Post-lockdown bounce-back and scarring

When economies reopen some expect a bounce back in sectors such as retail, hospitality and catering as soon as most controls are lifted. The situation is more complex than that.

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  1. Charles Stanley

The world's great advanced cities like New York, Paris and London are centres of culture and entertainment, eating out and tourism. They provide these services for local residents, commuting office workers, staycation trippers from their country and foreign visitors in their millions. The rents and capital values of their offices and shops have been high, reflecting the heavy footfalls across their pavements and the lure of the large city for companies seeking headquarters accommodation.

These cities, their leisure and hospitality businesses and their property sectors have been particularly badly hit by the measures taken to counter the pandemic. The ending of most pleasure flights has removed most of the foreign tourist business from these cities.

As companies have been told to get their employees working from home, they have lost the lunchtime and after-work trade. They have suffered from long periods of lockdown, closing bars, cafes and restaurants completely, or requiring them to work with outdoors seating, reduced covers or takeaway only. Most retail has been subject to periods of full closure, and other periods of social distancing and reduced working.

Not a return to normal

Some think all will bounce back as soon as most controls are lifted. After all, they argue, there is plenty of money saved by the many who kept their jobs and faced restrictions on spending. They will be back in the theatres, cinemas, museums, cafes, bars and restaurants. The office workers too will return, in part, as most companies have kept hold of their office space against the day when they can use it again.

Others point to the obvious and continuing signs of major distress in many of the service sectors and property markets that make up a great city. Retail has been particularly badly damaged on both sides of the Atlantic, accelerating the trend to online sales which predated the virus. In the US, the rash of financial reorganisations has included Tailored Brands with 1400 stores, JC Penney with 846, Ascena with 2800, GNC with 2633 and Pier 1 with 991. Store closures and lower rents often follow such major changes.

In the UK, New Look agreed no rent on 68 stores and turnover related rents, lower than before, on 403 outlets. Debenhams is closing all its stores to go online under new owners. Most of Arcadia's brands have also gone to online specialists, with many stores to close.

In 2020, retail failures affected 54 companies with 5214 shops in the UK. John Lewis has announced the closure of its major new flagship store in Birmingham, a blow to the centre there. It is also seeking to convert part of its Oxford Street shop to offices. 63 Jaeger stores and 65 TM Lewin shirt shops belong to brands moving to online models under new owners.

Dining out will be scarred

Many who think catering will bounce back more than retail have to admit that there are a number of chains in financial trouble, looking to slim down the number of restaurants and hotels from which they trade.

In the UK, Travelodge has entered a voluntary arrangement seeking new terms for its hotels. Pret a Manger, Zizzi, Casual Dining, Pizza Express and other companies and brands are shutting restaurants to slim their networks.

The great cities have more shop space than can be traded profitably at old rental levels. There will have to be both a further reduction in average rents, and a slimming of retail space. Whilst the leisure and tourist trades will probably revive as lockdown ends, boosting catering, it is not clear that there will be a full return to offices and train stations, affecting the restaurants and bars which serve the office workers and commuters. In these areas too some property will need to be repurposed and some rents will have to fall.

Valuers are finding it difficult to judge future values, when demand and profitability is so difficult to gauge. When looking at most shops, it is saftest to start with what is the alternative use value, given how many will need to be converted. In too many cases people hope the old value will return with more people arriving in the High Street, leaving shop values still exposed given the need for change. Some restaurants and bars too will need reappraisal in the light of changed and reduced flows of customers in their part of the city.

It is still too early to back full recovery in traditional shops, and there is need to be selective about catering revival, given the extreme pressures created by long lockdowns and changing consumer patterns. There are also a lot of hospitality businesses with large new debts to get them through the period of little or no cash flow. They will be asking their funders for more to see them through recovery. Some need patience from lenders over the debts accumulated so far. Investors need to be aware of the dangers that some will go through administration before they recover.

This week, HSBC announced plans to slim its office estate, aiming for a reduction of 40% over the longer term. We await more news and plans from other large users of city offices. Last year in London, new demand was well down on previous years. Rents were stable with some increase in rent free periods for new lets, whilst vacancy levels rose. It is taking time for businesses to decide what the new normal might be like – and how much homeworking there will be post pandemic.

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