Industrial work counters crashing retail

It is now a cliché to say that the pandemic accelerated pre-existing trends. But it is hard not to repeat it time and again when describing the pace of change in the built environment. Pre-Covid and post-Covid thinking are very different in urgency. This is especially true in the commercial property sector.

Before the pandemic we knew that retail outlets had to adapt to the growing threat from internet shopping. We knew offices had to adapt to accommodate more flexible working – hot desking, more breakout rooms for discussions, a fresh approach to encourage the bright young things who have an altogether different expectation of work than those late in their careers. We knew the development and construction sector had to pay greater attention to environmental factors – zero-carbon, reduced water usage, more recycling, less plastic waste. This much we knew.

What we didn’t expect was that when the pandemic reached our shores it would hit like a tidal wave, crushing the timeframe for adjustment. It forced acceleration. It also ripped a hole in the economy limiting the resources available to fund change. And it came at an inconvenient time when prospects in commercial construction were already looking fragile. Workloads had fallen in 2018 and 2019 and were expected to fall further. Not only had the sector to adjust to meet change driven by technology, the environment and society, it also had to deal with inevitable uncertainties surrounding Brexit.

The pandemic then forced lockdowns resulting in profound changes in people’s behaviour. Access to shops was limited. Offices shut. A huge part of the economy shifted to the internet. This massive accidental experiment disrupted lives. But it proved that large amounts of what once required travel could be done from home. It worked well for some, badly for others. Importantly, though, it provided a look at how things could be done differently. We have yet to put the pandemic behind us, but the data point to permanent and significant change in how we buy and sell and how and where we work.

This raises the question of how much change – and how quickly –the sector needs to adapt to in order to meet the big swing towards more commercial activity being conducted online, be that shopping or remote working. It also raises the bigger question of how we should reconfigure the built environment to match the changes.

Sticking with what this means for the commercial sector, Chart 1 shows the jump in internet sales. Looking at those numbers it’s hard not to see a permanent shift. Despite being able to return to shops, online sales have remained well above the line of trend growth. Projecting the pre-existing trend, it seems reasonable to suggest the pandemic has brought forward growth in internet sales by between five to seven years.

Meanwhile, the data on homeworking also points to the pandemic creating permanent and significant change. It is hard to predict how much work time will shift to people’s home, but it seems reasonable to imagine the level settling above twice what it was before the pandemic.

Before the pandemic homeworking was variously judged to be roughly between 5% and 7% of the working population, having steadily increased over recent years from a low base. This ignores the roughly 8% who use their home as a base, rather than work at home.

Importantly, we need to recognise that, within today’s labour market, homeworking as a norm is potentially relevant for around a third of the workforce. For about half of jobs, such as health and care, construction, transport, manufacturing, hospitality, and more, it is not possible to be based at home. There is also a group for which working from home some of the time might be appropriate.

Chart 2 shows the level of working from home as tracked by the ONS though the pandemic. The figures are averages across each month. Working from home and working partly from home was exceptionally high during the early months of the pandemic, lower when cases eased and restrictions were lifted, rising again last year with the emergence of the Delta variant and, latterly, of Omicron.

With vaccines available, both risk and fear fell as 2021 progressed allowing the lifting of restrictions. But throughout the whole period the share of the workforce working exclusively from home has not fallen below 15% on the ONS figures. Notably many more people are splitting days between some at home and some travelling to work. Term such as hybrid or blended working have become commonplace in the management lexicon. This all suggests a significant shift overall to homeworking.

Not surprisingly, this has huge consequences for offices and the retail and hospitality sector that supports office workers. This is well recognised within the property sector, which is adjusting fast to a new world order.

It only takes a glimpse at the latest RICS survey of UK commercial property sector to grasp how profound these impacts have been on the commercial sector. The survey divides the sectors into industrial, office, and retail. Industrial has been doing well, while both retail and offices have been hit hard in recent years. The paths of these three subsectors were already diverging in response to the EU referendum. Developers were expanding warehouse capacity to support rising inventories ahead of the transition and were easing investment in retail and offices, concerned over falling demand.

When the pandemic hit and lockdown was introduced there was a need to boost distribution and warehouse capacity further, while the demand for shops and offices fell away. The pre-existing path was accelerated. But as we have moved into the later phases of the pandemic, the feeling is that these trends are now ingrained.

Moreover, the additional questions posed in the RICS survey are enlightening.  They were included to gain a deeper understanding of structural changes. They found that when asked if office space remains essential for a company to operate successfully, 66% of respondents replied ‘yes’. But 29% didn’t think so and 5% didn’t offer an opinion. Big majorities of the respondents reported greater demand for more flexible and more local workspaces, with more space being allocated to each desk. Perhaps more interesting was the 87% of respondents saying that they were seeing more repurposing of office space for other uses, with 15% saying this is occurring far more.

 

When we look at the construction data, they echo the pattern of a gently rising level of industrial activity and falling commercial activity before the pandemic – as shown in Chart 3. Moreover, they echo the exaggerated divergence as the economy seeks to get back on track after the pandemic.

This pattern is amplified in the Barbour ABI data for the value of contracts awarded and the value of projects seeking planning approval. Its Snap Analysis for January, which looks back at 2021, shows the understandable fall in the value of contracts let in 2020 in both commercial and industrial. But the bounceback is far stronger in the industrial sector. The relative strength measure used by Barbour ABI to indicate how the latest figures compare with recent history puts industrial in 2021 at 100 compared with commercial and retail at 58.

Planning application figures produced by Barbour ABI, which are highly related to confidence in a sector, show a dip in commercial and retail of 8% in 2021 adding to a 25% drop in 2020 in the value of projects seeking planning approval. The industrial sector meanwhile saw an increase of 23% in 2021 following a rise of 54% in 2020.

This suggests a continuation of the trend that sees pallid growth in office construction activity, even more sickly activity in the retail sector, but with far more buoyant workloads in the industrial buildings sector.

That certainly fits with the latest Construction Products Association forecast. It suggests that construction activity in offices and retail will fail to recover to 2019 levels even by 2023. Meanwhile, the industrial sector driven by warehouse building looks set to continue to boom.

This points to a clear break from the past in the commercial market. While this is not good news for those specialising in office or retail building, it is not a cause for despair.

The message within the commercial property sector is that there has been, certainly in the offices market, a flight to quality. That may mean less spent on bricks, blocks, steel, glass, and timber. But it also may well mean more invested in design. And, as time moves on, the lower quality office and retail space that becomes redundant will need to be repurposed – an opportunity for innovate ways to use defunct offices and retail in a way that is more compatible with a world increasingly looking to conduct commerce online.

It's long been a cliché to suggest that change is good. But for construction that often holds true, certainly where construction facilitates the change.