Coronavirus hits commercial property sector with ‘short-term paralysis’

Commercial real-estate adviser Savills has issued a comprehensive update to its global client base, detailing the expected impact of the Covid-19 pandemic on Ireland's commercial property market.

While stating at the outset that the Government's policy response to the spread of the coronavirus has been both "decisive and robust" so far, Savills notes that "short-term paralysis in leasing and investment markets" has already set in as a result of the "sharp slowdown in economic activity and delayed business decisions".

Having said that, however, the report cites early evidence from Asia which suggests this decline could be followed by a “fairly rapid rebound in confidence and activity post-crisis”.

China

In this regard, Savills refers to the experience of China, where following the imposition of strict controls over the nine-week period from the first reported case of coronavirus in Wuhan, economic activity had rebounded to 80 per cent capacity by the first week of March.

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In the case of the commercial property sector here in Ireland, and in Dublin particularly, Savills says the overall impact on demand for business space in the capital will depend on the extent to which the coronavirus can be contained in the United States. This it says is due to the “key role” US multinationals play in driving Dublin’s office sector.

The report points out the potential for “near-term strain” on the respective business models of flexible workspace providers as operators depend on shorter-term income to meet long-term lease commitments. Savills notes that WeWork temporarily shut at least 100 offices in China during the crisis period.

But while the office sector is under significant strain currently, the report says the longer-term impact of remote working remains unclear.

While more people may look to work from home or flexible workspaces in the future, Savills suggests that the benefits of an office environment, in terms of collaboration and the immediacy of personal contact, may actually be proved by the current crisis.

The report concludes that the desire of employees to work from home in the future will “probably not subtract materially from overall office space demand once the crisis passes” as many employees will want to do it only on certain days of the week.

With Friday being the favoured option for the vast majority, this leaves the Monday-to-Thursday requirement for office space unaltered, Savills contends.

Outside of the office sector, the report notes the widespread impact of the coronavirus on the hospitality sector as the combination of travel restrictions, suspension of large gatherings and guidance on social distancing lead to a sharp contraction in demand for the services of hotels, bars and restaurants.

Retail

On the retail sector, Savills highlights the major contraction in footfall, with food and beverage, leisure and fashion sectors being most affected. The report notes that 70 per cent of fashion stores in China suspended their operations during the peak period the crisis there. Unsurprisingly, the grocery sector remains the least affected in retail as of now, as people continue to shop for food and other essential items.

Savills warns that the crisis may lead to a “shake-out of failed small retailers” which could in turn see a long-term reduction in demand for retail space that will take time to claw back.

Looking at the outlook for investment in the wider commercial property market, the report says that "supportive monetary action" instituted by the US Federal Reserve, the European Central Bank, the Bank of England and the Central Bank here will create "favourable investment conditions if the crisis is not protracted and occupier demand recovers quickly".