Savills: How office markets respond to the Covid-19

Savills' leading office agents from 20 cities and countries* in Europe and Asia Pacific have identified global trends and changes they see in office markets.

As the worldwide spread of Covid-19 has resulted in massive workplace closures and home office policies in most markets, key trends and opportunities highlighted by Savills include:

For tenants:

Cash flow and liquidity are the most important concerns for tenants around the world, as a result companies seek to reduce their costs by reducing rents, alternative structures or postponing payments.

Some tenants are looking for short-term extensions to avoid the cost and effort of moving. Others seek to sublease or renounce redundant space by rethinking their needs. Already in China, some tenants who have recently signed lease agreements have been able to negotiate more favourable terms.

Many Savills agents believe that in the short term the market is likely to change in favor of tenants. This will mean that companies that are able to make quick decisions are able to negotiate more advantageous deals.

In the long term, the market may undergo deeper structural changes as firms review their office practices. Tenants are testing their ability to work from home in real time, which may be more widespread even after the pandemic is over. Companies may look for ways to reduce their space by redesigning their workplaces and permanent flexible work arrangements.

Companies that have planned changes to their leases (renewals etc.) in 2021 should look for ways to extend their decision-making time. Tenant representatives are successfully reviewing the existing terms with the lessors. Many landlords also give companies early access to start furnishing the premises.

Those who need a reduction in rent and/or maintenance fees may request a rental holiday in exchange for an extension of the lease.

For landlords, investors and developers:

Many landlords work with their tenants to find a pragmatic solution that suits both parties, while others choose to wait until there is more clarity.

In Moscow, for example, street retail premises (especially in the premium property segment) are mostly owned by companies/funds and individuals. Not all of these premises were bought using borrowed funds. Those owners, who are not loaned, are likely to communicate with tenants for rent holidays or for rent rate reduction or payment deferral. For those owners who bought the premises using the borrowed funds, the lack of payments from the tenants may negatively affect the financial condition, which may lead to non-payment of the loan and further forced sale. However, such forecasts are still extremely premature.

The "wait and see" approach is also observed in the investment community. Nevertheless, some opportunistic investors with low credit levels are currently considering asset purchase options, but with significant discounts, resulting in a gap between the price expectations of potential buyers and sellers in some places.

The development market also faces a number of challenges due to the pandemic. Global supply chains of some construction materials have been disrupted. Human resources are also a problem in some places, as construction sites are being closed in response to social distancing measures.

Jeremy Bates, Executive Director and Head of Transaction Services at Savills, comments: "It is inevitable that Covid-19 will have a significant impact on all commercial real estate transactions. We've already seen tenants request deferral of rents and concessions from landlords, particularly in the hospitality, retail and leisure sectors and this is likely to continue as the impact of the Covid-19 spreads worldwide. Our global sentiment survey showed that 86% of countries reported favourable rental conditions for retail tenants, just over 50% reported favourable conditions for office tenants and only 23% reported favourable conditions for logistics.

"In exchange for concessions and deferrals, landlords, for understandable reasons, in some cases have asked tenants for business justification, actual and projected cash flows over an agreed period of time. Clearly, given the unprecedented circumstances, it has never been so important for landlords and tenants across the range of properties to work together to form a survival strategy that works for both parties. As a result, the current situation may accelerate future changes in the traditional lease model.

Notes:
* Countries / markets that have contributed to Savills overview: Amsterdam, Australia, Beijing, Guangzhou, Shanghai, Wuhan, Frankfurt, Hong Kong, India, Jakarta, Lisbon, London, Madrid, Paris, Seoul, Stockholm Tokyo, Warsaw, Singapore, Moscow.

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