Blog December 2, 2020

Data reveals the impact of COVID on UK commercial property leases

By Jack Harrison

While there are hopeful signs of relief from the COVID crisis thanks to new vaccines, we’re still some way from a return to ‘normal’. For many in the retail, leisure and hospitality sectors, it could be months before trade returns to pre-lockdown levels. Many are already struggling to pay rents and, with less revenue coming in, there’s no easy fix on horizon. The health crisis has hit these businesses hard, and their landlords are feeling the effects, too.

Anonymised data from more than 150,000 live leases managed via MRI Software’s enterprise property and accounting solutions paints a picture of millions of pounds of commercial rents outstanding – and it’s clear that the tenant/landlord relationship is being tested to its limits. But it’s not all doom and gloom: the data also shows that many real estate owners are being flexible and working with their occupiers to get through the crisis, with an increasing number offering rent reductions. It’s clearly an uncertain time, but the evidence of cooperation brings hope.

Data shows true scope of the problem

Our analysis reveals that the proportion of outstanding rent payments in the commercial sector (retail, shopping malls, logistics, warehouses and office spaces) is growing at an alarming and unsustainable rate.

Current data shows that for March, when the government introduced the first lockdown, 19% of the total rent invoiced remains outstanding. Since then, the amount due has peaked at nearly £400 million for September (33% of the total owed), with the proportion rising to 58% in October (a little over £200 million). It might not be a surprise in the circumstances, but the sheer scale proves there will be no easy way out.

Another key finding from the data is the significant decrease in the number of new leases signed since the pandemic struck. New leases being set up in the MRI solutions were down by a third (33%) from March to August this year, compared to the same period in 2019. In April, May and June specifically, the figures dropped to 433, 268 and 406 respectively, compared to 599, 524 and 630 during the corresponding months of 2019.

Early steps on the road to recovery

The headlines give some concern, but dig deeper into the data and there are positive takeaways. Analysis of the figures indicates that the continuing uncertainty around COVID is leading to commercial tenants and landlords working together to find ways to make it through the pandemic.

There are encouraging signs that landlords are supporting tenants through rent reductions, rent deferrals and agreements for shorter leases. From March through June 2020 there were 30% more rent reductions compared to the same period the previous year. Additionally, the length of new leases has declined by 25% year-on-year over the same period – dropping from 69 months to 52. These both point towards landlords offering a greater degree of flexibility, and being willing to negotiate key terms and conditions to ensure at least some continued income rather than risk it disappearing altogether.

New normal, new opportunities

However, despite the best efforts of many commercial landlords to help tenants and ease the burden, there are changes ahead. In some form, social distancing restrictions will continue into the spring at least, and that will put serious pressure on businesses and their performances. As landlords plot their routes forward out of the pandemic and beyond, they will need to consider ways of keeping their operations financially viable.

For many, the answer will be diversification – and branching into last-mile logistics and/or mixed-use residential redevelopment could help them avoid being left with empty commercial space generating low income. Owners with city- or town-centre portfolios, for instance, will surely begin to explore opportunities to turn some commercial spaces into campus-style developments combining retail, space as a service and Build-to-Rent, student accommodation and senior living. Previous research from MRI has shown that, before the pandemic and lockdown, two-thirds of property professionals already believed that former retail premises could be the UK’s biggest untapped resource for new residential development. Another option, driven by the growth-upon-growth in ecommerce, will be to redevelop space for warehousing and fulfilment centres. The beginnings of this movement could be seen before coronavirus, and the resulting uncertainties around the performance and returns of traditional commercial will accelerate the trend. It may not be the panacea for the high street conundrum, but building communities could contribute to arresting years of decline.

Navigating change with flexible tech

Ultimately, regardless of the changes that happen and the speed at which they take place, technology will play an increasingly important role in the strategic planning, execution and ongoing validation of landlords’ strategies. Connected digital solutions that can quickly and accurately identify strengths, weaknesses and opportunities are required. Those that embrace software to take decisive, data-driven actions will find routes to success. Those that continue to operate reactively, and don’t effectively use the insights at their disposal – they will fall behind in an environment that will remain uncertain, and often volatile, for some time to come.

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