‘It’s not like we’re going to go back to normal’
Commercial real estate is set to undergo more change than the sector has seen in decades, says Ryan Johnson, Bayleys’ national director for commercial.
Everything from shopping malls to offices, retirement homes and tourist accommodation may have to look at how they operate, he says.
Real estate is fundamentally about where people live, work and play and Covid-19 has challenged the way we inhabit and interact with physical spaces. “We don’t entirely know all the answers but you can see the absolute speed of change that’s going to happen and the opportunity that throws out on alternative asset classes, and our traditional ones,” Johnson says.
Pre-Covid, commercial real estate was behaving relatively homogenously with rental growth and cap rate compression across all asset classes. “Post-Covid every commercial real estate asset class is not performing the same.”
This is largely because a lot of attention had been placed on income without a lot of consideration for risk. “Now I think we’ve seen that complete spin around.”
The flip side is there are opportunities out there, he says. “You look at some of the more interesting kinds of alternative commercial real estate, like self-storage, cloud kitchens, fulfilment centres, data centres, supermarkets, and the more traditional industrial warehousing, and carparking as well has come back with fewer people wanting to take public transport because of social distancing and human density.
“Those are some of the different opportunities now, and then you can look at some of the more challenged sectors of real estate where there is human density. That would be your closed malls, senior living, and any accommodation, whether that’s hotels or student accommodation, and hospitality and travel.
“All of those are opportunities in themselves to reformat in a postCovid kind of environment.”
Shopping malls are an example, and a Bayleys lockdown sale of the Kelston Mall in West Auckland for $43.4m shows interest is there.
But malls may have to adapt to a new way of being, Johnson says. They traditionally have a department store or another anchor which might occupy close to 50 per cent of their GFA with apparel and accessories accounting for another 30 per cent. That means 80 per cent of the business of malls has been impacted by ecommerce as the online behaviours of consumers during lockdown has condensed five or 10 years of behaviour change into a few weeks.
“Those closed malls have got to look at parts of them for alternative uses, whether that’s office accommodation or ecommerce fulfilment centres, or storage, or hotels, or residential in terms of build to rent.
“So you might get a suburban mall that’s traditionally had 70 per cent of occupiers which have now been challenged by ecommerce but maybe they need to re-theme in terms of medical and healthcare.
“Do they predominantly become a large doctor’s and physio with x-ray and dentistry, so almost a healthcarethemed part of the mall, to replace that challenged discretionary online retail? Or it might be a larger part of an entertainment-themed mall.”
Changing use requires changing thinking about how space might be repurposed.
“One of the things we used to do – take a mall or an office building – commercial real estate owners might have used customer surveys or economic data to drive their thinking. Now, with our entire way of being turned on its head, is it sociologists or futurists or psychologists who are now people we should talk to?”
A big asset class not largely impacted is industrial, which has online commerce, warehousing and supply chains to its advantage, and also last mile takeaway and online delivery services. But other key areas impacted are the 500,000-strong SME market, many of which lease premises, and the tourism sector.
“You’ve had two massive sectors literally turned on their heads on the income side so there’s going to be a huge amount of change and opportunity in those two markets as well.”
Bayleys bought one of the country’s leading tourism brokerage firms, Resort Brokers, during the Level 4 lockdown and while the deal was 12 months in the making Bayleys announced it was looking forward to playing a facilitative role in the reactivation and revitalisation of the tourism sector.
Johnson says while opportunity in tourism may not appear immediately, tourism will always be a traditional sector of the New Zealand market. “There’s commercial real estate covering that in terms of hotels, motels, resorts, backpackers, and what have you, so there’s a huge amount of rationalisation in that sector about to happen as well.”
It just isn’t correct to think the commercial real estate sector has ground to a halt, he says.
“Although the actual transaction side hasn’t happened because of the Covid hiatus, in my view we’re about to see probably the most change in commercial real estate we’ve seen in decades. I look through all our commercial asset classes and all the sub sectors and there’s literally something happening in all of them.”
Epidemics are happening more often and more may come, meaning almost structural change is underway. “It’s not like we’re going to go back to normal and the owners outside of your home are going to sit back and go ‘well, we’re just going to keep doing what we’re doing.’ That can’t happen and so I think it’s going to force this futurist thinking by every commercial real estate owner.”
“We’re about to see the most change in commercial real estate we’ve seen in decades.”