As a resume writer in business services, edited stories such as the one below, from the Sydney Morning Herald, about the fall of commercial property due to the effects of the virus, send a shiver up my spine. It means hundreds of thousands of staff will be sacked over the next year, although some may also work from home. Now is the time to polish that resume.
There is a lot of discussion about how the coronavirus pandemic might create new normals in behaviours and in industry landscapes. For property landlords, that combination could create very significant and quite unpleasant structural changes.
When Westpac announced its $1.6 billion of COVID-19-related provisioning this week, it specifically called out, not just a fall in residential property prices, but a decline in commercial property values.
If there are to be problems within the commercial property sector, it isn’t hard to pinpoint the most stressed segments nor that much of a stretch to see them as something other than a temporary phenomenon.
Wesfarmers’ Rob Scott became the latest in a line of listed retail company chief executives to foreshadow large-scale store closures on Tuesday when he said he didn’t see many of the Target chain’s 290 large-format stores being commercially viable over time. Store numbers and sizes would be slashed; discussions with landlords would be held.
Veteran retailer Solomon Lew shut down Premier Investments’ 1250 stores early on in the course of the pandemic and has suspended all lease payments. Premier, with about 70 per cent of its leases expiring this year, is inevitably going to put the screws to its landlords over future rents as part of a long-standing campaign to get them to share some of the pain the retail sector has experienced in recent years.
A lot of small discretionary retailers, restaurants, cafes, gyms and others won’t survive the lockdown despite the efforts of government to provide some life support.
The ravaging of discretionary retail will produce permanent, structural change and therefore the days when retail property could count on ever-increasing streams of rental income by leveraging the imbalance in their relationship with tenants are numbered. There will be a re-set of rentals and the income of the A-REITs exposed to the sector.
The other factor that will impact retail property is the abrupt halt to travel and immigration. The Morrison government had, before the pandemic, already reduced the cap on permanent immigration from 190,000 to 160,000. That’s now irrelevant. It’s going to be quite some time before we see immigrants, or overseas tourists, returning.
The pandemic has demonstrated that white-collar workplaces can be far more flexible and fluid than might have been thought and that digital communications is easier and more effective than might have been appreciated. Offices will, of course, reopen once there is a green light to return to them. In the immediate aftermath of that return, however, social distancing and safe workplaces will still be front-of-mind and those issues are likely to persist from quite some time and perhaps permanently.
On the other side of the pandemic, or at least the worst of it, it is obvious there will be fewer retailers, particularly small retailers and service providers, whether in suburban strips or the big malls.
Beyond the retail apocalypse, closed borders, a significant reduction in travel even once borders re-open, minimal population growth, changes to the way we work and the nature of the workplaces for those who do work in offices doesn’t auger well for other landlords or investors in any of those markets.