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Moving Past Covid-19

The Covid-19 pandemic has led to questions about what the future holds for commercial property but, while change is ahead, the crisis is not a king-hit for the sector, Miriam Bell discovers.

By: Miriam Bell

1 July 2020

Observe the bulk of public discussion of the property market and you’d be forgiven for thinking the market only consists of residential property. The buildings which we live in attract far more attention than the buildings we work, shop, play and store things in.

Yet those properties make up a major and critical part of the market. This overlooking of commercial property is not a new development. The commercial property sector has long sat in the background, always there but not seeking attention. And that’s the way that many commercial investors seem to prefer it.

Looking back at the early issues of NZ Property Investor, commercial property didn’t feature much. Over the years that has changed – particulary of late as skyrocketing prices and regulatory changes in the residential sector prompted many investors to look to commercial as an alternative.

And since Covid-19 struck there has been an increased focus on the commercial sector. That’s because the lockdown and the resulting economic downturn have had a serious impact on commercial property. The most obvious example of that can be seen in the problems that arose around the payment of commercial rents during lockdown.

That particular issue has settled down somewhat. Many commercial landlords have managed to come to agreements with their tenants over rent and, for those who haven’t, the Goverment has now introduced a $40 million commercial rent dispute package to assist negotiations.

But, given the ongoing economic fallout from Covid-19, there’s many questions about what the future holds for commercial property. So we’ve looked to some experts to get a feel for what might lie ahead for the commerical sub-sectors in the post-Covid-19 age.

Retail Woes

Tourism, hospitality and retail have been hit hardest by the Covid-19 crisis. As a result, retail property is the commercial sub-sector which is struggling the most.

Physical signs of this are increasing as ever-more retail spaces are emptied out and replaced with “for lease” ads in the windows.

While the moves down the alert levels to level one, and near normality, do offer some hope, the economic downturn will continue to have a major impact on the retail sector. The level of uncertainty in this area has left many commentators unwilling to offer up forecasts – although it’s widely accepted vacancies will go up.

However, Colliers’ latest report on the commercial sector notes there are some exceptions to the general trend. They are those retailers that were classified as essential services, primarily supermarkets and pharmacists, it says.

“Companies with an established online presence were also shielded, to an extent, from the downturn. As a result, the supermarket sector, in particular, has bolstered its reputation as a defensive investment asset and therefore likely to attract greater investor interest during current volatile times.”

Moving forward, it’s widely accepted that retailers will need to rethink the way they do business. They’ll need to look to their online presence and offering and move away from an emphasis on high street shopping. But while this shift may have been exacerbated by the Covid-19 crisis, it’s one that was happening pre-Covid-19 as online shopping grows in popularity.

Retail property owners need to be aware of this trend and think about ways to adjust. For example, both domestically and internationally, mixed-use retail properties – which have tenants offering a combination of shops, services and hospitality - tend to perform better than shops alone. That means if a retail landlord has a suitable property it can work well to go for a mixed-use option.

Office Changes

Lockdown prompted a mass shift to remote working for many office workers and that has prompted much speculation about the future of office property.

Some big companies have changed their models and are downsizing their office space. But while this may be a trend going forward, there is a degree of resilience in the office property sector. PMG Funds chief executive Scott McKenzie says one supportive factor is residual low vacancy rates going into the crisis.

For example, in the Auckland CBD office space, the vacancy rate pre-Covid was 6%, as compared to the pre-GFC rate of 14%. Likewise in Christchurch, the rate was 10% pre-GFC but 5% pre- Covid. “This leaves the office sector in a reasonably strong place in terms of capacity to absorb the shock. It’s a better situation than during the GFC.”

The sector’s journey to growth will continue, but there will be some major structural changes in the office space, McKenzie says. “Lockdown was the biggest global remote working experiment the world has ever seen and it will have an impact on the office property sector.

“Some of the existing trends in that space have now sped up. In particular, flexible and remote working. There will be differences around health and safety protocols, especially short-term. We’ll see much less of things like hot-desking and there will be questions around the best, most effective use of space.”

But office property in central locations has been round for hundreds of years and that’s not going to change, he says. “Offices exist to bring people together to facilitate interaction and collaboration.

There’s still a need for spaces to do that because they enable creativity, innovation and the transfer of know how. It’s harder to achieve these things in remote working environments, even with the help of technology.

‘Offices are here to stay but the way people come together for work and how they work might change a bit. Office property and the way it is used will evolve’ SCOTT McKENZIE

“Offices are here to stay, but the way people come together for work and how they work might change a bit. Office property and the way it is used will evolve. The spaces will be designed to be more efficient and to better enable the work and the culture.”

Meta5 Group* managing director Patrick McFarland agrees that office property – and its owners - will have to adapt to the post-Covid-19 world. He says many businesses will reduce their physical footprint and look for technology solutions to build culture and enable flexible working practices.

For office landlords that means they too will have to embrace flexibility. For example, in order to attract and keep good tenants they’ll need to be open to structuring their leases in different ways, as well as focusing on arrangements which incentivise tenants,
McFarland says.

“It will also mean increased investment in technology in the office itself. Dedicated video conferencing rooms will be a necessity, as will personalised equipment. Even building aspects like higher tech air conditioning systems could come into play.”

[*Meta5 Group is an Australasian workplace strategy consultancy.]

Industrial Strength

There might be struggles and changes ahead in the retail and office sector, but the future is looking pretty bright for the industrial sector – thanks to its strong fundamentals, which include limited vacant supply.

For example, Colliers’ latest Auckland industrial vacancy survey showed that, in February 2020, the overall vacancy rate was 1.4% with just 171,000m2 of vacant space across the region. A tight leasing market and limited supply response pushed prime vacancy to under 1% or just 30,000m2, but secondary space was also tight.

The survey also notes that while development activity has taken place, there is only around 300,000m2 of industrial space under construction, representing around 3% of total supply. That was not enough to satisfy demand and is much lower than in
previous cycles.

Colliers associate director of research Ian Little says the extremely low vacancy rate, modest supply pipeline and limited access to land for development underpin the sector’s strength. “They will provide a significant buffer against the changes in market demand likely to eventuate in the second half of 2020.”

Further, at the heart of the industrial sector are goods-producing industries like manufacturing and construction, which are major contributors to the New Zealand economy, he says.

“This is bolstered by services such as transport, warehousing and postal services - industries that were already in growth before Covid-19. These services have received a significant boost in recent months as people shift to online and ‘click and collect’ services more than ever before.”

“Additional depth comes from the rising public infrastructure spend on major road, rail and other ‘shovel ready’ projects. It is likely that more projects and government support will be announced to drive New Zealand’s recovery and boost the sector further.”

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