Is commercial real estate becoming a toxic asset?

Over the past 20 years, the investment world has fallen in love with commercial property and while activity is gradually restarting, the dawn of the “retail apocalypse” is being met with a brutal “rent apocalypse” and together, they are wreaking brutal havoc across this once highly coveted asset class.

The global stock of investible commercial property – hotels, shops, offices and warehouses has quadrupled since 2000, to $32 TRILLION with more than a third owned by institutional investors (think Super funds) who piled and swarmed in by the lure for lucrative solid returns.

The combination of long leases, reliable rental income and capital appreciation has meant that commercial property was born to be a star and owners just need courage and patience.

COVID-19 proved everyone wrong.

Owning property is no longer “safe as houses”.

Across the world, millions of tenants have stopped paying rent, leading to chaos among shopping-mall and office landlords. Think billionaire retailer Solomon Lew who took the law into his own hands by issuing a decree that his 1200 retail stores would not be paying any rent during pandemic induced closures .

Temporary delinquencies are only part of the problem because as always, we need to look at second order consequences of the pandemic.

Digitisation of commerce was inevitable but many investors and owners were hoping to have either divested their assets or handed this evolution to their successor to complete.

In essence, COVID-19 has accelerated global trade by 5 years, speeding up the decline of bricks and mortar shops, boosting the demand for warehouses while companies that have found remote working effective will shrink the office space or make them a relic of the past.

Video calls in lieu of business trips will mean less hotel nights billed and less entertainment expenses at restaurants.

While the world will not morph from The Flinstones into The Jetsons overnight, there are already big signs that our behaviour have changed permanently.

The bigger task for asset owners and managers to survive isn’t simple reinvention, but rather embracing the restructuring that must take place.

All of this involves not sitting on properties and milking them for rent, but reinvesting in them to open up potential for greater efficiency.

Relationships between asset owners, managers and tenants need to evolve and this communication needs to start from inception.

The ivory tower between owners and tenants need to be dismantled as arcane communication create unrealistic dialogue.

Working with neighbourhood shopping centres have always been a core focus at EDC and a recent victory was secured when we generated another medical tenancy enquiry using LinkedIn and Facebook.

Contrary to conventional methods, the asset owner engaged with this physician personally to personalise their communication and foster a human relationship from the outset, and let’s be honest, who doesn’t like dealing with the big boss?

Discussions and negotiations continued through the lockdown and after 4 months of courtship, the asset owner has now signed a 5 year lease agreement for a new medical clinic to open up alongside a dental clinic and pharmacy.

Our next campaign is to find another allied health tenant.

Or how about the thriving cafe opposite my office that closed down 24 months ago when the pediatric hospital relocated, removing a thousand mouths to feed. Sitting sad and idle, it has since undergone a complete refit and is due to open as a suite of modern offices. A costly but necessary pivot. 

This is what it will take, agents and asset owners will have to do more because right now the pie is shrinking so it is survival of the fittest.

You need to do it differently and you need to do it quick. 

If hotels can become apartment blocks, while malls are being reincarnated as e-commerce fulfillment centres and office blocks are being converted in community focused co-working spaces, what is stopping you?