with the waves caused by Brexit and elections temporarily in abeyance and the property market continuing to make impressive gains. Some clients have now been clear that they believe both this and next will be ‘lost’ years, with little to show whilst the world recovers. For others, the jury is still out and the question of whether this will this simply be a “3 month blip in a 20 year business cycle” as one commentator noted, or a historic moment, with decades of impact on the economy, changed demands for the built environment and a profound impact on the evolution of the office and retail sectors in particular.

The economic data from the US confuses this further, with an unexpected bounce in the US non-farm payroll expanding as announced last week and a significant reduction in unemployment in May. Last week the Office for Budget Responsibility in the UK also revised down its estimate of the cost of the coronavirus job retention scheme (where the government pays 80 per cent of the wages of furloughed workers) by £24 billion. It now expects the cost to be a “mere” £60 billion.

In relation to the London office market, I spoke recently with a major West End developer, who reported that regarding the four office schemes that they currently have in development, they do not propose any changes to the design as a result of a post-Covid world. Another contact spoke of a ‘nil-sum game’, the idea that the need for more space to social distance will be offset by the reduced numbers of personnel that will (in the short to medium term in any event), be able to occupy offices as a result of social distancing. The question of how to get staff into the offices also remains unresolved – the prospect of my commute being c. 80 miles a week of running makes me feel tired at the thought!

Personally, I do not wonder so much as to whether I will ever work in an office again (I know that I will), but more about whether I will ever wear formal shoes and a suit again! Meetings look set to continue in a remote fashion for the foreseeable future and the need for attire suitable for face to face meetings just one by product of a less formal approach inevitable from more home working. Many believe that the office will become a hub for sharing ideas, with the ‘younger generation’ in particular seeking out a place for education and experience, rather than a place to simply complete functional tasks.

The landlord and tenant relationship across all real estate sectors has naturally been in sharp focus, with shops and offices in particular lying mostly empty since the lockdown started. The March quarter date caused significant strain on this carefully balanced relationship and observers will be watching the forthcoming June date with interest and trepidation. Many of the usual tools available to landlords to chase debts have been suspended or curtailed and the Memery Crystal Real Estate Litigation team has been particularly active in pursuing tenants whose balance sheets suggest that they have the ability to pay some or all of their rent and are being opportunistic in not paying. The firm has also been busy restructuring rents where commercial agreement has been reached.

Three months of impacted trading for occupiers will force many to make even harder decisions than those in March. Some have spoken of a triumvirate of interested parties working together, with landlords, tenants and lenders all sharing in the losses. Many tenants feel rent deferrals are not an option and only store up the problems that will not disappear in the months ahead. The best approach from tenants seems to be transparency and engagement with landlords, to show that their businesses really are suffering, despite the government support and to agree bespoke arrangements that help both and with payments being made where they can be and indulgences granted in return that fairly reflect the reality of all parties. Turnover rents, long established in retail shopping centres, may also gain popularity in other sectors.

It has been interesting to see the reaction of other countries facing similar adversity. In New York they have a concept of “commercial tenant harassment” and have introduced legislation whereby personal liability provisions for commercial leases have been rendered unenforceable. This protects individuals who have personal liability under certain commercial leases for defaults by the tenant and legislation has made such provisions unenforceable for rent and other payment defaults.

In the UK the residential market has already opened up and many will be closely watching for signs of early recovery and confidence in this sector, to throw light on what may happen in others and whether it can kick-start the economy back into motion. It remains to be seen what will happen but there are positive signs and there will be exciting opportunities as a result. One example is the Ballymore purchase of the Broadwalk shopping centre in Edgware, to convert it to residential, which would be one of the largest conversions of retail into residential undertaken in recent history.

The battered retail market has also shown pockets of success. Bike shops and corner shops have had record trading, with other businesses including computer games, gold traders and sanitiser manufacturers all benefitting, The Times reports.

Meanwhile, WeWork continues to be buffeted and in the latest lawsuit over their aborted IPO, investors say the  company tricked them by promoting a transformation of the concept of workspace in order to sell hundreds of millions of dollars’ worth of stock. The fate of WeWork in particular and the serviced office sector in general remains to be determined after years of strong gains. Current comment suggests that the flexibility they offer is winning out over any lingering concerns of shared space, particularly as new social distancing measures have been introduced. This sector had never experienced a down turn in the market before and it remains to be seen how it will perform in a recession. Some commentators suggest that demand is already starting to return.

My personal practice has continued at a reasonably steady level until now, supporting clients in particular with sales, leasing and financing work over the past months since lockdown. There has been an inevitable slowdown in the number of investment transactions and it is a source of disappointment that that a number of deals that we had in place to work on have not proceeded. I hope still for a swift return to pre-lockdown investment levels (liquidity is not the problem for many) and an active market, with opportunities for investors to acquire assets that may have previously been seen as overpriced or unattainable, much as we saw in 2016, post the Brexit referendum. We have our full team of lawyers in place to advise on all aspects of real estate legal matters and remain ready to assist our clients as they may need. We expect to start a phased return to the office next month and to welcome back clients as soon as the Government advice allows.

It is widely anticipated that the Chancellor will deliver a mini-budget during the week commencing 6th July and the Government has suggested a renewed focus on getting the country re-started and business back on its feet. The proposals to relax Sunday trading laws and planning restrictions to fast track approval to serve food and drink outside will hopefully provide much needed assistance to the ailing leisure sector. Many commentators also believe that among the measures to be announced, infrastructure investment will feature heavily. There may well be a particular emphasis on sustainable, or green, infrastructure.

On a personal note, the reality of the pandemic was brought home last week when I was saddened to see the passing of Michael Goldmeier from Covid-19. Michael was head of litigation at Berwin Leighton Paisner, when I joined the firm in 2001.