Real estate issues continue to hit retailers the hardest

Now that half of the UK population has received at least one dose of the Covid-19 vaccine, there seems to be light at the end of the tunnel and people are starting to talk about what the real estate market will look like after the pandemic. Larry Jobsz of Buchler Phillips and Russell Davidson of Gunnercooke provide key insights into what the future may hold.

Amid the coronavirus recession, the organizations hardest hit may have been in the hospitality and leisure sectors, which are still among the most sensitive to changes in the economic environment. Typically bearing high levels of fixed costs and operational commitments, companies in these fields clearly have disproportionate impacts on profitability when there is a reduction in their revenues. A notable fixed cost for the operators of these zones is real estate, whether it is a rent on a catering unit or an estate, a commercial mortgage on premises such as a club or a long-term lease on hotel.

Very soon after the first foreclosure began in March 2020, several leisure businesses, large and small, faced unforeseen issues regarding costs of ownership, not least because their businesses had been booming until then. Successive closures have shut down hotels, restaurants and cafes entirely, although some have been able to replace a small portion of their income with take-out services. If the leave program and vacations at professional rates have helped, many establishments have closed their doors, never to reopen. Some 2,200 locations closed last year, with branded restaurant chains the hardest hit.

The real estate issues have been a timely catalyst for these companies to prepare in other ways in the future for an eventual recovery. Ultimately, leisure and hospitality are consumer-driven industries where tastes and shopping habits can change. They are very competitive, with points of difference difficult to establish outside of the obvious areas of value for money and superior service.

A sustainable strategy for real estate must therefore be developed alongside as strict a management as possible of other fixed costs, thus mitigating the impact of all types of business disruption or unexpected changes in the competitive landscape. Recently, these have included improving efficiency, productivity and cost savings; hospitality specific questions regarding tax, VAT, HMRC and PAYE; employment problems; optimization of cash flow; asset reviews; leasing and other financing options for equipment.

The future of the sector is bright, however, with around three-quarters of small and medium-sized operators considering recruiting. Customers in the hospitality industry are anticipating a bumper season when the reopening takes place and forward bookings increase significantly from previous years. A survey conducted in recent weeks by Lumina Intelligence found that the opportunity to negotiate more affordable rents and the accumulated savings from the public will see the market return to 72% of its 2019 value. People in the industry are resilient and many of those are resilient. who lost their business will no doubt start over.

Beyond the high-profile examples of the hotel and leisure industry, so many corporate restructurings severely affected by the pandemic have included an important real estate element. It has been a stark reminder that ownership, or at least the cost of owning or using it, is at the heart of so many businesses that stay afloat.

Of course, both sides of the landlord-tenant relationship suffered: Landlords (landlords) faced defaults and rent vacancies as the occupants of the business were unable to operate and may have failed. to have closed their doors for good. Likewise, companies able to continue doing business, perhaps aided by personnel costs thanks to the government’s vacation program, will have found that ownership costs and contractual obligations remain a major concern.

Regardless of Covid, the best approach to resolving real estate issues is invariably to find constructive solutions in the long-term best interests of both parties in a contract. This doesn’t just mean mediation, but spending time crafting lasting arrangements that will benefit all stakeholders. These include sales-based rents, deferred service charges and other costs, revised lease breaks, lease extensions and rental review deadlines.

Market change

Many predict that the office market will be forever changed. The pandemic has accelerated the trend of flexible working that was already taking hold, as well as the continued reallocation of many office spaces for residential purposes. Some large tech companies have announced that they will adopt a remote working model for all staff in the future, while others have taken the opportunity to reduce their footprint (and real estate is for many companies the biggest expense after wages). Yet predictions of the demise of city centers and the office sector are exaggerated.

McKinsey & Company predicts a pattern of workers spending half their time working from home and the rest in the office, with greater return to the office for companies requiring a higher degree of face-to-face interaction than can be expected. reached with a Zoom or Teams call. Many companies that wanted to embrace full remote working now realize that it is difficult to train new employees remotely, that some employees suffer from stress when working from home, and that a completely remote model creates relationship problems. client and team building.

What appears to be happening is a move towards shorter, more flexible leases, preferably in buildings with the ability to scale up and down as needed. The serviced office market is expected to grow. However, there is still a lot of new space coming out of the ground in city centers and tenants are now signing leases, as they marked the worst of the pandemic by keeping the existing space. There is still a debate about the extent to which city centers, as opposed to regional hubs, will come back to life, but young people will continue to move to cities for training and seeking opportunities.

Retail has been hit hard by Covid. The industry was already undergoing significant structural changes since long before the pandemic of store closings for months. A report from The Local Data Company estimates that nearly 10,000 large retail stores closed in 2020. John Lewis is the latest example of a retailer that had already managed to lose weight and relocate most of its future business. online: it’s not just about old-fashioned department stores. who have suffered from the dramatic increase in Internet retailing. Yet while the aforementioned report also found that there were 32,847 closures in the independent retail and leisure sectors, there were 31,405 openings, many by fast food retailers and grocers. .

The new use of Class E planning now automatically allows for a wide range of commercial uses, and while it is undoubtedly the case that much of the retail space will be converted into a mix of Leisure, office and residential uses, smaller independent operators and opportunistic international retailers await. to see what becomes available.

A slow but steady recovery in the retail sector could then be anticipated, with an emphasis on destination retailers able to attract customers due to the ambiance of the location and the quality of the products. The likely increase in city center living is likely to boost local retailing, especially in food, provided the products sought are not readily available online. The trend will be towards a greater mix of uses in smaller units within city centers.

What can stay

Nonetheless, an ongoing shift in shopping habits will continue to remove “traditional” capacity from downtown areas until retailers take drastic steps to accommodate the new order. Rents too high for the majority of multiples; lack of in-store innovation and slowness to expand online; high staffing needs.

Established retailers need to think like independent destination businesses and deliver an engaging in-store experience to Millennials who almost grew up shopping online. Most of them need a very good reason to venture beyond their doors to participate in discretionary shopping as a leisure activity.

Trade tariffs, data security, investments in store technology, price wars and constant “ sell ” periods, not to mention logistics and the supply chain, have forced owners to company and management teams to keep moving to stand still. As in the field of leisure and hospitality, the real estate factor will remain dominant in the viability of businesses, hence the need to redefine the relationship between owners and tenants in the foreseeable future. Again, these will need to be structured alongside other measures such as stock control and working capital; technological and operational efficiency; relations with suppliers; trade with international partners and support for banking arrangements.

A contrast to the woes of the retail industry is logistics, where it is time for those with warehouses and logistics centers to rent, especially with good highway access. Online shopping has been sped up dramatically by the pandemic and is here to stay. Expect a trend of building new warehouses over the next few years.

The residential market never really closed during the pandemic – visits and sales still took place and the stamp duty holiday led to price hikes in many parts of the country. Real estate agents tell us they’ve rarely been this busy. And if a lot of people say that city centers will be deserted as people move to the countryside in search of a home office and open space, it’s the fact that for virtually every sale of a real estate in the city center, there must be a buyer. The ideas of emptying city centers are misplaced.

An increase in the number of people living in city centers is likely in the coming years – a trend which in itself will underpin the eventual regeneration of the High Street, but with a different kind of commerce and a plus. great emphasis on leisure and lifestyle activities.

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