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The impact of COVID-19 on offices, retail and warehouses – predictions for the future

The COVID-19 pandemic has caused approximately one third of the world’s population to live in some form of quarantine. In the UK, the restrictions imposed to limit the spread of the virus have forced the country to change the way in which it lives, shops and works.  

As restrictions are gradually released, employers and employees alike are naturally questioning which aspects of working life they wish to retain as the ‘new normal’ is forged.   We consider what the future of office, retail and warehouses may look like as Britain emerges from lockdown.

Offices

For most of us, working from home has now become the norm wherever possible. This marks a significant change, with statistics showing that previously millions of Britons spent on average a third of their time in the office.

Many office based businesses have moved to 100% of their workforce working remotely during the pandemic and, despite initial teething problems with network and connectivity issues, the consensus seems to be pleasant surprise as employees report enjoying the lack of commute and improved work-life balance. 

With lockdown proving that home working is not just possible but often highly effective, reducing office space and saving money on expensive premises is an attractive prospect, allowing employers to significantly cut costs incurred on rent, service charge, and business rates in particular.

Even with these savings, the benefits of office space should not be forgotten. The office offers a communal space for the workforce to be together as well as a place to welcome clients, to interact with each other and to build professional relationships.

Despite the gradual loosening of lockdown, social distancing restrictions are likely to remain in place for the foreseeable future meaning that more space will be required in order to allow workers to conform to social distancing requirements.   The design and use of office space will have to change, reversing the previous trend of densification of office workers and necessitating the installation of measures such as screens around workstations.

For many businesses, a balance will need to be struck and demand for hot-desking and more homeworking is likely to significantly increase. Serviced offices are also predicted to benefit from this change in working practices, offering greater flexibility and passing on operational savings to the tenant. However, claims that COVID-19 will signal the end of the office as we know it seem exaggerated and premature.

Retail

Whilst supermarkets have enjoyed increased demand as the nation spends more time at home, the sudden reduction in footfall has accelerated the demise of the British high street which has for years been struggling to compete as online shopping becomes more prominent and overheads (particularly business rates) increase. 

The pay squeeze resulting from wages rising at a slower pace than inflation has also limited retail spending in recent years, and the economic impact of the virus has exacerbated this with the IMF describing the forecasted economic decline as the worst since the Great Depression of the 1930s. Stores such as Oasis and Warehouse Group, Cath Kidston and Debenhams have all filed for administration during the pandemic citing Covid-19 as a significant factor.  

At the March quarter day, retail was widely reported to be the most affected sector in terms of non-payment of rent due to coronavirus with service charge and rent payments taking a significant hit. Many tenants have sought concession agreements to defer payments or make such payments monthly rather than quarterly in an effort to manage cashflow.

Some have argued that the desire for a physical retail presence will remain as shoppers enjoy the sensory aspect of shopping but it seems unlikely that the same scale of retail space will be required after the pandemic. Savills Research has found that that the UK may be ‘over spaced’ for retail by as much as 40%. It seems probable that COVID-19 will accelerate the resulting decline in the physical retail sector.   

Warehouses

As online retail soars, so too does the increasing demand for warehouse and distribution units which serve those online retail shops. Whilst giants such as Amazon have long been capitalising on this business model, requirements for small amounts of logistics space have risen in particular throughout the lockdown period as businesses who had not previously maintained an online presence now develop one.   

In the midst of the economic uncertainty caused by the pandemic, investors are seeing warehouses as one of the few safe bets and many REITs are seeking to diversify their portfolios. The low interest rates currently offered facilitate this move.

It is worth mentioning, however, that investing in logistic space is often not as simple as it may first seem.  Good transport links are obviously a must but the technology required for effective operation of these units should not be underestimated. A strong electricity supply and high speed broadband are essential. In addition, robots and electric vehicle charging points often feature on a list of tenant requirements. 

On top of this, it is common that each individual operator has specific requirements, even down to particular heights of ramps and dimensions of the unit, and as a result the distribution units often become bespoke to the particular tenant in situ.  Nevertheless this issue lies at the higher end of the market and on the whole warehouse and distribution units are posing an attractive proposition to many investors.

Conclusion

Many of the trends forecast in relation to office, retail and warehouse premises have been in existence since before COVID-19 but it appears likely that virus will accelerate their progression significantly. As businesses are forced to adapt to the ‘new normal’, it is clear that some companies will fare better than others. The key to success in maintaining market position will be flexibility and the ability to capitalise on new opportunities as they emerge.

Amelia is a solicitor in the Real Estate team as Ashfords LLP, advising clients on a range of Commercial Property matters including estate management, commercial acquisitions and disposals and development. For further information please contact Amelia Newman on al.newman@ashfords.co.uk.

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