COMMENT The impact of Covid-19 and its associated lockdown restrictions has been severe. We’ve seen many commercial tenants struggle with their lease obligations, hitting landlords hard.
The latest data from MRI Software reveals millions of pounds in unpaid rents. The good news is that the data also shows landlords are being flexible and are working with tenants to navigate the crisis, with an increasing number offering rent reductions and rent deferrals.
Anonymised data from more than 150,000 live leases managed through MRI’s enterprise property management and accounting solutions reveals that, during the pandemic, the proportion of outstanding rent payments in the commercial sector (retail, shopping malls, logistics, warehouses and office spaces) has increased substantially, to a point where it has become almost unsustainable for landlords.
For March, when the government introduced the first lockdown, 19% of the total rent invoiced remains outstanding. Since then, the amount due has peaked at £387m for September (33% of the total owed), with the proportion rising to 58% in October (£204m).
Taking a hit
The data emphasises just how much activity in the commercial property sector is understandably slowing down as a result of the pandemic, with the number of new leases falling by a third for the six-months from March to August 2020, compared with the same period in 2019.
Throughout and beyond the second lockdown, it’s clear that the challenging market conditions will continue to have a severe impact on both financial and operational aspects for a long time to come. The sector is likely to experience a seismic shift, and the future requires more space as a service, decentralised operating models and more mixed use.
While there are many public examples of worsening relationships, bitter disputes and legal proceedings, it’s not all doom and gloom. We are seeing the green shoots of collaboration, and the data indicates that landlords are supporting tenants through rent reductions, rent deferrals and agreeing shorter leases.
Indeed, figures on rent reductions show that owners and occupiers are increasingly finding more flexible leasing arrangements to ensure the ongoing viability and success of their businesses.
The cooperative spirit is borne out by the fact that, from March to June 2020, there were 30% more rent reductions than during the same period in 2019. The number of rent reductions increased by 46% in March, 82% in April, 27% in May and 11% in June, compared with the same months in 2019.
What’s more, from March to June, the length of new leases declined by 25% compared with the same period in 2019. The average term of new leases was down year-on-year to 52 months for March to June, from 69 months for the same four months the previous year, leaving tenants locked in for shorter terms and giving them more flexibility moving forward.
Spirit of collaboration
As the uncertainty around the pandemic continues to disrupt operations, strategic planning and the very viability of many businesses, tenants must continue to collaborate with their landlords to overcome new challenges.
Both parties need to cooperate on creative and mutually beneficial solutions, such as linking rents to turnover in retail or reimagining how office spaces will function, as well as being open to renegotiating terms that reflect these changes.
It’s also true that, despite the uncertainty and volatility in the market, opportunities do exist, and landlords will without doubt be exploring options to diversify and transition space that might currently be used for more traditional retail or leisure uses to suburban residential, co-working facilities or last-mile industrial and logistics, where there is demand and growth.
All this means that businesses will need to utilise tech to efficiently effect change. Software solutions can help both landlords and tenants use AI-generated data analytics, for instance, to fully understand their lease circumstances across entire property portfolios, including their legal obligations, options and revenue.
It can help them better use the physical spaces they manage or occupy. And technology can also empower both owners and occupiers to gain data-driven insights into how changes in property use are affecting the business, fuelling better strategic decision-making.
As we continue to see consumer behaviour and working patterns evolve with the coronavirus crisis, all parties involved must also continue to communicate and cooperate. By doing so, they can make it through the rough patches and come out the other side with their businesses intact, reimagined and primed for post-Covid success.
Colin O’Reilly is sales director for investor solutions at MRI Software
