• Sun. Aug 7th, 2022

What’s next for UK commercial real estate? | Faegre Drinker Biddle & Reath LLP

2021 is already a surreal start, but it is nonetheless a ‘brand new start’ for the real estate industry as companies seek to turn the page of 2020 and face the realities of a market transformed by COVID-19 . We take a look at the latest developments in the real estate market as the industry turns to a post-pandemic paradigm.

CBRE’s Real Estate Outlook 2021 report predicts that “the UK worker, employer, consumer, landlord or tenant will never revert to pre-pandemic habits … not in 2021 and never”. If they’re right, that would mean a fresh start for the industry – a shuffle or even a necessary and timely reshuffle, as some might suggest.

The UK economy is not expected to return to pre-coronavirus crisis levels until mid-2023, with a steady recovery and growth of around 6% in 2021. Central London’s commercial property sector is expected to shrink. strengthen after its £ 3.9bn drop in sales last year as confidence to return to the capital grows. Although £ 8.9bn of retail, store and office development sites were traded in London in 2020, down 30% from 2019, there were signs of a recovery at last quarter following vaccine developments, with sales totaling £ 4.5 billion in this quarter. alone. Volumes are expected to continue to recover over the next 12 months.


There are positive signs that the worst may be over for the office market. Apart from the life sciences sector, which is particularly active due to the increase in funding and investment generated by the pandemic, the demand for office space is expected to remain below trend in 2021. Demand is highly dependent on the job growth, which is expected to increase slowly, to just 1.4. %. Regional office rents are expected to hold up better than central London rents, as employment in London is expected to recover much more slowly than in the rest of the UK

Flexibility in employee workplaces will be a popular topic in 2021, with more than half of companies already expecting to embrace a variant of hybrid working. This shift towards lower office attendance could be offset by reallocating space to help collaboration, productivity, and social interaction so desperately sought after isolation is over. There is currently uncertainty regarding the net impact of COVID-19 on the demand for office space, and while the concept of the office leads nowhere, what offices will look like from now on is relatively unknown.

The experience of 2020 has shown that diversity of use is the key to resilience in the event of a major short-term change, and one redevelopment to watch out for throughout 2021 is Grosvenor’s West End program, which has been awarded a building permit in the amount of £ 500. mixed-use structure connecting Mayfair to Oxford Street. The site will be transformed into 204,000 square feet of sustainable Class A office space, 33 homes, 67,500 square feet of shops, restaurants, cafes and a hotel. The popularity of this program is based on many features, such as the conservation and adaptation of historic buildings for contemporary use, its production of 37% less carbon than others built to current British standards and the 360 ​​locations for bikes he will provide. Grosvenor’s Development Director Thomasin Renshaw best describes the impact of their investment as “a major vote of confidence in the West End at a pivotal time for the capital’s economy.” It will provide so much of what we badly need – new jobs and a boost to the economy. “

Other investors remain confident about the long-term outlook for high-quality properties in major London locations, with British Land trading on a £ 401million office portfolio in the West End, selling a 75% stake in a portfolio of 3 buildings at Allianz Real Estate. , and with London’s “Cheesegrater” (The Leadenhall Building) achieving record long-term office rent for the City of London. Ukrainian energy company Dtek has agreed to pay nearly £ 110 per square meter for the top floor, demonstrating not only its willingness to maintain a presence in the capital, but also its willingness to pay a heavy price for doing so.


December 2020 saw a total construction activity index of 54.6, which is above the 50.0 mark where growth begins, and significantly healthier than the record 8.2 recorded in April. Forecasts for the coming year look promising, with stronger underlying demand expected to continue and foreign investors better prepared to finance UK projects now than the risk of a British pound depreciating due to Brexit no deal is gone.

Retail Leisure & Hospitality

Supermarkets, housewares and DIY retailers have remained robust throughout the pandemic, but the closure of non-essential stores has put substantial pressure on retailer revenues and will continue to affect performance from 2021. This pressure will translate into a preference for revolving leases and a move towards shorter lease structures offering greater flexibility for tenants. Surplus commercial space and falling values ​​create short- and medium-term opportunities for commercial assets to be reallocated to include alternative uses, such as innovative pop-up shops, coworking spaces and mixed-use programs. Versatile and agile landlords, able to quickly adjust their business models and strategic visions to meet what tenants really want (or even need to survive) in the post-pandemic world, will be in the best position to be successful. coming year.

The success of the vaccination rollout will be key to the recovery in hotel demand, and hotels with little exposure to large gatherings, such as those without conference spaces, will recover the fastest. The sharp increase in demand for hotel investment following the 2021 vaccination effort, which will allow the reopening of our borders and our airways, should allow the sector to once again benefit from a global pool of investors, although total UK hotel investment fell 70% in 2020. Knight Frank is currently advising on a number of high value off-market transactions in London.

Logistics and warehouse

Investor appetite will rise again this year in the already booming UK logistics sector following the continuing impact of the pandemic on online retailing and a better understanding of the role of space warehouse within our critical national infrastructure. Strong demand and the weakening supply of large warehouses will drive further rent increases for well-located assets adjacent to cities, urban areas and other strategic ‘last mile delivery’ hubs.


We expect to see new opportunities arise in this space as traditional lenders (and even some challengers) leave certain niches by creating an appetite for others to fill certain voids. We have already seen the launch of Silbury Finance in January, targeting £ 3bn in development and student housing loans over the next six years, backed by funds managed by global US asset management firm Oaktree Capital Management. And with all eyes on the changing of the guard across the pond, Schroders announced its new London-based full-service European lending platform earlier this month. The platform includes loan origination, underwriting and asset management in UK and continental Europe, covering all types of senior loans as well as high yield and mezzanine capabilities. Earlier in January, M&G announced that it took out a £ 303million loan in December from Singapore-based Sun Venture, financing the purchase of an office and retail building at 1 & 2 New Ludgate in London ( interestingly located opposite our London office) with Land Securities for £ 552million. M&G cited long-term leases, central location and the quality of the tenant mix while noting the financing outlook.

This is undoubtedly a positive start to 2021, but the true impact of the pandemic on UK debt markets will become clearer in the coming months.

Conclusion: positive signs, still a lot of uncertainty

The impact of COVID-19 is vast and not yet fully known, but one thing is clear for 2021. As we move towards some kind of new normal, investor strategies will need to be more nimble, agile and versatile. than ever before. to learn about how and where things can be done differently and, in some cases, better. As noted in our September Quarter Day commentary, we continue to expect an increase in the number of tenants seeking to renegotiate leases to take advantage of “new normal” market conditions. There will be a strategic advantage for the majority of landlords in working with their tenants to explore methods of helping their businesses withstand these unique times. Other solutions are, of course, available to be continued if necessary. Faegre Drinker’s COVID-19 Real Estate Working Group is available to ensure that all issues are carefully considered and that all lease variations, agreements and concessions are strategically agreed and appropriately documented.