You Asked Us: What did we learn in Q3 2020 about the commercial property market in Europe and North

Which markets have displayed resilience through the traumas of the year so far? Will the crisis see rents tied to tenant cashflows moving forward? And are there any reasons for cheer in the retail sector? Our expert panellists answer your questions.

Our expert panel:

• Cate Agnew, Executive Director, Natixis
• Susanne Eickermann-Riepe, Chair, RICS Germany Advisory Board

In your opinion, which markets in Europe are most likely to remain resilient in the face of prevailing macro challenges? Which are more vulnerable?

Susanne Eickermann-Riepe: There's a ton of capital floating around out there and most of the market participants in Europe believe that equity for real estate is unlikely to recede dramatically. Countries most likely to see strong inflows are those in which governments have handled the crisis very well, have taken the right measures, and have protected the value of the economy. This has an obvious impact on the attractiveness of markets. It looks like we will see further inflows in the European markets: Germany is known as a safe haven, as is France, but both are expensive. Some southern European countries, especially those whose economies are heavily reliant on tourism, have been hit harder by the pandemic. It will take some time for them to get back on to investors’ priority lists.

Any there any signs of a pick-up in cross border investment flows? If so, where are they being directed?

Cate Agnew: I can only speak for the US, but at time of writing, there’s no sign of any pick-up in inflows here.

Retail is generally viewed negatively – are there areas of the sector which still have some appeal?

CA: From a retail perspective, the grocery-anchored space in the US remains the “darling” of the market. That was the phrase used recently by Melina Cordero, Managing Director of CBRE’s retail capital markets business for the Americas. Her explanation is that e-commerce is yet to significantly penetrate the groceries market.

According to Commercial Property Executive, average grocer sales range from $570 to $712 per square foot – comfortably exceeding the national average.

SE-R: The shift to online shopping is accelerating the trends in retail real estate. While the local food retail sector is booming, lots of investors are concerned about non-food retail; this problem will worsen over the next few years. Cities will need to take a broader view on this; how can they enhance future shopping experiences? The EU Renovation Wave initiative should work to create new areas of experience, more mixed and more resilient.

Do you expect landlords to increasingly take note of tenant cashflows when setting rents?

SE-R: Tenant solvency has always been an important factor in risk analyses when letting. Landlords will certainly take a closer look at the economic environment in which potential tenants operate. Hopefully they will find enough interested parties willing and able pay the required rent, but the gap in expectations between landlords and tenants is widening. It is not yet clear who is going to prevail in that tug-of-war. Discussions will intensify when leases expire and new negotiations are due. If buildings do not have the quality, flexibility and connectivity, or the ESG standard that tenants increasingly seek, it will have an impact.

CA: From a retail perspective, yes. Tenants have already set their maximum payable rent at a percentage of store sales. Now landlords are in the position of needing to partner with tenants in setting rents Levels will be decided according to affordability for tenants, rather than what landlords necessarily believe to be acceptable.