The dynamics in commercial property markets in the face of the pandemic

Kigali – The current coronavirus pandemic has sent the global economy into a deep recession, the worst since the Great Depression that took place in the 1930s. This has left many economies struggling to emerge out of the recession.

In Rwanda alone, economic growth that averaged 7.4% for last five years dropped to 3.5% in the first quarter of 2020 while the global economic growth is projected at -4.9% in 2020 from 2.9% recorded in 2020 as per the International Monetary Fund’s projections in June 2020 .

 

But unlike other most economic shocks, the coronavirus pandemic forced many countries to deploy containment measures in order mitigate its impact which changed the normal way of living and working with the most obvious being working from home, social distancing and stay at home orders.

 

These behavioral changes have in turn put enormous pressure on the commercial real estate markets placing the industry at the epicenter of the crisis. What is still unknown is how long we are to live with the virus for and whether these changes are here short term or to stay.

 

One of the major challenges the commercial real estate sector faced in the previous years was the wide mismatch between the supply and demand of commercial space in the market.

The supply of office space for example outstripped demand with the sector experiencing a slow take up of space while the retail sector showed potential and yet limited market saturation with the industry being dominated by the local companies (informal sector).

The commercial property market had however shown slight but steady growth from the second half of 2017 through 2019. According to Rwanda National Institute of statistics, growth in real estate activities had stretched to 10% by the second Quarter of 2019, but dropped to -0.1% in the first Quarter of 2020. Increased growth in the period was sparked by factors such as the rise in demand across the occupier market and the increase in both domestic and foreign investments.

The increase in demand was also driven by the enforcement of government policies and regulations such as the directive to all tenants operating from residential houses to relocate to commercial buildings in early 2017, which sought to achieve better market performance of the sector. Has all this been flashed down a drain by the pandemic?

The impact of the pandemic has been felt across the commercial real estate market and this has left investors wondering about the near and long-term outlook of the sector. The most common changes in behavior within the industry have been working from home and social distancing which have forced most companies to shrink their overall footprints and caused reductions in headcount in the office sector in particular.

The pandemic has also destroyed most the small businesses that were already struggling to keep afloat pre Covid-19 pushing them to vacate their rented spaces in malls and many shopping centers. This has in turn caused higher vacancy rates and a major fallout in the retail segments.

The hotel industry was the most hit during the pandemic following the complete halt to the travel industry. Even with travel bans being lifted across the globe, recovery is expected to be slow with people still reluctant to travel and broader adoption of virtual meetings and conferences.

With scientists racing to develop a working vaccine, it is still unknown what the new normal will be like post the pandemic. The severe shocks suffered from the pandemic combined with the uncertainties in the future of the commercial property market have sent property developers into fear and panic anticipating difficulties in repaying their loans.

The anticipated severity of the pandemic impact remains unknown and the future of the different property types and markets uncertain albeit the projected 5.4% economic growth recovery outlook in 2021 as per the National Bank of Rwanda Monetary Policy and Financial Stability Statement of 28 August, 2020.

The views expressed in this article are of the author.

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