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EMEA Office Market Responseto Covid-19
Damian Harrington Director | Head of EMEA Research
+44 20 7487 1691 [email protected]
Andrew Hallissey Executive Managing Director | Occupier Services, EMEA
+44 20 7344 6552 [email protected]
Peter Leyburn Head of Cross Border Tenant Representation I EMEA
+44 20 7487 7018 [email protected]
LESSONS FROM APACTwo weeks have passed since our last update and promising signs continue to emerge in APAC. While activity in the region has slowed down it is not in complete pause mode. It is clear certain industries and locations are holding stronger than others.
Leasing transactions volume appear to have ramped up in China, mainly from global corporations needing to meet business objectives. Many are using the situation as leverage when negotiating lease terms.
Colliers’ China office has adopted virtual property tours which has been well received by clients – demonstrating our entrepreneurial thinking and the trust of our clients to deliver services to them, despite using unfamiliar methods of communication and brokerage.
Landlord concessions have been mixed. In markets that were landlord-favourable at the end of 2019, such as Japan, landlords have so far offered no rental concessions to office occupiers. Low levels of vacancy have underpinned a ‘take it or leave it’ situation. Conversely, the responses have been different in New Zealand and Singapore. New Zealand landlords are offering 50% reductions in April rents. Singapore is offering 30% reductions in property tax.
LANDLORD-TENANT NEGOTIATIONSColliers’ teams across Europe have been chairing negotiations between occupier and landlord/investor clients to help navigate them through these challenging times and secure their positions for the future.
As we have seen in APAC, the strategies implemented by landlords are to safeguard their portfolio values in the form of leasing concessions. This is taking the form of rent-free periods, rental holidays and rent abatements in return for an equivalent lease term extension or escalated rent/balloon payment over the latter part of the lease, calculated on a NPV basis. The volatility in financial markets and uncertainty in the pricing of debt, despite significant monetary stimulus, is putting additional pressure on landlord cashflows, particularly with regard to managing LTV ratios and debt margins.
Colliers’ key clients have been working closely and flexibly with their occupational tenants, holding weekly calls to navigate and remain up to date on their pan-European portfolios. The need for cooperation has been clearly demonstrated by the first quarterly rental collection of the year, with certain listed REITS reporting a large drop off in rents collected. Landsec, one of the UK’s largest retail and office REITs, only collected 65% of their portfolio’s rent at the first time of asking, with retail most challenged. They are setting up an £80 million rent relief support fund to help tenants.
In some markets, a Covid-19 clause has even been written in to leases (usually a two year clause) to protect tenants in case of future episodes. This is in addition to the benefits available to occupiers in the form of government support, including business rate, VAT, tax and social security deferrals. In certain countries broader loan, grant and employee subsidies are taking some of the sting out of negotiations by alleviating the pressure on both parties.
For those engaged in pre-leasing/development projects, many have acted pragmatically to delay completion dates and fit-out projects or defer start dates until normal activity and safer conditions resume. This may impact the landlord’s typical rental income in the short-term, but longer-term it will help ensure the survival of both the tenants and landlords’ business and strengthen relationships.
WHAT’S HAPPENING TO LEASE ACTIVITY?Deals which were close to completion, or had completed most of the due diligence process, are still expected to go ahead this year.
We are also noticing that occupiers who are putting deals on hold are seeing these deals go back to the drawing board. Clients are pausing to reflect on what their future requirements and ask questions like “do we really need this much space”, “is it efficient”, “will we use space in the same way we used to before the onset of the Covid-19pandemic?”
Companies that are continuing, or even increasing their leasing activity, typically include government bodies, NGOs, shared service centres and life science companies. For those that are still actively signing, three years seems to be the lease length being adopted until economic results are clearer.
Across geographies there are other differences and similarities. In London, deals below 10,000 sq ft have been the worst affected and the drop off rate in deals is much higher – largely as this bracket is usually reflective of SME business activity/expansions. We are starting to see this decline curtail and are confident activity and confidence levels will pick up. In the City of London, demand is sitting at around 5M sq ft, with approximately 150 deals under offer.
Pre-letting activity is still very much continuing as vacancy is so low. This is the same in Germany, where some cities like Munich and Berlin sit below 1% vacancy, and in Paris and Amsterdam where quality, grade-A office space is extremely limited. Good assets and leases are hard to come by.
Finally, we are seeing the first signs of how the pandemic has influenced office design. Colliers’ Dutch WPS teams are working on implementing future office designs utilising “distance calculators” to ensure an office can function with a 2metre distance perimeter placed between workers.
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In London, we noticed that despite the lock-down, 150+ deals are still under offer.
We estimate demand is around 5M sq ft, and this is despite 20% of deals stopping or being put on hold in the first week of lockdown.
While some companies/industries are suffering, others are booming and cannot recruit fast enough / need more space: online casinos, healthcare recruitment and gaming companies to name a few.
For the most part, the sub 10k sq ft part of the business is feeling the brunt of the slowdown - the SME end of the spectrum. For larger companies, pre-let deals are still going ahead, due to the low levels of vacancy residing in both the City of London and West-End. Landlords have been in contact with their tenants to delay completion dates, subject to lockdown restrictions, in order to maintain active and healthy relationships.
The decline in activity has begun to flatten, and we are positive that transactions are still progressing. Around 50/60%, of deals put on hold are currently in discussion to reassess and agree a more appropriate solution. The impact and fear of the virus on CRE has meant some occupiers are now requesting COVID-19 clauses for a two year period post completion in order to mitigate the risks if COVID-19 returns.
Landlords are, for the most part, being pragmatic and it is critical they continue to do so.
FranceFrance’s sub-10,000 sq ft deals are either on hold or tenants are withdrawing until clearer conditions materialise. Deals that were in their earliest conceptions are now postponed, with many companies going back to the “drawing board” to reassess their future.
For larger corporate companies, many are still pushing ahead with their deals – with many taking pre-let agreements in order to secure space.
For tenants negotiating lease renewals, they are now using the situation as leverage to secure further rental concessions, even implementing specific COVID-19 clauses. Concessions such as rent-free periods and balloon payments are increasingly adopted to maintain landlord cashflows.
GermanyIn comparison to the rest of Europe, German office markets are doing well. That said, our German teams do expect a slowdown in leasing activity in the coming weeks as the pandemic enters its peak.
The German markets have remained resilient due to the extreme (low) levels of vacancy, with Berlin and Munich below 1%. In Frankfurt, Dusseldorf and Stuttgart, businesses with 100+ employees are also pushing ahead with deals as they adopt a “business as usual” approach.
Clients believe businesses need to carry on as normal as possible in order to achieve their objectives. With budgets in place, it is hard to chop and change these strategic moves without further disruption materialising later down the line.
ItalyWe have seen that both landlords and tenants are willing to cooperate and negotiate sensibly to ensure the safety of one another. The businesses which were expanding in Italy have now mostly put major deals on hold and adopted “wait and see” mentalities as they are hesitant to commit capital to new office leases when the future of their business remains unclear.
New deals which were in early conception have been put on hold as site visits have been restricted. This has meant that construction sites and fit out projects have been postponed. Some landlords have offered short-term incentives – mostly rent-free periods – but it is a common concern amongst clients that this will not prove to be a long-term solution. The long-term economic impacts of the virus are still yet to be seen, and for commercial leases, tenants are concerned as to how they can mitigate this uncertainty.
We have advised this can be achieved with increased flexibility, at the landlord’s discretion, but there are legal regulations which must be adhered to, especially for standard office leases (6 + 6 years) with annual rents under €250,000. Lawyers have seen an uptick in work as more and more tenants come to them for advice.
NetherlandsMuch like other markets, tenants are seeking rental concessions, and most businesses are refusing to pay April’s rent, or only offering around 50%. COVID-19 lockdown measures have also been extended until the end of April and it is likely this will continue to disrupt business activity. As a result, many occupier clients are creating “back up” plans.
We are in discussions with landlords to extend completion dates on current fit-out projects due to delays in supply/materials. Most relocations are currently postponed.
While site visits are more challenging, we are investigating smart solutions to work around this – much like in China. This is being well received by our clients, strengthening our relationships and ensuring we are still completing deals (where possible) ‘digitally’.
The pandemic has influenced office designs going forward, and WPS teams are working on implementing future office designs utilising “distance calculators” to ensure an office can function with a 2m distance perimeter placed between workers.
PolandNegotiations are ongoing between landlords and tenants, with most tenants looking for rental concessions. However, not all landlords have been as responsive to this as others and neither has the Government; which seems to be more concerned over the retail sector than the office sector.
Polish office development pipelines were strong at the start of the year, with many developments coming to practical completion in 2020. So far, most construction sites remain open, protecting the original completion dates and workers jobs.
A couple of deals are on hold in Poland, as clients take a “wait and see” approach. Colliers is using this as an opportunity to work with tenants to assess their active requirements, review the strategy going forward and look at ways to minimise cost, yet maximise efficiency. In most cases, this is resulting in space reductions in operational portfolios.
We believe the adoption of flexible and remote working will encourage future office occupiers to rethink the traditional model and encourage more active working. Our recent “working from home” survey highlighted most respondents would want to work from home at least one day a week and, many tenants are now looking at their own businesses and seeing whether this can be adopted.
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Ireland In Dublin, businesses and construction sites are now closed which will result in delays to the 45,000 sqm office pipeline which was under active construction. 50% of this space was already pre-let which will likely mean leases will need to have their start dates rescheduled to allow for these delays.
Q1 take-up levels were strong, sitting at around 80,000 sqm over the course of January and February. However, with lockdown measures in place, it is likely the coming months will see reduced take-up levels. Major leasing deals have subsequently fallen through, notably Workday (14,000 sqm) and Tenable (4,000 sqm).
Landlords have remained stubborn and little rental concessions have been offered to tenants. As a result, many of our clients are seeking our advice on how to mitigate this. They are also seeking legal advice on what they are legally obliged to pay as some tenants are beginning to withhold rental payments. For large landlords and corporations, while disruption is likely to continue, they should be financially sound. The SME market will prove more challenging, and with little rental relief offered so far there is likely to be a vacancy rise in the coming months.
SpainThe Spanish Coalition Government continues to grapple with the pandemic, and has ensured that workers are protected, as they have legislated that redundancy is now illegal. They have committed a €20 billion aid programme to SMEs, but this is not specific to just CRE businesses and it is unclear whether the initial package will be enough to buoy the economy or the businesses within it.
From a leasing perspective, only deals that were 80%+ complete prior to the COVID-19 pandemic are going ahead as usual. Everything else is on hold. Although force majeure is in place, most tenants are unclear where they stand in relation to rental incentives. Colliers has been in constant contact with clients to advise and inform on their respective lease positions with each landlord. Landlords are having to act pragmatically with a focus on cost saving and securitisation of profit and loss accounts.
RomaniaMost of the deals that were in discussion have now adopted a “wait and see” approach, but there are some exceptions where deals are going ahead. For the deals put on hold, the most common delay timeframe is between 6-12months which will impact take-up levels for 2020 and early 2021.
The industries hit hardest have been accommodation, retail, banking and finance and co-working spaces/operators. Other industry sectors have seen an increase in demand for their services and therefore an increase in active space requirements.
The Government has initiated an emergency response, offering financial packages, but they have not imposed a force majeure which means no entitlement to lease incentives, unless granted by the landlords’ goodwill. Most landlords are yet to offer rental incentives. However, we expect legislation could be re-written allowing for force majeure clauses to be added into commercial leases, in order to protect office tenants in the future.
RussiaRussia has been in lockdown since March 30, and businesses are now closing following Government advice.
From a leasing perspective, deals which were 70/80% complete or with legal teams are still going ahead. We are seeing a surge in our clients looking to close these deals quicker in order to ensure minimal disruption or changes to the lease contract. Most deals, however, are being delayed or postponed.
There has been some confusion and uncertainty regarding the payment of rents, notably which currency they are required to do so. Landlords have kept rents in Euros or US Dollars, which given the volatility of the FEX, is causing concern for tenants who are worried they may be “over-paying” for their leases.
Some tenants have acted proactively and paid rental obligations 2/3 weeks in advance which should temporarily ease landlord’s concerns over cashflow issues. This will be reviewed in May with an expectation landlords will open active discussions with their tenants in order to devise a strategic and practical plan going forward that benefits both parties. We are advising our clients, both tenants and landlords, on how they can do this effectively.
South AfricaThere was a shock at the junk status downgrade by Moody’s, but it is no surprise considering the Government has still yet to implement any financial package to stimulate and protect the economy.
In the high and densely populated areas the lockdown measures have been largely disregarded and many are seeing it as a “public holiday” which is only increasing the spread of the virus.
For existing leasing deals, activity is split. Some deals are still going ahead, and others are being put on hold. With tenants resisting paying rents, landlords are also suffering and as a result are calling upon the Government to bail them out.
New business activity is largely subdued.
IsraelMost landlords are standing firm on rental concessions, whereas, the Government has begun offering three month property tax incentives with the aim to provide some relief to those at most risk.
Colliers is working on post-COVID-19 strategies to help our clients return to business as normal, reduce costs and get back on their feet. We are also aware that co-working and flex-working models may see a rise in popularity in the coming months as many businesses have been forced to adopt these. In doing so, we believe they will see the advantages and the cost-saving benefits.
While leasing activity is certainly impacted by the outbreak, some companies are pushing forward with projects and Colliers is working on several deals with key names looking to setup operations and expand.
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UAE & KSAUAE We have seen an increase in responses from occupiers regarding the key question of “what concessions are on offer for us as occupiers?”. In most cases, this is not a “one size fits all scenario” and each landlord must be dealt with separately with individual concession packages being created to reflect the existing lease. This is generating a large volume of enquiries from both existing and new clients. Colliers has been advising on where they can minimise costs and seek compensation/relief from rental obligations.
KSA For leasing deals which were almost complete in Saudi Arabia, they are still going ahead, Fit outs are also progressing where possible, but as working hours have been reduced there will be a knock-on affect and delay to these projects. The Government has introduced a regulation which states only 20% of employees can be in the office at one time and temporary curfews are in place.
