Unsurprisingly, the COVID-19 pandemic has stagnated the growth of the global stock of investible commercial property with the UK commercial property market being no exception to this trend. The real estate company Colliers International forecasts that annual all-property returns will fall by 7.1% this year with the retail and leisure segments of the market projected to fare particularly poorly [1]. However, it’s not all doom and gloom, as there is the expectation by real estate companies that the external shock of the pandemic will only be a short-lived phenomenon and that commercial property should bounce back in 2021. Hugo James, Partner and Head of Long Income at Alpha Real Capital maintains that with “more supply (of long income real estate) being made available, the market is set to grow even faster” [2]. However, will the combination of coronavirus restrictions and the so-called ‘Amazon effect’ continue to dampen the growth of the UK real estate market by decreasing real estate prices and make further inroads into the entire financial system, or will it face a quick rebound following the loosening of coronavirus restrictions?

The Extent of the Damage

There is a general difficulty in assessing the extent of the damage in the commercial property market, as it is opaque in nature and valuations are often slow to reflect falling prices when markets suffer [3]. However, there are various indicators which show the health of the market as a whole; investor appetite has failed to revive with indices tracking listed real estate investment trusts (REITs) that invest in commercial property plummeting in March, reflecting the indiscriminate sell-off of shares by investors [4]. Furthermore, sovereign wealth funds (SWFs) invested $4.4 billion in the first seven months of 2020, down 65% from the same period a year ago according to Global SWF [5].

There has been an attempt by commercial landlords to ensure their tenants survival which have been hit hardest by the economic fallout of the pandemic by offering more flexible lease lengths. According to property data group Re-Leased, the average length of a lease for commercial tenants fell by 10 months between February and June to 27 months [6]. Despite the obvious benefits to the tenants, the shorter leases present a degree of uncertainty for landlords regarding future occupancy and cashflow.

A further barometer to assess the extent of the harm caused by the crisis are the high delinquency rates on commercial mortgage-backed securities (CMBS) which are bundles of loans sold on capital markets. CMBS’s have seen delinquency rates in the US, where they are mainly centred, surpassing the levels of the financial crisis of 2007-09 [7]. This is a further reflection of the growing stress in commercial mortgages [8].

The Mixed Impact on Each Segment of the Market

The impact of coronavirus has been largely uneven within the market, with some sectors losing out while others profiting, creating a zero-sum game in some instances.


According to Colliers, transactional activity in the office sector has picked up to a three-month high in June, however volumes remained firmly below the five-year monthly average of £1.7 billion [9]. Meanwhile overall UK office investment volumes stood at just under £5 billion at the end of the first half of the year around 50% below the five-year average of £10.2 billion [10]. Alongside this, Colliers found that upwards of £1.5 billion in agreed deals are understood to be pending completion while a lot of construction activity has been severed temporarily.

Aside from these dismal figures, office owners are facing substantial bills to make their workspaces ‘pandemic-proof’, with many banks desperate to get their traders back in order to execute transactions which require reliable and fast internet connection as well as stringent compliance and oversight requirements [11]. It is estimated that for a building which costs €20m to build, landlords could expect to pay €400,000 to implement the full range of measures [12].

Expectations of waning demand for prime office space meant overall confidence levels for sales and rents over the next quarter were weaker than during the 2008 financial crisis. Such pessimism has already been revealed in share prices. The share prices of Land Securities and British Land – the UK’s biggest listed  developers, which have more than half their portfolios by value tied up in offices – are both down by more than 40% in the year to date [13].

Future projections show that all-office total returns are expected to fall by 5.5% by the end of 2020. City offices will perform better than any other UK office market, with total returns expected to decline by a more modest -1.9% [14].


Data from the British Retail Consortium found that sales volumes rose by 3.4% year on year in June, making it the strongest increase in two years. However, growth was driven by online sales, with consumers still hesitant to return to the high street. Pressure on both tenants and landlords has been growing substantially, highlighted by a further decline in rent collection at the June quarter day, with less than 15% of retail rents collected [15]. Retail investment activity was limited in June, with preliminary data suggesting that £164m was transacted across 28 deals. Appetite for supermarkets remains generally strong, with LondonMetric acquiring a five-store Waitrose sale and leaseback portfolio for £62m [16].

Aditya Sanghvi of McKinsey, a consultancy says that on top of the reduced rent caused by shop closures, the vacating of department stores, which often act as “anchor” tenants, may give other stores the right to pay lower rents, or even to cancel lease agreements [17]. Furthermore, other property investment and development businesses such as Derwent are considering changing the terms of some of their leases with restaurants and retailers by allowing tenants to pay rent based on what they earn rather than a fixed cost, known as a turnover lease to support hard-hit businesses [18].

Future projections show that all-retail total returns are expected to decline 14.1% year on year in 2020 (following a 6.8% year on year decline in 2019). Rents will fall further, rental collection will be more difficult, more space will become redundant and business failures will increase. The share price of REITs with retail exposures will continue to reflect these expectations [19].


The sector which has been clearly reaping the profits as a result of a change in consumer behaviour has been the logistics sector. By the end of May 2020, e-commerce saw record growth in sales (May 2020 reached £2.19 billion vs £1.38 billion recorded in May 2019) as companies and consumers adapted to coping in this challenging social and economic environment [20]. The increase in online demand will drive the demand for warehouses and lead to the decline of bricks-and-mortar shops.

The growth of e-commerce has been reflected in investment activity, with the sector’s investment volumes dropping only 13% in the first half of the year, according to JLL data. Mirroring this trend seen in the private markets, REITs focusing on industrial and logistics, data centre and net-lease properties have been the most resilient, while those with portfolios that are heavily concentrated in retail and hospitality continue to see significant discounts [21]. This all shows the evolving task for investors to embrace the restructuring that is taking place.

At 0.7% year on year, the industrial sector is the only sector in which total returns growth is maintained in 2020. Total returns growth will accelerate to 6.0% in 2021, and average 5.6% over the five-year forecast horizon [22].

A Potential Rebound in the UK Commercial Property Market?

Despite the aforementioned economic indicators presenting a bitter outlook on to the UK commercial property market, with vacancy rates rising, downward pressure on rents and a delay in property developments, the recovery looks far more optimistic than in 2008. Investors are betting on a rebound with the Canary Wharf Group, partly owned by the QIA, unveiling plans in July for a large new mixed-use development, including business space, in London’s financial district [23] and Brookfield Asset Management, the Canadian group that part-owns Canary Wharf, revealing in May that it had bought a 7.3% stake in British Land [24]. In the aftermath of the pandemic, some funds may look for bargains as distressed properties emerge.

However, from a retrospective standpoint, the recovery shouldn’t be merely as difficult as previous property crises which could have been attributed to extreme credit cycles in which the market acted as a residual sink for surplus liquidity creating an excess supply of new developments, depressing prices [25]. This is not felt as much today with supply and demand not being in such drastic disequilibrium. Much of the space in the City of London is being built under offer or pre-let and this is the case internationally. Furthermore, what seems clear is that banks are in a sturdier position than during the financial crisis. Loan-to-value ratios were below 60% at the end of 2019, compared with 70% in 2007, so there is more equity to absorb drops in values, says Richard Bloxam of JLL, a property consultancy [26].

Ultimately, if consumer behaviour continues to be altered and the extent of remote-working that has been seen continues to persist, a restructuring of the commercial property market may come sooner than expected.

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