The Pandemic due to COVID 19 has brought a complete change in the way we live and work. Each and every sector of the economy has been impacted. The pandemic has caused huge job losses which are forcing people to take drastic decision to adopt other ways of earning. The inclination is more on starting up their own small business for sustainable income source. The demand for small shops in malls is now an emerging trend for educated youth as well as senior citizens to secure the livelihood for themselves and their family. Many employed people are now interested to invest money to purchase shops in a mall to earn rental income and securing their future in case of their job loss.
Due to very good infrastructural facilities and connectivity with metro rail connecting suburban areas with metro cities, the distance is no longer a constraint for shop buyers. The demand for shops in 2 and 3 tier cities are increasing now after the pandemic caused due to COVID 19. Homebuyers now prefer their residential locations away from the hustle and bustle of metro cities as especially for employees in information technology and other service sectors as the trend of working from home has become a regular trend after the pandemic.
Post COVID 19 people have started showing different priorities for better and sustainable living conditions. Job insecurity and reduction in salaries are forcing people to rethink ways to secure their life. On the positive side, the real estate sector has been quick to respond to changes and adapt to new technologies; this is apparent in the digitization of so many processes. The Covid-19 pandemic has brought about massive shifts in investment preferences that will continue to outlive the pandemic.
We have identified six trends that we believe commercial real estate investors will need to navigate in the months and years ahead:
1. Rental Trend for Shops and Office Space: Though the investors for shops and office spaces are likely increase causing more competitions among shop and office space owners for renting out their spaces. The stiff competition will possibly bring down the rental rates of commercial space. However many realty experts feel the rental rates will remain unchanged due to balance in supply and demand. Due to pandemic situation many shops have suffered due to slow down in business, especially restaurants which have taken the maximum hit. Now the home delivery concept has picked up and some shop owners are looking for alternative space with lower rent structure. However, in the office segment some offices are looking for more space to maintain distancing in the sitting arrangement for their employees. Although it is also seen that many offices have allowed significant number of their employees to work from home. We can see that in post pandemic situation there are many possibilities and investors and lessee have to be very cautious.
2. Amendments in Lease Terms: Due to uncertainty caused by the pandemic impact, the lease agreements are likely to see changes. Will insurance carriers modify coverage to protect landlords or tenants in the event another pandemic occurs? It is yet to be accessed but surely there will be some additional clauses that will bring in some force majeure conditions to protect tenants in particular.
3. Bankruptcy Procedural Delays: The pandemic will result into numerous bankruptcies. Landlords will need strong bankruptcy strategies to support their interests as creditors. Landlords will need to protect themselves by adding certain clauses in their lease terms. It is advisable for landlords to consult skilled bankruptcy counsel and understand the process and timing of working through a bankruptcy filing.
4. Impact of Online Business Models: Retail business will see major shift from physical stores to virtual stores and the existing retail establishments which include stores and restaurants will see some operational changes to implement guidelines for health and safety. In long run the online stores will dominate the physical stores and will work as extended counters for these virtual stores. Amazon , Flipkart, Medicare etc. are already some major online stores and it is not far that some retail shops will work as the extended service providers for these virtual stores by keeping their physical stocks and cater to the requirement of their valued customers.
5. Shift in Location Preferences: Post COVID the investors are rethinking about the revised parameters for judging importance and selecting location for their commercial space. Since it is expected that large population would prefer to have their residential accommodation in the outskirts of the crowded city limits to avail more space for living and enjoy better living conditions, retail shops in these areas are gradually becoming more attractive. And further, the property rates are still much lower compared to Metro Cities and investors are expecting higher return on their investment if they invest in a shop in tier 2 and 3 cities due to expectation of large influx of people in these areas in future.
6. Investors Revisiting Risk vs. Rewards: The general sentiments of investors are re-thinking with their calculations on risk verses reward or return factors. The return on an investment is directly correlated to its risk profile. As commercial real estate assets undergo changes in demand or use, their risk profile may change. Investors will likely carefully reassess their risk tolerance for new commercial real estate acquisitions.
The changes are bound to take place in the pattern of investment in commercial properties but may be difficult to say at this stage as which changes will be permanent; it is the time that will answer the best but at present market is very sensitive and working only on the basis of estimates and projections by realty experts.
KW Group's Anthem.