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      COVID-19 and the commercial real estate market

      The full impact of COVID-19 has driven changes in working, so, the way in which tenants use space may not be realised until there is clarity around the extent to which remote working will effect a permanent change in office space usage and, ultimately, demand.

      mm by Seele Nkate
      February 8, 2022
      in Columns
      Reading Time: 3 mins read
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      COVID-19 and the commercial real estate market
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      The COVID-19 pandemic created perhaps the worst disruption that the property sector has ever faced. Property owners were left to seek different ways to attract tenants, deal with changing lease structures and manage a host of other COVID-related issues.

      COVID-19 has caused many observers to challenge and question the fundamental way we work and, more importantly, where we work. By compelling people to work and live differently, the pandemic revealed hitherto unknown reservoirs of flexibility in how the property sector can function and changed expectations of how people will use properties going forward.

      Many people are far more focused now on what they perceive to be a healthy work/life balance, rather than an uncompromising commitment to the demands of one’s work over one’s personal life. The increased importance of convenience and productivity in how people manage time will no doubt require physical changes to existing properties to better align with how workers expect to use them going forward.

      The pandemic demonstrated the resourcefulness and adaptability of the property sector to meet rapidly evolving space needs. As people recover from the pandemic and return to normalcy, the ‘new normal’ will encompass new ways of working, shopping and living. These changes in how people conduct their everyday lives will require properties to adapt along with their users.

      Studies and reports conducted around the world reveal a broad range of industry perspectives about how working from home (WFH) will affect office demand. But under almost any conceivable scenario, companies will most likely be leasing less space in the future. All of these considerations have resulted in a few trends we have observed in commercial real estate:

      1. The rise of new lease structures: Short-term, flexible and others

       Taking into account the shift to either remote or hybrid working, the decline in some commercial real estate values, and the ongoing uncertainty brought about by COVID-19’s resilience, it should come as no surprise that many tenants have a greater need for flexible and short-term lease structures.

      However, trends in the US, as reported by The National Law Review, show that “new leases haven’t been as impacted as many may think – more than 75 percent of new leases signed in the first half of 2021 were for terms greater than four years, and 25 percent were for terms of 10+ years — percentages consistent with pre-pandemic levels”. This perhaps suggests that commercial real estate is even more resilient than previously imagined, as well as a willingness by property owners to adapt existing spaces to the needs of their “anchor” tenants with long leases over large spaces.

      The full impact of COVID-driven changes in working and the way in which tenants use space may not be realised until there is clarity around the extent to which remote working will effect a permanent change in office space usage and, ultimately, demand.

      1. Enhanced legal protections

      As far as other pandemic-related lease terms go, the last two years have made it clear that force majeure definitions most likely need to be amended to account for circumstances like COVID-19.

      Lenders, developers, contractors, landlords, tenants and borrowers need to take a second look at the impact of existing relevant provisions or clauses related to “Force Majeure” or “Unavoidable Delays.” In terms of construction contracts, leases and loans, the definitions of these clauses may have a significant impact on covenant performance going forward, especially if, as medical science seems to suggest, pandemics like COVID-19 are likely to reoccur in the future. This is especially important now as rampant supply chain shortages continue to cause construction delays.

      1. Pressures mount to design a new type of office

       Given the ongoing discussions around the future use of office spaces and new models of working, it is understandable that companies have adopted diverging perspectives. While some companies have decided to mandate a return to the office, many more have accepted the fact that flexibility will likely be an important recruiting and retention issue well after COVID-19 subsides.

      Either way, most of these companies are actively exploring ways to make coming to the office attractive to their employees, either through the physical attributes of the space, additional amenities that bring convenience, or proactive programming to ensure that time in the office is well spent and dedicated to matters that can only be accomplished by in-person interaction.

      Property owners will need to work with tenants to adapt to these new expectations. Those with vacant office space must find solutions for driving up demand – solutions which might involve enhanced amenities such as more outdoor spaces (e.g. terraces, courtyards, gyms and childcare facilities). Further, expected amenities which may not be provided by the landlords themselves, like retail spaces, may be addressed through promoting third-party leases with users who will complement and serve this need.

      Despite ongoing pandemic-related challenges, opportunities continue to exist in commercial real estate. Market fundamentals and discipline have, broadly speaking, held up during the course of the pandemic. As a bank, RMB Botswana continues to observe and analyse the market so as to remain well-informed on the headwinds and tailwinds that our clients face. This is all part of our effort to be adaptable and able to continue to support our real estate clients’ growth and development of the local economy.

       

      Tags: COVID-19

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