The impact of the pandemic on the commercial real estate sector

However, with Savills predicting that commercial property investments will enjoy a 10% rise in 2022, it is clear that the market has made a remarkable comeback. With the spectre of public health restrictions now behind us, Britain’s high streets have finally been allowed to welcome back paying customers and commuting workers. Thus, fresh opportunities have appeared for investors in the commercial space that is driving forward momentum in the market.

With this in mind, it is important to note the economic impact that the pandemic has had in the last two years and to recognise the developments in the commercial real estate market that have allowed such a remarkable recovery to take place.

Impact of the pandemic

With social distancing measures and work from home orders in place, commercial property assets like high street shops and restaurants suffered the effects of a reduction in footfall. In fact, it’s estimated that footfall fell by over 40% in 2020. Therefore, it was estimated that British high streets could suffer losses of 20% to 40% in the wake of COVID-19. In the retail and hospitality industries, the numbers aren’t much better as more than 2,200 retail units were forced to close their doors in just the first year of the pandemic.

But the repercussions were also felt elsewhere. In the commercial office sector, it was commonplace for companies to attempt to cancel their leases ahead of the end of their contract, whilst government legislation made it almost impossible for landlords to force these companies to honour their leases. To make matters worse, the rise of hybrid working has forced the majority (73%) of business leaders to look towards smaller office spaces for their workforce, decreasing demand for large office areas.

On a more optimistic note, the pandemic came as a blessing in disguise for investors in the storage sector of the commercial market. With online shopping enjoying a boost in popularity and supply chains falling behind demand, demand for storage was high, creating returns of 36% for storage space investors.

Signs of recovery?

With £57 billion flowing into the commercial space last year (superseding the five year average), it is becoming apparent that investors have been keen to capitalise on the fresh opportunities that a return to normality and a lack of restrictions have created. In fact, with the number of sales rising by 3% last year and demand for office space increasing by 30% in Q1 2022, the signs of recovery are easy to see.

Certainly, the revitalisation of the commercial real estate sector has been remarkable when contrasted to the difficulties it faced during the pandemic.

The trends that have contributed to recovery

For many commercial property investors, conversion projects in the commercial sector have been a useful way of navigating the chronic disparity between supply and demand in the residential market. By taking old office buildings and turning them into flats, these investors have partly contributed to the recovery of the market. However, there are other trends that have also had a significant impact.

For instance, the aforementioned storage facility market boomed during the pandemic. Last year, the volume of sales in this sector increased from 699 to 892 transactions, or by 28% year-on-year. Meanwhile, the value of these sales grew to £16m, causing a remarkable increase of 57%. As such, it’s fair to say that the industrial sector of the commercial property market has played a major role in its recovery.

Moreover, investments into retail and leisure units have also improved since the pandemic, growing in value by 31% in 2021. As such, one of the hardest hit sectors of the commercial real estate market has contributed to its recovery rather quickly.

Finally, as 38% of UK working adults say that working from home is a regular weekly occurrence, employers have increased demand for prime office spaces. With employees going into the office less, business leaders have used office spaces with amenities like gyms and free refreshments in an attempt to urge their workforce back into the office. Consequently, £18.2m has been invested into this sector and the number of transactions in 2021 grew by 3%. As such, this is another sector which has helped the overall market re-find its feet.

The specialist finance sector and how it could encourage further recovery

Like with any investment, a growing market is one that surely holds the promise of new opportunities for willing investors. That said, the revival of the market will certainly bring higher demand and, thus, lower supply. Therefore, specialist finance lenders have an important part to play in the continued revitalisation of the market and future health of commercial property investments. In a market as complex as the commercial one, success is built on the foundations of speed and flexibility. As such, the specialist finance industry must be able to adapt to the new commercial landscape and deliver clients the financial packages and solutions that will best equip them to succeed.