The Week: Is commercial property the elephant in you

Fund managers are seldom the first to predict the long-term decline of their asset class, but surely commercial property managers are looking to the future with some trepidation?

  • The office market may not be dead, but it is in real peril
  • There will be winners from the commercial property fall out, but it is not a zero sum game
  • There is likely to be pressure on yields across the market

Commercial property managers have long had to adapt to structural change, but the changes happening today feel different. In particular, the widespread adoption of agile working in response to the pandemic appears to threaten the viability of vast swathes of office space. Does commercial property still have a place? Or is it time to back away from the asset class until the outlook is clearer?

There are plenty of reasons to believe that the office market is not dead. Most of the work-at-home converts haven’t lived through a miserable British winter confined to the four walls of their house. Equally, they haven’t worked from home while a bunch of their colleagues are in the office – how long before FOMO or even FOMOOP (fear of missing out on promotion) kick in?

However, few are likely to rush back to the daily grind of crowded commuter trains and sardine can tubes even if a vaccine is found tomorrow. And if only half of employees are in the office on any given day, can companies really justify those expensive City offices? How long before companies push back on their legal or banking fees, knowing that part of those fees go to support empty London real estate?

There are winners from any crisis: offices may get pushed into outer London, creating demand there. Homeworkers may help revive their local high streets. The online shopping boom should create demand for ‘last mile’ industrial warehouses. However, it is difficult to see posh City offices becoming Amazon delivery hubs any time soon. It is not a zero sum game for commercial property – demand is being taken out of the market, which will put pressure on yields.

It doesn’t help that landlords have been the fall guy for corporate distress. Among some commentators there appears to be an expectation that landlords should give up their space for free until corporates get back on their feet. In some cases, landlords have been treated with derision by tenants keen to use the situation to their advantage. It doesn’t help that they are naturally disadvantaged by the CVA process, where they may have to accept the decisions made by other creditors.

Some of the old rules still apply – commercial property is an income-generative asset in a low income world. It is diversifying. However, it is difficult to paint a bright future for it today, particularly for large funds holding trophy buildings in expensive city centre locations. That said, funds with cash on their balance sheets may be in a good position to cherry-pick distressed assets. Investors will need to be discerning.