2021 will be a year of revolution not evolution
Alex McCulloch, Director of CACI, talks about the impact on property
First published in CoStar on 11 January 2021
2021 will be a year of revolution not evolution, but we will see it unfold in two stages. With the new lockdown now in place until at least mid-February, the first part of the year will make 2020 look like a walk in the park – in January alone there is a triple whammy of potential pitfalls for businesses to watch out for.
First, we will see the result of a heavily disrupted Christmas trading period, and the fall out is likely to trigger a continued number of high-profile failures across retail, leisure, and potentially property. There will also be a true understanding of the time required to roll-out the Coronavirus vaccine, which, in spite of the welcome boost from the Oxford-AstraZeneca approval, will need months to reach enough of the population to allow wholesale relaxing of the rules, whilst highlighting that the people therein tend to be lower priority for the economy. Finally, Brexit is supposedly done but its challenges still loom, with a bare-bones deal in place that will only serve to kick many issues down the road, flaring up at regular intervals throughout the year. These themes, underpinned by the new lockdown, stricter measures, and school closures, mean a return to ‘normality’ for high streets, shops, offices, and public spaces is surely not possible until the Summer, at least.
However, as crucial as these topics are, they are also just a reflection of the immediate challenges on top of more structural issues – namely the long-term economic outlook and shifting consumer behaviours.
For example, in the space of the first two weeks of the pandemic, we saw consumer behaviour accelerate five years. This led to a significant step-change in online spending; collective wellness (a greater focus on the community; increased loyalty to local, independent brands; a growing self-awareness on how our choices impact the environment, sustainability, and each other); and a huge shift towards working from home. All these changes are here to stay and will completely transform how we live our lives in 2021. Many of these developments should result in positive outcomes in the long-term too, with stronger communities, better work/life balance, and an ethical ethos running through consumers and brands.
But for every yin there is a yang – and beneath the surface of this positivity is the menacing undercurrent of an uncertain economy. We will, as a result of Covid, be in a recession. Alongside this, there is rising unemployment and job insecurity, a fall in real-terms consumer spending, a likely shift to Treasury cost-saving/increased taxation, and the miasma of Brexit uncertainty.
Only the most ardent Brexiteers are still advocating sunlit uplands, and whatever the long-term outcomes hold there will be short-term pain. This, in turn, will temper many of the good intentions that people have, challenging ‘collective wellness’ with ‘personal value-seeking’. As a result, we will see a polarisation of consumer, those who can afford it will adopt a more sustainable, ethical lifestyle, whereas for many, values will be the number one watchword.
So, what does that mean for property? There are three big things that will be transformative through 2021:
1. The role of space will change: Two-thirds of people currently working from home intend to carry on doing so after the pandemic is over. This will transform the physical landscape, flattening the previously peak daytime economic spend away from cities and into suburbs and communities. The office then becomes a collegiate space, with flexible meeting rooms and an acceleration of the ‘we-work-ification’ of offices. This means the ground floor provision is less grab and go sandwich and instead more of a sit-down lunch with the team. In addition, retail actually sees a revival as people are more inclined to stay on after work and engage with their surroundings: you are only in 3 days a week, so you make the most of it. The suburbs and communities will see a revival of daytime trade – a spring flowering of entrepreneurship – coffee shops, flexible workspace, grab & go lunch spots, and other innovations reviving previously moribund commuter belts.
2. Performance-based leases are the future:The ongoing Covid-19 uncertainty will be evident in the first part of the year, followed by a new consumer reality with greater blurring of channels, meaning that the pressure to move leases from the current outdated, redundant 67-year-old model to performance-based model will be intense. All parties need to recognise that this cannot be solely turnover based, it must reflect the value of stores through showrooming, online halo, and influencing impressions. By the year-end a number of these modified leases will be live, either via third party objective adjudicators like CACI, or run in-house. But performance-based leases are the future and are the route out of the uncertainty of 2020.
3. And where leases go rates must follow: If rent is flexing to reflect performance, so should rates – which at the moment are effectively a land tax but need to evolve to become a performance tax (or abolished altogether!). Regardless, rates will undergo wholesale reform by year-end. Occupiers need to see occupancy cost become more transparent and better mirror the benefit they get from being there.
By the end of 2021, we will have a landscape that bears little resemblance to that with which we ended 2019. Some things about this year just gone we will never want to repeat, but from the trash can fire of 2020 we should be able to salvage a new, more sustainable reality that sees innovation rewarded, spaces evolve to better reflect their uses, and communities revitalised. At the heart of all of this is data. Many businesses at the moment have the data, but do not recognise the value accurate implementation of it can have. 2021 will be the year that good businesses harness that information and move forward at the same pace their customers are. Perhaps for them, those sunlit uplands do await.