Covid-19: Real estate has been disrupted


At a glance

“I cannot see the long-term allure of being at home every week day and week end, without the variety of being in an office and the amenities of city centre life that has grown up to support office working. Time will tell. I do not believe in the death of the office, but people are likely to return with a new, refreshed perspective on what is important in their lives.”

Our Co-Head of Real Estate Daniel Abrahams outlines his latest thoughts on Covid-19 and the real estate market.

One of my children recently asked me if we should re-run 2020. The idea would be that at 23:59 on December 31st the clock would then revert to 0:00 on 1st January 2020. A clean slate. There is certainly a lot to like about an idea that removes the impact of Covid-19 from the property industry and reverting to a time when there was no ‘new normal’. To do so however would remove some of the inevitable adjustments that need to be made and which have accelerated ’15 years of change into 150 days.’ We would be more oblivious to the new benefits of our 3-step commute to our home work spaces and the yet unseen enterprise that will surely blossom in the fertile wake of the lockdown.

When I started my first Covid-related article shortly after lock down was imposed, I pictured perhaps a series of three (of which this is the third) with a beginning, middle and end scenario and various stages of comment, before an ultimate return to our usual routines almost exactly 12 weeks after the Prime Minister instructed us to remain in our homes for that amount of time. How naïve that feels now. The world is undeniably changed and the future for how we use commercial real estate as indeterminate as it could be. This week could be a marker and give us a glimpse of how we move forward, with schools returning, freeing up parents to return to work and the start of meteorological autumn causing a general re-focusing on business. Agents tell me that they are seeing more deals and focus from investors.

The change to flexible working is of course not new. At Memery Crystal we commissioned and co-authored a report titled “Real Estate. Disrupted” at the end of 2019, to give some thoughts on the potential future of the industry and the built environment. We focused on the need to provide an experience and a reason to journey to and remain for any length within buildings across sectors as well as an emphasis on them being service-led. Much of the opinion was crystal-ball gazing, but it remains even more the case in the current climate. I encourage you to read the report – available here. We boldly claimed that “People will be put at the centre of real estate strategies.” Now, that must be case if we are to coax them from their bedroom offices.

We also claimed that “Businesses are seeking new ways to attract and retain talent, with their working environment central to their propositions and enlightened landlords are adapting likewise. This is not just about fit-out and amenity, it is about the wider environment, access to infrastructure and the mix of cultural and leisure assets which are within the workplace vicinity. Consumers of space – be that a retail shopper or an office worker – are demanding more, and so occupiers are demanding more from developers.”

The Times offers another view, stating “Some office landlords have grown lazy on the back of long leases to big companies. Most commercial property in the future is likely to require more intensive management, along the lines of Regus or WeWork, with tenants being shuffled in and out of office spaces that have to be reconfigured constantly. It will also need more creative thinking.

Simon Silver of Derwent recently proffered the view on a webinar I attended that there will be a two tier leasing structure, with larger traditional occupiers still requiring their own space on longer leases (Amazon recently announced plans to invest $1.4bn in new office space to accommodate thousands of workers, and Baker McKenzie announced in July that its London office will be relocating to new office space in 280 Bishopsgate, EC2M 4RB in the heart of the City) and the flexible lease structures that are familiar.

Commercial real estate news platform Bisnow summed up the period since March well, stating “As we wait with bated breath for the decision to return to some semblance of ‘normal life’ post-pandemic lockdown, we are faced with a series of decisions that will shape the way we use the physical assets where we work, rest and play. Our working lives have undergone the largest beta-test for remote working in history, with office properties sitting empty and collecting dust. We don’t have to use them the same way when we return.”

Various alternatives continue to be debated as to how we will use the commercial real estate that dominates city centres. The ‘Hub and Spoke’ model is interesting, but difficult to implement for most businesses outside of the largest in headcount terms and who operate in a business that is suitable for remote working. It will also still lead to eroded interaction amongst staff where they do not gather as a collective. It would still mean real estate overheads (in some cases with minimal overall saving) and would mean driving for many, often for longer than their original commutes would have been and with a negative environmental impact.

There is certainly a big charm offensive required from employers and government to convince people that their offices and transport in particular are safe. A mere one in six workers in the UK had gone back to their desk at the end of August, according to figures released by Centre for Cities. We are seeing the direct effect in the job losses at retailers such as Pret, involving thousands in the retail and leisure industry. Those that expect to eventually return to a London that they knew will find that they were the makers of their own demise – these businesses need supporting now, or they will be gone.

The safety of buildings naturally plays a large part and commentators have written at length about the lengths that are needed to change the narrative and ensure safety – notably the potential contagion that can swirl through air conditioning (seemingly more aggressively in more modern buildings designed to re-use air for environmental reasons). The idea of a Covid rating for buildings is also one that could develop (in the same way as Energy Performance Certificates) – and something that canny potential employees may enquire about as part of their due diligence on an employer.

The major companies that have stated that their staff need never return to the office – (Schroders, Capita etc.) surprise me. When I started work in the City as a trainee solicitor I loved the buzz of working in the heart of a global business district and learning from those that were around me. The environment and camaraderie built with my fellow junior solicitors as we figured out how to exist in that environment was what I relished and for new joiners to the working environment to be robbed of that is a huge loss for them. We run the risk of becoming faceless to each other (Zoom and Teams are no substitute) and as one colleague mentioned to me – how do we even know if our employees are the individuals doing the work that is emailed in?! The point being that we cannot engender a culture and teach the ways that we want our businesses run without collaborating in proximity.

What is also clear is that there is unlikely to be a return to the ‘old ways’ either, should we even want that? There are undoubted benefits from home working. More family time, less ‘lost’ travelling time and costs, potentially less pollution, enhanced local community and a local economy that has recovered far more quickly than town centres, leading to the aptly named ‘doughnut effect’, with the city centres remaining depressed.

There are also significant downsides that cannot be ignored. The Times reported an overall negative effect on gender role allocations, stating “Feminists have long held home working to be a progressive ideal, supporting women in particular to juggle work and caring responsibilities. But analysis by the Institute for Fiscal Studies suggests that intense home working reinforces gendered divisions of labour. Mothers are spending less time on paid work than before the lockdown and are more likely to be interrupted when working than their male colleagues.”

This is a generalisation, but there are and will continue to be significant detrimental effects on the post-Covid working world. Perhaps if it had the chance to evolve over those 15 or so years the effect would not feel as sharp as it does. Witnessing central London dying on the vine is heart breaking. Local retailers have been quizzing me in town as to when my firm will return in numbers and businesses that have stood for hundreds of years through plague, war and depression are teetering on the brink. We have to decide if they belong to a now bygone era and whether we are prepared to let them pass and to usher in new commerce and ideas to replace them. Personally I hold too romantic a view of the “old days” to want that to happen so quickly.

I noted with interest a quote from Rob Groves from office developer Argent, saying “I’d like to challenge people saying they will never need an office and ask them in 12-18 months’ time whether that was the right decision or just a reaction to what’s happening now.”

This is a view that I subscribe to and I cannot see the long-term allure of being at home every week day and week end, without the variety of being in an office and the amenities of city centre life that has grown up to support office working. Time will tell. I do not believe in the death of the office, but people are likely to return with a new, refreshed perspective on what is important in their lives.

Perhaps more alarmingly is the immediate effect on the commercial real estate market. Savills report that global investment volumes fell by 33% in H1 2020 compared to H1 2019. During the first 170 days of 2020, deal numbers fell by 39%, 37% and 34% in the Americas, EMEA and Asia-Pacific respectively compared to the same period in 2019.

Whilst the residential market appears to be on an unstoppable run (it will stop) with the news that house prices rose to an all-time high last month (source, The Times) fuelled by pent up demand, desire for work space at home and the Chancellors Stamp Duty Land Tax give away, the commercial market cannot boast the same. Sources quote that Q2 was the worst quarter ever for central London office deals, RCA data showed, with the dearth of international investors a particular problem for this market.

There is strong belief that there is an abundance of capital waiting to be deployed and that the distress will come, allowing opportunity funds (no longer named vulture funds) the chance to pick up assets at significant discounts. The state aid that is still being enjoyed has staved that off for the moment, but as the weather turns, the icy blast of realism will inevitably hit the economy and we will see the truth of the reality of what is left to start the re-build with. Best assets are considered to still be keenly sought after and are trading at significant levels, such as the recent £380M sale of the Cabot to Link Asset Management, where it is rumoured they did not even inspect the property.

One client commented to me that many are “over complicating a simple industry”. That boom and bust in real estate is cyclical and that the market was at a late stage was well known. A poll conducted by the City of London Corporation in July has revealed that 99% of global investors are still keen to invest in London, with 79% actively doing so. I do not doubt the availability of capital, but the desire to be a first mover in the new world seems tempered at best. Deals are happening, and the period between now and Christmas is usually a fertile one. It will be telling. Perhaps when we see more transactions begin to happen we will see a herd mentality start and those with nerve will find that they have picked up real and lasting value. Logistics and PRS remain in strong demand and we at Memery Crystal are active in these areas in particular. This week should be a new start and Estates Gazette reports that activity is picking up, businesses are setting out their stalls for growth, opportunities are being eyed and funds are being raised to seize on them.

We continue to support our clients and have ongoing instructions across the finance and construction industries in particular, whilst helping our clients think creatively as to how to manage their portfolios and business plans through an ever changing landscape. As lawyers we are part of that process and equally have to adapt our practice and ingenuity to best advise against that backdrop.

So, as I mentioned at the start of this text, my expectation that I would wrap up a trilogy of articles with clear conclusions and a “well that was interesting” conclusion was well wide of the mark. The market has been truly disrupted as we at Memery Crystal in some way predicted with our thought piece and I suspect that the hindsight required to know even where we are now is some way in the future.

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Daniel Abrahams

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