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Coping with COVID: Commercial Property & The Impact of Coronavirus

Editors Note: As part of our ongoing ‘Coping with COVID’ series, we will be analysing the impact that coronavirus has had on various aspects of the property sector. The following interview is the first on Commercial People News.

The impact of coronavirus has been felt across the globe, with many businesses suffering severe losses, while others have collapsed entirely.

For those businesses who emphasised employees being inhouse, the recent government directive to work from home this winter, has caused many headaches after businesses, and commercial landlords alike made efforts to make premises ‘COVID secure’.

To help us understand more about the critical decisions businesses are facing, we have spoken to Luke Philpott, Joint CEO of Devono Cresa – the industry leaders in commercial property advice for occupiers in London, the UK and across the world.

DeVono was founded in 2003 in London. Initially a three-person team, the company later became a partner of the global real estate firm Cresa, renaming themselves DeVono Cresa. DeVono Cresa currently employs 53 people across their headquarters in the eye-catching Bloomsbury Building in Holborn in London.

Commercial People: Firstly, can you give us a bit more information about yourself and your experience?

Luke Philpott (LP): CertainlyI’ve been in the property sector since 2003 when I joined a real estate practice in London, before later joining the then three-person firm, DeVono, as a surveyor in 2006.

I’ve been the joint CEO for the past four years, focusing on the strategic direction of the business as well as client relationships and the commercial endeavours that we take on.

CP: What are your thoughts on the Chancellor’s recent Winter Economy Plan?

Luke Philpott, Joint CEO of DeVono Cresa

LP: From a business point of view, some of the loans that have been extended – such as the Coronavirus Business Interruption loans scheme are a big positive. The ability to extend the payback period of loans from a previous 6 to now 10-year span as well as an extension on the application period is a major plus. Deferring VAT payments to next year and beyond is also a significant help.

One of the major issues, for ourselves and all the clients that we’ve spoken to, has been the preservation of cashflow – with no clarity on when trading performance is going to come back – whatever sector you’re in, the main focus, has been on cash preservation. So naturally, anything that speaks to that is going to be welcomed.

My response to the Government’s recent schemes has been largely positive; I think they’re in a no-win situation.

Ultimately, if it weren’t for schemes such as furlough – a phrase that many British people would never have heard of until six months ago – the level of unemployment in our country would be catastrophic.

CP: What type of concerns have some of your clients (particularly those in the office sector) had regarding COVID-19?

LP: The biggest challenge that everybody has had to deal with is the underutilisation of space.

Back in March, when the lockdown started and we were effectively banned from going to our offices; the market had the double whammy of trading performances essentially falling off a cliff; meanwhile, property/fixed costs as a business carried on unabated.

There’s been a lot of press about the ability (or lack of) for commercial landlords to collect rent in the two-quarter dates that we’ve experienced under lockdown. However, in our experience as a middleman – facilitating a lot of those conversations (between landlords and tenants), there has been an overwhelmingly positive response.

We’ve been really impressed with the vast majority of commercial landlords and how they’ve responded and been willing to support their tenants. Of course, there are exceptions, but our experience has been largely positive.

CP: Are there any other areas of concern?

LP: One of the other main concerns of our clients has been market uncertainty. Our clients are UK businesses, and ultimately, they’re suffering from an absolute inability to predict when their markets are going to come back. On top of that, they also have operational issues, and those who wanted to reopen their offices have had to do so in the midst of inconsistent messaging (from the Government) over when and how they can open the office.

Ultimately, the problem many of our clients have found is that even when you’ve established a COVID-secure office, it implicitly means that you’re operating on a vastly reduced headcount, as you’ll be left with large amounts of underutilised space. The issue of wasted space is a factor made even worse by the expensive nature of commercial property in Central London.

CP: With the Government now returning to their message of ‘work from home if you can’, how has this affected your clients?

LP: It is undoubtedly a difficult situation for the economy, for us, and our clients. In reality, the return to ‘work from home if you can’ means a continued pause (within the commercial property sector), which is a bit frustrating as we have only just had a semblance of recovery following the hiatus that took us through from March until September.

Luke Phillpott, Joint CEO of DeVono Cresa

In as little as three weeks, we’ve actually witnessed a significant uptick in a number of metrics including footfall, public transport into Central London, as well as the number of enquiries we’ve received.

We have a pretty broad church of clients, both large and small, who were beginning to unsuspend their projects, as well as a number of clients wanting to meet face-to-face. What’s frustrating is that I believe that the current directives will cause another pause, preventing a return to work and a positive market sentiment.

On a positive note, the property sector is a beast that really has its milestones pre-determined from a time way before COVID became part of our vernacular. For example, if you have a lease expiry, rent review or an opportunity to break (your lease), those clauses were likely set in place years ago. As a business, you have to address and take care of these events as and when they arise, regardless of the current issues we are all facing.

For a lot of businesses, simply doing nothing about any events that they may have in their tenancy agreements is not an option.

At the moment, most companies are scrutinising how their business will look moving forward, revising their headcount, how they support their clients, and whether or not they need a larger or smaller office as a result.

CP: Continuing the focus on offices; have, you noticed a significant change in DeVono Cresa’s clients’ purchasing habits? Alternatively, are businesses pushing on with their plans regardless of COVID-19?

LP: No, I don’t think many businesses are pushing on regardless.

Q2 leasing was down 57% on the previous quarter, but the average size of each deal our team are supporting on is up marginally from 7,700 sqft (in the same period in 2019) to 8,100 sq ft, so there is [some] activity.

We’ve witnessed a number of changes that our clients are going through such as the reduction in the volume of space due to flexible work practices, as well as redesigning their layout to cope with COVID restrictions.

Another change we’ve noticed is that there is now a greater focus on employees. A lot of businesses in our space have run staff engagement events and return-to-the-office assessments to help make workspaces ‘COVID-secure’.

One of the other trends we’ve noticed – albeit over a period of the last 5-6 years, has been a greater appreciation of the flexible workspace solutions available to occupiers.

At DeVono Cresa, many of the businesses that we’re speaking with, have begun to move away (at least in part) from traditional longer-term leases and towards serviced office providers and the more beneficial deals that they can facilitate. As such, we’ve seen many traditional landlords offering their spaces on flexible terms with several turnkey solutions.

CP: How has DeVono Cresa’s day to day operations been affected by the pandemic?

LP: Our core business has not changed too significantly as we still help and advise other businesses to make strategic real estate decisions. In the last six months, we have done an enormous amount of work supporting these conversations, with much of it being pro bono.

As a part of our bit to help out, we started a page on our website pro-bono page that attracted in excess of 800 enquiries. From these initial enquiries, we worked with almost 200 businesses, helping them with their COVID response strategy.

CP: Why did you decide to offer Pro Bono support?

LP: We’ve been lucky from the point of view that we’ve been financially very secure for the better part of two decades now. As such, we felt we had a responsibility to help out other businesses who were struggling during this tough economic period, and we could.

We were inspired by the ‘Clap for our Carers’ initiative and wanted to do our bit to help businesses and the economy.

CP: How has DeVono Cresa as a business been affected by COVID-19?

LP: We took advantage of the furlough scheme, and furloughed roughly half of our staff.

Outside of business development, however, the majority of our other teams that support existing clients were by and large, not furloughed. We decided to take this approach because we wanted to ensure that our existing clients had someone suitably skilled to contact them should they need assistance or require us to advise on a property proposal or help them think about a particular conundrum.

CP: Looking into the future, do you think a further complete lockdown is likely and if so, what impact would this have on the commercial property sector?

LP: I don’t think a second long-term lockdown is likely as I believe a permanent lockdown for anything more than a couple of weeks would effectively ruin the economy, doing irreparable damage to both businesses and individuals.

I feel that people are at a breaking point with the restrictions as witnessed by the number of people desperate to return to the office and work in general. A complete lockdown to me would be a particularly damaging prospect.

CP: Finally, what do you think that the office sector will look like in 2021?

LP: It’s a good question, and it’s hard to answer, but I see it (the office sector) in quite a binary way, almost pre and post a vaccine – assuming one comes.

Without a vaccine, I think to some degree we’ll have continued inertia – although short of complete market paralysis like we had earlier this year.

I think that until a vaccine does arrive, it will be a slow and steady stream of business. However, I can imagine that in the event of a successful vaccine, there will be a sense of euphoria (amongst businesses and consumers) as things will be able to return to the way of old, which could result in an exponential uptick for us all.

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