Commercial Awareness: Commercial Real Estate

What is Commercial Real Estate?

Commercial Real Estate differs from Residential Real Estate as the property is used exclusively for business and income-generating means rather than for living purposes. A piece of Commercial Real Estate is essentially a property that has the potential to generate profit through capital gain or rental income.

There are four main classes of commercial real estate: office space, industrial, multi-family rentals and retails.

• Office Space. These office buildings can be multi- or single-tenanted and are grouped into three further categories. Class A buildings have a good location and high-quality construction. Class B properties are equally high-quality in construction but have a less desirable location. Class C offices are those in an unfavourable locations and are likely to be the poorest quality structures on the market.
• Retail. This encompasses retail stores, shopping centres and shops. Retail commercial real estate tends to be multi-tenanted, often with a lead anchor tenant. An example is Kingfisher Shopping Centre which hosts Next and Primark as anchor tenants. These nationally known retailers are expected to draw in customers, who will then shop at other venues in the centre. Anchor tenants are often offered steep discounts on rent in exchange for significant long-term leases.
• Industrial. This covers warehouses and factories with a range of functions such as heavy manufacturing, assembly, bulk warehousing, storage, and distributions. Industrial real estate is usually situated in industrial parks outside of urban areas, and along major transportation routes.
• Multi-family. This covers leisure and healthcare facilities such as hotels, pubs, restaurants, medical centres, hospitals, and nursing homes. Whilst multi-family properties can serve as a residency, their primary function is investment. Multi-family commercial property is also split into separate asset classes. Class A properties garner the highest rents and are usually luxury buildings with top class amenities. Class B properties are of good quality and location but may not enjoy so many amenities. Class C properties can be outdated but offer the most affordable rents for tenants.

How Has the Pandemic Impacted Commercial Real Estate?

The pandemic has brought great uncertainty to commercial real estate.

For Office Space

Initially, industry analysts believed that commercial office real estate was in danger because demand for space was dramatically diminished by social distancing, layoffs, quarantines and remote work. Major corporates thought that working from home would stay: Google decided to opt out of a new office in Ireland and Pinterest paid $90million to terminate a San Francisco office lease. Banks such as Nationwide and Morgan Stanley were reported to be reviewing their global office needs.

However, countless surveys have revealed that workers would like to, at least in part, return to the workplace. There is therefore still demand for office space, but now for different types of amenities. In order to accommodate flexible working, companies need shared and collaborative workspaces. Many companies are also seeking more flexible lease terms. There is also a focus on using space which prioritises hygiene. Businesses are demanding high indoor air quality and greater touchless technologies.

For Retail Space

Out of the commercial real estate properties, retail has struggled the most throughout the pandemic. As retail footfall has fallen, many stores and outlets have been forced to close and negotiate a reduction on or cancel their existing lease agreements. The Centre for Retail Research estimated that 2020 saw over 15,500 stores closures in the UK as a direct result of Covid-induced administration or CVAs (company voluntary arrangements). The picture is similar across Europe. France has suffered more than 12,000 store closures due to Covid-19 too.

The one traditional brick and mortar retail exception is supermarkets, who despite strains on their ecosystem, have enjoyed increases in their profits. 2020 supermarket logistics space take-up has nearly doubled on 2019. Recent shifts to online shopping have also presented supermarkets with an opportunity to repurpose their existing retail space. During the pandemic, many converted under-utilised retail floorspace into micro-fulfilment centres.

For Industrial Space

Industrial real estate has seen the largest growth in demand and investment over the pandemic. Investors have remained active in the market with warehouses and storage for e-commerce marking notable areas of growth.

For Multi-family Space

Multi-family rentals have struggled, with many assets involved in the hotel and hospital industry. That said, the UK multi-family sector saw a record high investment of £3.5 billion across 2020, up 30% from 2019. Canadian real estate investment and management group Realstar was a significant contributor to this acquiring a portfolio of Multifamily and Student Housing, worth over £570million.

UK-based Commercial Real Estate Deals to Note

• In Q1 of 2020, Legal & General acquired Sanctuary Buildings on Great Smith Street for around £300million
• In July 2020, Hong-Kong REIT agreed to buy The Cabot in Cabot Square for £350 million
• In October 2020, one of Singapore’s leading REITs entered into an agreement with Canada Pension Plan
• Investment Board to acquire a 50% interest in the Nova Properties (two Grade A office buildings) in Victoria, London for £430.6 million
• In Q4 of 2020, Brookfield Properties sold One London Wall Place to AGC Equity Partners for £480 million
• This week, Swedish furniture retailer Ikea has bought former Topshop Oxford Circus flagship store for £378 million

Wider Commercial Real Estate Reading:

• The Big Table Group Invests £53million In Its Restaurants
• WeWork Goes Public
• Warehouse Space Shortages