I’m calling it: the market is back

Ted Schama, Joint Managing Partner at Shelley Sandzer

First published in CoStar, 19 September 2023

I’m calling it: the market is back. To explain how I now feel able to draw this conclusion, unfortunately I have to mention Covid again. Yawn, I know, but I cannot escape just how useful that point in our history was for defining and contextualising how we got here.

Pre-Covid, we all operated in a market that really knew itself. Valuations had meaning, and market forces were at play in a rational way. That’s not to say everything was rosy, we had only just come out of the looming shadow of the global recession, but there was a systematic understanding of how things worked, and positivity reigned.

Peri-Covid, chaos prevailed. Despite anxiety around the acronym, CVAs taking place under the radar did allow businesses to negotiate recovery packages that for many will be the only reason they are still standing today. What we didn’t have during this period, and for all the renegotiations that took place throughout, was the informal ‘rule book’ we had pre-Covid. Everything changed, and every business’ needs became atypical and completely bespoke in a way we’d not seen before.

What that meant was a fragmentation of the market, when we began to emerge from the most difficult moments of the pandemic. All parties were determined to make deals work, but the crippling impact of Covid on finances meant landlords were unable to dip their hands into their pockets in a meaningful way, which was often frustrating in the face of a deal we all would have jumped at in a pre-Covid world.

As things started to settle down post-Covid, and there was a better understanding of the financial limitations within the market, the invasion of Ukraine struck and suddenly inflation sky-rocketed. Hospitality operators were then skipping from one problem to another, the feeling that they had managed to consolidate – even fractionally – shattered by ongoing resource challenges amplified through inflationary pressure. Were it not for the dedication and innovation that naturally exists among our best people in hospitality and property, the market would be in a dark place.

All of this makes me think back to life before Covid. Not because I’m desperate for a return to the past, nor because I think they were glory days never to be replicated. Precisely because I think they can be, and it gives me a sense of pride every time I see the old ways – updated for the present context – in play.

Forward-thinking landlords pre-Covid helped to realise great places. They did this by creating an environment that enhanced their asset, and were never afraid of taking on a more equitable deal where appropriate, or rather where that deal was seen to deliver both tangible and intangible benefits to the place. It was forward-thinking landlords only back then, now that thinking has matured into the mainstream.

Likewise, savvy restaurant operators often saw opportunity in fitted units, albeit the premiums required were sometimes prohibitive. Now, we’re seeing more opportunities where landlords have taken possession of fitted restaurants, with no premium required at all. Even on lease assignments, there is an acceptance that the availability of a good quantity of properties means premiums have had to soften.

I completely appreciate at this point that I’ve done the bad thing and brought the word Covid back into your life, purely because it suits the flow of my argument. But what do these comparisons actually mean for the hospitality market?

Firstly, we have fluidity again, something I’ve been craving for what feels like an eternity. There was a strong element of flexibility infused into the pandemic, forced by the very nature of the chop-and-change dynamics. Where that was almost entirely at the operational level, we now have a property market that is bending and flexing in the right ways to achieve the best result possible for landlord, tenant, and customer.

Most importantly, the market has rediscovered itself. Things aren’t exactly the way they were before, but there’s no reason they should be. The evolution in thinking and decision making is finally getting us to a stage where we don’t have distrust or second guessing.

Challenges remain. Inflation is high, as are wage demands and interest rates, while staff availability and propensity to spend for lower and middle affluence are still on the low side. However, spirit and confidence are on an upward trajectory, and I can finally make sense again of the market.