COVID-19 vs. the market: How serious will the impact be?

Office – receding

The rapid spread of the coronavirus pandemic and the subsequent consequences have had a significant impact on the labour market, with many commercial operators struggling to survive. Many businesses currently find themselves dependent on aid packages and salary compensation from the state.

A number of researchers believe that COVID-19 will have a variety of long-term effects. For example, both employers and employees have come to appreciate the opportunities offered by working from home and in adopting digital solutions that provide a smarter, more efficient approach to some tasks. This is likely to result in greater autonomy, increased efficiency, less time spent commuting and an improved balance between work and family life. Greater focus will therefore be accorded to the concept of flexible offices. In the long term, this will probably mean that fewer square metres will be allocated per employee in offices as workplaces become more flexible – and some employers are realising that it may not be necessary to provide a separate desk for each and every employee.

Another likely result is greater interest in shared offices and office hotels, which provide businesses of all sizes with additional flexibility in relation to their needs for premises. The tendency for commercial operators to gather in communal offices and benefit from both shared facilities and the exchange of knowledge is therefore expected to continue. However, we expect that the traditional way of organizing office workplaces will continue to be the dominant way of organizing. Within a short space of time, there will be a focus on knowing who to be around in everyday life.

At national level, the vacancy rate for office premises in Q1 2020 remains unchanged at 7.6%. There have been some regional changes, however, with the Capital Region and Zealand Region seeing a reduction in the vacancy rate, while the rate in the Region of Southern Denmark and the Regions of Central Denmark has risen. Thus, there will be places around the country where we experience a declining office market.

Residential rental properties – stable

Thus far, the residential market has remained relatively stable during the coronavirus pandemic. There is rising interest in residential properties among foreign, institutional investors and capital funds, where Denmark is viewed as a safe haven for property investments with a high level of rental security. In the search for higher yield, investors are showing more and more interest in properties outside the large towns and cities, where returns are more favourable. Both the market rent and initial yield have generally stabilised and are expected to remain steady over the coming year.

It is anticipated that interest in older residential rental properties with low rents will still be high. Even after the government is expected to obtain backing for a proposal to alter Section 5.2 of the Housing Regulation Act (Boligreguleringsloven), as an alteration will result in a natural pricing regulation. Even though the demand is high, everything else will mean falling prices for this type of older rental properties. The change will result in a longer realization of the potential of renovating units in older properties from before 31 December 1991. The proposal, in its present form will entail a quarantine period of five years following change of ownership before the new owner may modernise units and raise the rent (cf. Section 5.2). In addition, the energy mark on the property must at least be a C.

Industry – high demand

COVID-19 has had a positive effect on industrial and logistics properties, which are trending upwards, on account of the rise in online commerce and technological development. This has been strongly enhanced by the effect of COVID-19 on the market, where internet trade in particular has risen sharply – even though growth rates were already high. The high demand is primarily focused on new and modern properties with high ceilings, easy access and locations close to essential infrastructure such as highways. It is important that new and modern industry and logistics properties continue to be built as they are in high demand from many enterprises with urgent need. There is thus still a good deal of unexploited potential because there are simply not enough modern industrial properties to meet the high demand.

Required return remains high compared with other sectors. There are a number of investors who are extremely interested in investing in modern industry and logistics properties – or building new ones – especially if enterprises are willing to enter into long-term, non-terminable contracts. This can help appreciably reduce the risk for investors. In this context, sale and lease back transactions are especially popular.

The share of vacant industry and logistics properties remains stable at 1.9%, equivalent to 1,966,200 sq m, where the primary vacancy rate is to be found among old, unmodernised properties, which testifies to the high level of activity on the market. There are likewise expectations of increasing market rent and decreasing required return in several areas.

Retail – negative effect

COVID-19 has had a negative impact on the retail sector. Retail sales fell by 2% in March, representing the biggest monthly drop since Statistics Denmark began recording statistics in 2000. We expect rising unemployment for the rest of the year. The clothing category experienced the most significant decline in relation to February, decreasing by a whole 27%. In contrast, grocery shops have seen their turnover increase by 1.4%. The Danish hotel and restaurant sector recorded more than 200 bankruptcies between 1 April and mid-May.

Some investors are cautious about investing in the retail sector, which is experiencing a continuous stream of structural changes on account of mounting pressure from internet trading and changes in preferences among consumers, who are increasingly spending money on experiences rather than tangible goods. This tendency is being strongly amplified by COVID-19, where sales in physical shops have decreased. It is therefore expected that rental prices will fall and yields will rise.

At national level the vacancy rate for the retail sector in Q1 2020 rose by 0.1 percentage points and now stands at 6.7%, corresponding to 839,000 sq m – the highest level in 17 years, even before the arrival of COVID-19. The figures to come for Q2 are expected to be heavily affected by the coronavirus pandemic. Many shops have had to change their strategy, many will file for bankruptcy, and we will see an increase in empty premises for which new uses will have to be found.

Even though the coronavirus pandemic has encouraged more people in Denmark to purchase take-away meals, restaurants, cafes, and other food & beverage concepts will on a short time basis not be able to absorb the increased available retail space. The development in typical Danish market towns and smaller cities around the country are considered to undergo another downward trend and more stores will be hit by death toll. Both the market rent and yields are expected to come under pressure over the next 12 months, with a slightly decreasing market rent and a gentle rise in required return.