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Commercial real estate faces into a new tomorrow

The property market may be in limbo, but the office and industrial sector should pull through this period relatively unscathed

As I sit here in week two of our enforced ‘work at home’ protocol, what is clear is that we have a united country and great people. Despite a non-result in our election, our sitting government has acted quickly and our people are responding.

The stay-at-home policy is, for the most part, being respected – as is social distancing. My wife and I walk our dog early in the morning and early evening and we have noticed more and more people out getting some fresh air in prior to hitting their home office or after a day’s work – and all of us respect the two-metre rule. Let’s hope adhering to social distancing pays off.

What has also become apparent to me is that working from home can work well. It is not that I didn’t think it would, and I miss the interaction of the office, but in an extreme circumstance like this it is clear that we can be efficient and carry out all of our tasks effectively from our home offices.

The situation we have been forced into will likely make our industry re-evaluate working from home policies, and one major change to come out of this experience might be an accelerated culture of working from home. This might mean more hot-desking in the city and potentially a need for satellite offices. It is down to our people to demonstrate that our respective business philosophies and capabilities do not change in a ‘work from home’ scenario. It it pleases me that, to date, in QRE our people have been able continue to perform as if they were in the office.

The major problem, of course, is that the property market just cannot function properly. Meetings and viewings are tough to organise – and ill advised. There will be an inevitable suspension of transactions, pending the burn-out of this virus.

In our business, uncertainty tends to turn out the lights and we are now in a state of flux. While some of our letting transactions are likely to complete, I suspect the vast majority of our investment transactions will be put on hold.

Bank financing valuation work will be impacted. Periodic portfolio valuation work will be much sought after to ensure income flow. Rent reviews will happen, thanks to the upwards and downwards clause and, for those of us with property management functions, income will be critical from this business line.

Our view at QRE is that the office and industrial markets will get through this time relatively unaffected. We have been saying a slight price adjustment is required to reignite momentum in the sub-€20 million investment market and perhaps now we will see that adjustment in yield. But we do not believe rents will be affected materially in the office and industrial sector.

The retail, leisure and food and beverage sectors are likely to be the most impacted and there is a possibility of increased vacancy rates and a strong potential of downward pressure on rents. This in turn could impact on forthcoming rent reviews.

It will also be interesting to see what impact this crisis has on the private rented sector, corporate lettings and short-term lettings. There have been anecdotal reports that corporates are pulling out of rental contracts on residential accommodation and a recent Daft report attributed the increased availability of rental units to reduced demand for Airbnb lettings.

This could be a welcome development and introduce some much-needed supply into the rental market and potentially put downward pressure on rents.

Landlords are instructing property managers to redraft and decrease service charge budgets in shopping centres and offices in an effort to reduce occupancy costs to assist occupiers through the crisis. Non-essential items will be cut.

The optimist in me sees this as a three-month inconvenience: March, April and May. I believe and hope there will be a feel-good “back to work bounce back” when we return to business as usual in June – and we may have the run-in of all run-ins.

The last quarter of every year is always our strongest quarter and 2020 will probably be unprecedented for Ireland. We have been through a major recession in recent times, we have the experience and we are more resilient. But, most importantly, the fundamentals of our economy are strong – unlike the last shock in 2009.

Conor Whelan, managing partner, QRE Real Estate Advisers - Sunday Business Post 29th March, 2020

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March 2020