Coronavirus – Will it Threaten Commercial Real Estate?

The coronavirus pandemic is having a deep impact on all sectors of the economy. It also affecting real estate, which has, so far, been considered one of the most reliable investments. What are lessees and lessors of commercial properties facing today? What are the forecasts for the upcoming weeks?

 

For a month now, due to the introduction of the quarantine, it seems that everything in Poland has come to a halt. Following the closure of kindergartens, schools and universities, many entrepreneurs have their employees working in remote mode from home. Shopping malls, cafés and restaurants have been closed. The situation affects all entrepreneurs, but to a very different extent. In many cases, the so-called home office does not disrupt the work of a company, in others it slows down its functioning and requires reorganization, but does not cause the closure of businesses and, in turn, their insolvency. In other companies, on the other hand, it leaves a deep mark on financial liquidity, causing the need to lay off or reduce salaries during the pandemic. Especially in the case of those dealing with trade and services. Lessors, especially those offering commercial space, are also concerned about financial losses. Although lessors are usually protected against a complete disaster by lessees’ bank guarantees or security deposits paid after signing a lease agreement, this is short-term protection.

Companies whose profile allows them to work from home and are bound by long term office space lease agreements may feel the most stable. Transferring traditional work to remote work one in most cases translates into the effectiveness of the company and the dynamics of obtaining revenue, but does not deprive them of generating it. What if this work model works, and companies see it as an opportunity to reduce expenses by reducing leased office space and remodeling the company to home office work or, at best, transferring employees to coworking? It can be expected that after the pandemic is over, people may be saying that there is no need for such large offices when some employees can work from home. This may translate into lower demand and the renegotiation of agreements on the office market.

Let’s remember that in the era of globalization we do not operate solely in our own backyard. Foreign lessees of Polish offices (network companies, global companies, with branches all over the world) are connected by networks of dependencies with companies all over the world and interact with each other. For the shared services sector located in Poland, the current situation is therefore a real exam in crisis management. If they pass with flying colors, they will gain another argument for investing in Poland.

Lessees, whose business profile is based on stationary contact with clients, e.g. owners of fitness clubs, event or training companies are in a totally different situation. The latter conduct part of their business online (and will probably develop this profile now), although for now this is a small (about 20-30) percentage of all orders. However, the main part of their offer is carried out through group courses, conducted in training rooms. Such lessees are feeling the current situation the most, which unfortunately translates into lay-offs. Due to the pandemic, a lot of these companies are negotiating rent reductions with their lessors.

The coronavirus is unlikely to stop the leasing of new office space. Fit-out companies, architects, lawyers are still working to meet the deadlines for contract performance. Employees who need to be on site are working while maintaining rules of safety, and those who can work from home. New investments should therefore be delivered on time. The lease itself may be temporarily slowed down due to bans and general safety. However, once the situation calms down, the dynamics should quickly return to normal.

The warehouse market now seems to be in the best situation. Due to the closing of shopping malls and leaving employees at home, Internet sales are flourishing. This, in turn, cannot take place without logistic services and warehouses from which the ordered goods are sent. The current situation has resulted in many companies which had originally postponed re-profiling to e-commerce, implementing this system practically overnight and are now operating in the new reality without compromising the quality of their services. Currently, selling without this form will be very difficult, so many other companies are speeding up the introduction of the decision to appear online and this tendency will rather increase. Therefore, more and more new spaces will be needed to store goods.

 

Financial institutions, the government, banks, the European Union are promising a number of solutions to help entrepreneurs affected by the consequences of the coronavirus pandemic. For the aid to be effective, it must be tailored to the real needs of entrepreneurs, respond directly to their needs and be consulted with them. The most important thing is that it is purposeful and appropriate to the situation in particular industries. The idea of postponing payments to a later date is not a solution, it only results in an accumulation of commitment payments in the future, which will exacerbate the already existing liquidity problems and financial congestion in many industries. In the current situation, specific, dedicated proposals are needed for each sector.

However, the most important thing is solidarity in the business environment. The coronavirus does not bypass any branch of the economy – regardless of the size of companies. Few will make money from the virus and both the small and the large ones lose out. The difference is only in the amount of the losses. Therefore, in order to work out the best conditions for both sides to get out of this situation, cooperation and mutual understanding are key. After all, we all want to function smoothly and profitably after the crisis. The world after the coronavirus will certainly not be the same anymore. We will face new realities, we do not know what situations may happen to us in the future. Therefore, it will be necessary to develop new mechanisms of action and protection against unforeseen situations. Such that will not damage the market and will protect both parties to the agreements. However, this will depend on the good will of contractors, banks, financial institutions and on the solutions that the state will propose to help entrepreneurs.

The short-term effects of the pandemic on commercial property markets result in the renegotiations of lease agreements. In the long term, in turn, you can expect to acquire the skills to manage remote working, and this in virtually all industries. This model may become much more popular in the future and will already be rich in experience and managed more efficiently. New procedures can also be expected in offices and workplaces in the scope of the widely understood WELL, e.g. increasing the space between workers, the mandatory provision of hygiene and disinfection measures, periodic inspection and cleaning of air conditioning and ventilation and ozonisation of the air to ensure healthy working conditions for employees and to reduce the risk of infection. Above all, with regard to maintaining the operability of companies, the result will be to develop procedures for a similar shock that could arise in the future.

Unfortunately, at the moment no one can predict how long the fight against the virus will last and when normal functioning will go back to normal. Hopefully as soon as possible. Not just for financial reasons.