Offices, retail, logistics will shape commercial realty rebound

It is too early to evaluate the final impact of COVID-19 on the commercial property sector. But, new growth and development opportunities might emerge even amid the epidemic crisis as real estate developers and property tenants, including retailers, are exploring various ways to support their businesses.

Chinese commercial real estate will feel the epidemic's pinch in the short term. But considering the resilience of the Chinese economy, we see challenges as well as opportunities across various segments of the commercial real estate sector, like office, retail, industry or investment.

The office realty segment will feel growing pressure because both domestic and multinational corporations will become more prudent in workplace leasing and extension activities. The conditions for co-working space operators will be especially undermined, because their tenants like small and medium enterprises are facing growing risks in terms of financial liquidity.

Against the backdrop of slower economic growth and high supply of commercial real estate, quite a few Chinese cities saw slowing demand growth and rising vacancy rate in their 2019 office realty market.

On the one hand, the unexpected epidemic would lead many companies to reduce costs like office leases to cushion their revenue loss. Therefore, we are expecting intensified competition among office space operators, and a significant decline of activities in the office market.

On the other hand, local governments have introduced tax breaks among other policies to help corporates weather this storm, with a broader scale of supportive measures being in the pipeline. But the gradual recovery of the office market could only be achieved after COVID-19 is completely contained.

While real estate segments like retail, trade, hotels and entertainment are hit hard, there are also beneficiaries in other industries that would see rapid growth, including healthcare, medical equipment, online games, distance education, and e-commerce.

All of them would likely look for commercial real estate. Going forward, we expect landlords and tenants to place greater emphasis on well-being and intelligent workplaces. Factors like intelligent building management, well-being and safety management are key to office properties' competitiveness.

In the short term, telecommuting is believed to be more flexible, because it enables business or organization leaders to keep contact with their employees constantly. In this context, COVID-19 will deal a blow to the retail market, be it brick-and-mortar stores or online business.

In an attempt to curb the spread of the epidemic, China has launched a level 1 public health emergency response, including the cancellation or postponement of public gatherings, an extension of the Chinese New Year holiday, as well as temporary closure of scenic spots, cinemas, bars and other public places. Some landlords and retailers have already shortened their business hours or temporarily closed some of their stores.

As a result, a slew of major commercial property landlords have announced rent cuts or reliefs. A survey conducted by the Guangdong Restaurant Association showed that 69.64 percent of the restaurants were not in operation between Jan 18 and Jan 31. The rest who continued doing business reported their revenue more than halved compared to the same period of last year. And 30 percent of them reported almost nil revenue.

Many restaurants decided to save themselves by exploiting new businesses like delivery service, and online sales. The online channel has helped ease the pressure created by the floundering physical business to some extent.

Fresh food supermarkets and food delivery service providers, especially those having established online and offline sales channels, have seen their business increase significantly. During the Lunar New Year holiday, Carrefour's home delivery orders soared 300 percent, and orders for vegetables rose sixfold over the same period of last year.

JD Daojia, a major Chinese omnichannel e-commerce platform, reported its sales revenue surged 540 percent year-on-year between Jan 24 and Jan 27, and its best-selling categories are grain and oil, daily necessities, frozen food, fruit, vegetables and meat.

Retail, a key segment of the commercial real estate sector, will remain under pressure in the short-to-medium term while average rental is expected to fall. The conditions will not improve unless the epidemic is terminated.

Commercial buildings will pay more attention to environmentally friendly realty that safeguards and promotes health, and open areas in the future.

COVID-19 has led to an increase in costs relating to transportation, warehousing and time spent at the entry-exit inspections and on the quarantine of products. In the meantime, the spread of the disease has also trapped manufacturers in difficulties of operations, as factories and workers have to do their work on the site.

Remote work, extended holidays and a seemingly indefinite period of partial quarantine would likely pose challenges to export-oriented enterprises, for their suppliers and customers may consider relocating their business.

During the SARS outbreak in 2003, the industry value added macro indicator was reported to have declined for three straight months. Similarly, growth rates of transportation, warehousing and postal industries also declined in the second quarter of that year from 7.7 percent to 2.3 percent. However, the two indicators rebounded to the normal level after the SARS epidemic ended in June 2003.

The controls on the spread of the disease would influence the logistics sector in the short term, and bonded warehouses may suffer from decline in exports.

But Grade A warehouses will see limited impact in the medium-to-long term. Especially in East China and South China, where logistics land supply is in shortage, demand for Grade A warehouses in major cities remains high. In addition, as more people are choosing to stay at home and make purchases online, online retail will see further development, leading to knock-on effect on logistics as well as supply chains.

Last but not least, property investment might slow in the short term, but we can expect investment in realty to recover in the medium term, given the government's various measures, including maintaining easy liquidity. The Chinese mainland will remain a preferred destination for global investors.

Wei Dong and Zhang Xiaoduan are directors of research, Cushman & Wakefield, and lead research teams that focus on China's real estate market.