Commercial landlords and asset managers will be reflecting on what has been an intensely challenging year or so. Office and retail – two of our core markets – will be remembered as casualties, as opposed to beneficiaries (think industrial & logistics), of the pandemic.
Office take up in the 12 months to Q1 2021 was the lowest on record since 2004¹, whilst some FTSE landlords have seen rental income fall by as much as 31%². The rental moratorium has redefined the traditional landlord – tenant dynamic, with numerous reports of high-profile tenants exploiting the arrangement in a way that undermines the spirit of it; to protect those who need it most.
By and large, however, tenants and landlords have been working in harmony to reach a middle ground, conscious of the reality that the commercial interests of both parties must be respected. Compromising landlords are writing off rental arrears and being rewarded with the promise of lease extensions, for example.
With occupancy rates and footfall on an upward trajectory, the onus will be on landlords and asset managers to ensure their portfolio is equipped to encourage the retail and office trends that look set to define a post-Covid world.
The death of the office: a popular myth
Industry and media sentiment has changed significantly during the short time the pandemic has been around. Turn the clock back a year and it was hard to come by an article without some sort of reference to the ‘death of the office’. Nowadays, they’re awash with discussions of what the post-Covid office might look like, influenced – at least in part – by encouraging investment trends. New data from Knight Frank reveals that South East office take up in Q1 2021 was 41% higher than the previous quarter and the highest quarterly take up since Q4 2018³.
Research from Freespace accordingly reveals⁴ that in in May, 27% of UK offices had more than 10% occupancy – an increase of 16% since March – and a recent survey from Flexible office provider Orega found that 62% of tenant respondents want to either retain or increase their existing office space⁵. Investors and tenants are putting their faith behind the office.
A similar picture emerges on the retail front. The re-opening of non-essential retail served as a timely reminder of the importance of bricks & mortar stores, as shoppers flocked to the streets with a mixture jubilation and relief. Hammerson reported a footfall increase of 60% in the first week of shops re-opening, whilst other major players have seen it return to pre-pandemic levels in some areas⁶.
“Some of our retail assets have been the subject of highly competitive bidding processes in recent weeks, something that was barely imaginable this time last year”, says Stephanie Legh, asset manager at Avignon Capital.
Attention has now moved towards post-covid trends and their impact on the future complexion of retail and office assets. The industry is largely in agreement that whilst new some features have emerged in direct response to the pandemic and will play influential roles, those which look set to form the core principles existed prior to the pandemic and have indeed been accelerated by it.
A flexible future
Flexible working, which burst onto the scene in the late 2010’s via the likes of WeWork and IWG, has been propelled to the top of the priority list for office tenants and landlords alike. A global survey from EY discovered that 54% of surveyed employees would consider quitting their job if they are not promised some form of flexibility⁷, whilst research from CBRE reveals flexible space as the most sought after characteristic of office buildings today – 82% said so⁸.
An influx of new entrants is all but inevitable and design, fit-out and re-use considerations will be at the forefront of the landlord and manager psyche. CBRE asserts that savvy landlords will increasingly explore the potential to build out flexible space within existing properties such as shopping centres, health facilities and educational hubs⁹.
The concept also extends to the topic of leases. Flexible and typically short-term leases are a defining feature of flexible offices and have been for many years, but it is in the retail market where new conversations have emerged.
The general industry consensus is that long-term retail leases may soon become a thing of the past and landlords will entertain a greater degree of flexibility. Shorter lease lengths and turnover-based rents, underpinned by landlord-tenant cooperation intensified by the pandemic, may be more readily discussed.
Wellness agenda accelerated
The wellness agenda was well and truly underway before the pandemic erupted and heightened discussions of Covid restrictions and their impact on mental health has only bolstered its importance.
“The last year has been extremely tough for a lot of people. Employers, developers and landlords will face increasing pressure to create environments which harness a positive and compassionate approach to physical and mental health” says Stephanie.
The relationship between the workplace and physical and mental health has taken on a new lease of life. The likes of climbing walls, landscaped gardens and curated art collations represent the extreme features appearing at new office buildings, with gyms, healthy food options and sufficient outdoor spaces likely to become more commonly expected by tenants.
Both retail and office landlords will also continue to pursue Environmental, social and governance credentials. The likes of Cadogan join a long list of major landlords committed to net zero carbon emissions by 2030 and the significance of mixed-use developments – with regards to their role in sustainable place-making and community building – has become even more pronounced.
ESG is an integral consideration across both investment and asset management strategies here at Avignon and one that we take seriously. We aim to continue to play a defining – rather than passive – role as environmental challenges become more pronounced.
A technological future
Technology will also play a pioneering role in the future of both retail and office assets, something which Avignon has been promoting for many years. Contactless technology been catapulted into the centre of the public consciousness and will likely form a crucial part of operations in the workplace and retail stores.
Smart buildings are also becoming more advanced, moving beyond their traditional energy-use benefits to incorporate technology relating to social distancing; health checks; lift space; air flow; contactless entry and more. Tenants and landlords alike are becoming increasingly conscious of the role of technology in creating buildings which facilitate improved levels of physical and mental health, something that also speaks to wider wellness agenda.
If there’s anything that we’ve learned over the last year, it’s that the best landlords and asset managers are those which adapt. And with the post-covid boom not far away, we’re more prepared than ever to reap the benefits.
If you would like to hear more about our retail and office portfolio, please get in touch.