Commercial property blog

The future of speculative commercial builds post-pandemic

Is identifying strategic land for commercial development a thing of the past? We break it down by sector and outline what to expect for future speculative builds.

Retail and leisure

Between them, retail giants Boots and John Lewis have announced the permanent closure of more than 50 stores, putting 5,300 jobs at risk. Often leading candidates for anchor tenants at speculative retail schemes, last week’s news sent ripples through the sector and comes despite the Chancellor’s efforts to retain UK jobs.

While retailers are largely able to pivot to an online model – an extension of the e-commerce retail model that has been growing for some time – the same cannot be said for the thousands of hospitality and leisure businesses across the country, a significant number of which will be unable to sustainably re-open after the pandemic.

As a result – and by no means bucking a trend – we can expect the continued decline of speculative retail and leisure development. According to the Deloitte Birmingham Crane Survey 2020, not one major new retail, leisure or hotel scheme was started in 2019.

Moreover, the question then becomes: what do we do with all this redundant retail and leisure space? A move for retail to residential has been touted by many. Could we see Permitted Development Rights coming in to play, as they did a few years ago to help stimulate the conversion of lower quality offices into residential accommodation?

Office market

In the immediate term, it seems that few landlords have struggled. Break clauses are difficult to meet for occupiers and the jury is still out on whether COVID-19 constitutes a force majeure. While some SMEs may have chosen to sacrifice their office spaces to save cash, this has largely been few and far between.

While firms have systems in place for their staff to work from home and in unprecedented times like these, it’s no surprise that the “end of the office” debate may have been slightly over-egged. We are by our nature social animals and it’s strange for us to not have engagement with others during the working day; it’s hard to place a value on those ‘water cooler’ moments.

The Birmingham Office Market Forum has reported that take-up in the city is unsurprisingly down by more than 80% from Q1 to Q2. Without doubt, the far wider adoption of flexible working will change the sector forever, lowering market demand for larger spaces and serviced offices – but the physical workplace will always have its place and should recover but at a slower pace.

2019 saw record numbers in the construction of office space with Deloitte reporting over 775,000 sq ft being delivered in its Birmingham Crane Survey. That’s 250,000 sq ft more than the previous record – but a lot of space for the city to try and fill amid the backdrop of a global pandemic.

The sector will need market stability before the future of development in this area becomes crystal clear.

Student accommodation

With distance learning set for widespread adoption in universities across the UK from next term, we’re likely to see fewer students opt for year-long tenancy agreements – and in some cases, defer their studies altogether until the pandemic is no longer restricting our movement.

The number of international students – a group more likely to opt for private as opposed to university accommodation –  could also dwindle due to international travel restrictions.

As a result, plans for privately-developed speculative student schemes are likely to be halted or thrown out in many cases. This is significant when you consider that 87% of all new student lodgings in the UK have been delivered by private sector developers and that student housing in Birmingham was set for a bumper 2020 with a record 1,857 new units (Deloitte).

That said, speculative development will no doubt recover with enrolment numbers surely set to rise again in years to come. The industry will probably consider COVID-19 a hiccup – albeit one that has already cost some £100m in waived rental fees, according to Scottish legal experts.

Industrial and logistics

Consumers have flocked to online retailers like never before, driving immense levels of growth into the sector. Real estate agencies have seen inbound inquiries for space skyrocket; Savills recorded over 3 million sq ft of new requirements for warehouse space since the middle of March.

But just how temporary or otherwise is this boom? If the high street can encourage shoppers back to pre-COVID levels – will that demand still be present?

Any recovery will require a willingness on the part of landlords to be flexible. An average I&L lease is around 13 years right now and that’s a big commitment for businesses pivoting to meet demand from online retail.

We can expect to see an increase in break clauses, a reduction in terms and, crucially, speculative development. Property developers were put on pause by lockdown but are back delivering at pace once again, this time with a sharper focus on leasing existing voids and securing pre-lets before committing to build new space.

Ross Copping, Senior Account Manager