The commercial real estate industry is exclusively used for business-related purposes or to provide a workspace to business owners. Although some businesses would seek to buy their own property most often, commercial real estate is leased to tenants to conduct their business activities. This category of real estate can be very broad and includes several economic industries, such as retailers, office spaces, hotels and resorts, shopping centres, restaurants as well as healthcare facilities.
Due to its broadness, with the outbreak of the novel Coronavirus, Covid-19 the commercial real estate industry, has faced numerous signs of stress as clients started seeking alternative models due to forced closure of their business such as those working in the catering and accommodation and retail industries, those which might no longer afford the office spaces that they were renting out, and those who might have been required to change the structure of their office operations in order to cater for the increased health and safety measures or the requirement of more space.
One of the most immediate effects on the industry was felt since clients were no longer able to honour their existing rent commitments in relation to the premises that they were operating from due to the sudden loss of income due to closure. Others who might have still been able to operate and secure some income, were reluctant to let go of the liquidity due to the uncertainty that was apparent on a global basis.
Commercial property owners were immediately faced with requests from clients asking for discounts or credit terms since they were seeking to commit the lowest amount of cash possible in view of the said forced closures or a decline in their business income. Whilst big companies might not face this problem in the long run, smaller ones might need years to recover from the effects of the pandemic and might end up defaulting from their current contracts and seek alternative property within which to operate.
Another problem being faced in the industry is that whereas due to the outbreak there was an increase in awareness for health and hygiene measures which on the one hand requires working arrangements to allow employees to have more personal working space which in turn requires more floor space, on the other hand businesses are more reluctant or less able to move their operations into larger premises. This would essentially lead to a change in the working model of the business or the reduction of the work force in order to cater for these health and hygiene requirements.
Traditionally, in the commercial real estate property was leased for longer periods when compared to residential leases since whereas in the latter industry property is likely to be leased out on a monthly or annual basis, in the former property is leased for periods of five to ten years or in certain cases even longer. It is highly likely that with the outbreak of Covid-19 globally, business owners looking to leasing property for their operations would be wary of binding themselves with and committing to long term lease contracts. The trend will therefore shift towards the leasing of properties with a shorter lease period and with more flexible conditions.
The pandemic has caused an upheaval in most industries and brought about insecurities to businesses. Whereas some effects are temporary and are simply meant to mitigate the outbreak, some other effects are bound to be felt beyond the outbreak and the eventual discovery of a vaccine against the virus.
Another impact on the commercial real estate industry following the Covid-19 outbreak relates to the sudden shift from office work to “work from home” and “remote working” models. Prior to the outbreak remote working models were implemented by a select few, mostly businesses working in the I-Gaming and E-Commerce sectors, however following the outbreak, most businesses were forced to shift their operations remotely due to the requirement of social distancing in order to mitigate the spread of the virus.
Although some businesses have returned or will eventually return to physical operations from the office, other businesses have found that they have fared well with remote working and will keep using such a model even beyond the pandemic in order to provide their employees with more flexibility.
Big technology companies such as Twitter and Facebook have declared that they will allow their employees to continue working from home, whereas others including Google, Microsoft, Amazon and PayPal have reportedly extended their work from home policies. Should this trend continue to grow and more businesses start adopting such model, whether for the total operations of the business or for partial operations, the impact on the commercial real estate industry might be considerable since clients would no longer require office spaces or at least they would need spaces which are far smaller than the ones that they used to require prior to the shift in the mode of operations. Having said this, there are other stakeholders who oppose this model since they believe that by working from an office, a company would be able to create a community between the employees and the element of social interaction is important to preserve.
It is pertinent to observe that over the last few years the commercial real estate industry had been evolving since several other models had started emerging as an alternative to the traditional model. Although the outbreak has brought their shortcomings to the forefront, they are now reworking their models to adapt to the new reality.
For example, due to the limitations imposed on travelling, the request for short-term holiday accommodation has been struggling and therefore property owners in this industry might wish to revaluate their business plans. Moreover, the co-working industry and the co-living niche had initially been brought to a halt for health-related reasons, they are now revamping themselves. Some have also held that due to the outbreak might lead to an eventual rise in requests for co-living spaces since due to the lockdown period persons living alone have felt increasingly lonely and by co-living although people would have their separate apartments they would be able to hang out with other tenants in the communal space which benefits social interaction.
As any other industry, the commercial real estate industry is an ever evolving sector of the economy and although it might be currently facing some struggles during these times, due to its broadness it is hardly possible that the industry would no longer be required. Although the future is still unclear on how businesses from different sectors will operate in the future, real estate will always be required even though the nature of the demand might change.
Dr Catherine Mifsud
Senior Associate
Mifsud & Mifsud Advocates
This article may also be accessed on The Commercial Courier.
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