Commercial Real Estate is Down, But is it Out?

Business owners and commercial property investors can only guess what the future will hold.

Businesses have felt the crunch of lockdown measures in many ways, but perhaps none so strongly as the rents due for empty office spaces during lockdown. Remote working for some have been able to soften the blow, but the fact still remains that many are continuing to pay for what one might call a ghost town property. The negative effects of the pandemic on the commercial real estate industry are still being felt, and business owners and commercial property investors have little to no clue what the future will hold.

Pedro Barata, Business Director of AGREEN and IPBN Executive Partner told the IPBN that “The impact of the pandemic is being discussed with key players, but no one has presented solutions so far. Most people want to see where their investment is going. Pre-pandemic, the market believed that there was a need for new office buildings in the city center because many of the buildings had been converted to high-end residential properties. This means the stock of commercial properties has been reduced in Lisbon, for example. Building office buildings now is a huge risk as [many ongoing projects] are suffering because of a decrease in demand.”

One oversight in the sector is that no one seems to be developing ideas for post-pandemic office spaces, according to Barata. "Ideas such as reducing workspace but increasing meeting areas, or direct access to outside areas are under consideration. On the other hand, sustainability issues are no longer a possibility and are now a fact that no investor is leaving behind. To change the plans takes time. If the plans are at the sketch stage you can react to these new must-haves, but it will take about two or three years to actually see these things delivered.”

According to Cushman&Wakefield’s recent article, “In June… a general return to offices will start taking place, subject to rules defined at a local or regional level. This will be good news for [the commercial real estate] sector, where the decrease in demand continues to impact take-up volumes, with January-April figures registering a year-on-year decrease of 43% in Lisbon and 80% in Porto, to 41,700m2 and 4,100m2 respectively." 

“If people continue to work from home, it will change everything, but I don’t believe it will always be like this. Employers need their staff around them and people need to be involved with each other, so that’s why investors seem to be playing a waiting game,” Barata said.

AthenaAdvisers reports that “Last year, 190,000m2 of office space was occupied in Lisbon and Porto and €2.7bn was invested in commercial property, the third-largest sum of all time. This is especially impressive given the impact of the coronavirus.”

The report goes on to say that the future is relatively bright for logistics and leisure real estate development. Logistics properties commonly used for assembly, storage, or distribution have seen increased demand in response to the pandemic with more Portuguese citizens now buying online while leisure commercial real estate (anything from bars to sports centers) will see a hallmark of recovery once vaccination rates improve.

And Barata agrees with this assessment. “Before the pandemic, companies could deliver in 24 hours from Spain, for example. During the pandemic, these businesses couldn't make that kind of turnaround so they suffered a lot — it could take them a week to make the delivery. For them, finding a place to distribute in Portugal is necessary and there are many other companies in the same position.” 

As AGREEN’s goal is to make small green changes with big impacts in efficiency toward a lower carbon footprint, the company seems like it is still on the right track despite the obvious setbacks. Barata says, “AGREEN is committed to promoting the sustainability of buildings during construction and building maintenance. Sometimes small green changes can have big impacts in efficiency toward a lower carbon footprint. Before the pandemic, investors showed concern for sustainability, but now this aspect has become an undeniable priority. Due to the technological progress that occurred with the pandemic, it will be necessary to adapt facilities, especially with regard to communications and security, something in which AGREEN has vast experience.”