The changing face of commercial property in the post-COVID environment
While many of its impacts may be short-lived, the COVID-19 pandemic will undoubtedly trigger more permanent shifts not only in the way we live, but also in the way we work, think, shop and behave as consumers and businesspeople.
Some trends will emerge fresh, but many changes will come in the form of a rapid acceleration of those already materialising in their early stages - a faster uptake of online retailing, an accelerated move towards flexible workplaces and re-structured supply chain modelling and etc. These changes, while revolutionary, will have significant implications on demand for property across the various commercial sectors, with some segments poised to benefit more than others.
Supply chain remodelling a potential catalyst for the logistics industry
With border closures, social distancing restrictions and stock shortages that have accompanied the global pandemic, COVID-19 has highlighted a number of underlying weaknesses in existing supply chains, forcing many businesses to reassess how they can adapt their processes to minimise the impact of future events – notably, how they source, distribute and store inventory.
As companies strive to improve supply chain reliability, we will no doubt see a lot of businesses move away from dependence on a single country or company as a source of supply, to a focus on greater diversification and a move towards greater domestic supply chain independence. If some of these manufacturing processes return to Australia, these changes will serve to further enhance demand for the logistics and industrial sector, already a beneficiary of the rise of online retailing.
From a stock perspective, we may even see businesses store more inventory rather than rely on high stock turnover/low inventory models, especially when it comes to critical items such as medical equipment and essential parts. This could see an increasing number of businesses looking to establish alternative distribution locations, again furthering demand for facilities with the right location, layout and stacking capabilities to facilitate storage and ease of distribution. If we follow in the footsteps of our international counterparts, we may see industrial storage reaching heights of as much as 40 metres in the post-pandemic landscape.
Flexible working changing office space considerations
There have been a number of questions over how COVID-19 will impact the future of the office market. In the short-term, demand will remain weaker as businesses re-evaluate their financial position and re-consider their workplace structures. However, in the longer-term, it’s unlikely that we will see demand for physical office environments disappear, with workplaces still valuing the need for teams to collaborate and innovate in a shared space. Rather, we will see an adjustment as businesses move towards smaller footprints and flexible working environments.
In the near term, businesses with leases nearing expiry in high priced markets like Sydney and Melbourne’s CBD are likely to be the first to reduce space. However, the impacts will be more subdued in cities such as Perth where market conditions have been softer and rents are low. While businesses in these areas may still look to reduce space, the urgency is not as acute given the low occupancy costs, placing these markets in a relatively stable position in comparison to other office markets across Australia.
Problematic models exposed, but non-discretionary retail far from dead
Arguably no sector is going to feel the pace of change (and the causalities that come with it) as much as the retail industry, but not all are going to emerge from this as losers. In fact, we have already seen a number of innovations and good news stories from various retailers, particularly in the food and beverage space, who have successfully adapted their models to emerge triumphant in the COVID-19 environment.
What we are likely to see, however, is an acceleration of the decline of those product retail channels already facing problems prior to the COVID-19 outbreak – in particular, those that have failed to adapt in the face of growing competition from online retail, and large-scale centres failing to move away from unsustainable rent models.
One sub-sector that will remain relatively insulated from the inevitable acceleration towards online retailing is neighbourhood shopping centres. The nature of distribution in Australia means home delivery models aren’t economically viable for major supermarkets in sprawling suburbs, which will see many of these retailers continue to thrive in brick and mortar form (either through omni-channel models such as click-and-collect or physically through in-store sales). While these assets are well-positioned to continue leveraging consumer demand for convenience, it’s the larger centres with a high proportion of discretionary category retailers that will be under greater pressure to adapt, or else risk not surviving.
As to the broader question of what investors should look for in commercial assets moving forwards, these trends should evidently be front-of-mind in selecting properties, assets and sub-sectors poised to weather and emerge even stronger from this era of change.
Now more than ever, we are going to see the reinforced importance of fundamentals - the strength and longevity of tenants, an asset’s location, and the quality of individual properties and their resiliency to emerging trends. No doubt many investors will also be focusing on the benefits of diversifying their portfolio to mitigate risk and avoid over-exposure to a single market sector or location, with diversified commercial funds offering a strong value proposition over direct investment.