You're reading: Commercial real estate players confront new workplace realities

The novel coronavirus has changed the way people interact with physical space: less contact, more distance. And now many more people are working from home.

For the commercial real estate market, this new normal — in which only 32% of Ukrainians are working in office settings like they did before the pandemic — raises many questions. As vacancies grow, rental rates are set to decline. And tenants are reconsidering how best to use physical workplaces.

In these conditions of uncertainty, some industry players predict that commercial real estate will recover from the crisis, albeit slightly changed. Others are simply panicking.

Whatever happens, the COVID‑19 quarantine will mean a lot of change for commercial real estate.

Worst crisis

With 25 years of experience in real estate business, Natalia Naumets, director at the Real Estate Advisory Center, has lived through four major crises in Ukraine since the 1990s. She is sure that the current crisis in commercial real estate is the worst one.

However, in her opinion, the coronavirus pandemic wasn’t the major reason behind it. Rather, the virus was just the catalyst for the crisis.

“In Ukraine, the crisis was expected. It was in the air,” Naumets said. She believes the pandemic overlaps with the crisis of a “new government that does not know what to do with the country in principle.”

As a result of the global lockdown, retailers will have to reduce the number of their stores, thereby increasing vacancies in Ukrainian shopping malls, according to Olga Solovei, CEO at URE Club, a real estate business association.

“Even after the opening of stores, shopping centers will experience a strong decrease in attendance, which will directly reflect in the rental payments,” said Solovei. “In the best-case scenario, shopping centers will lose up to 50% of rental payments.”

In order to have at least some income, commercial real estate, including shopping malls, will be forced to cut rental payments by 30%, according to Naumets. There is also a high chance that the opening of new shopping centers this year will be postponed.

Experts are no less skeptical when giving forecasts on the future of hotels and restaurants. Starting in January, the flow of tourists and business trips declined fast and the only way to restart it is to open the borders and to launch flights. But when and how it will happen is still a big question. The government’s latest target date is June 15, but everything depends on international travel on the policies of other nations.

Solovei estimates that business activity won’t be the same in Ukraine for at least a year. “Not all hotels can survive this entire period, and we will hear about a series of closures and bankruptcies.”

Naumets is sure that the worst situation will be with high-end restaurants, which often serve foreigners. They will be closed for at least a year and all their equipment will be kept somewhere in warehouses, she said.

Empty chairs inside one of Kyiv cafes on May 20, 2020. Experts say that, among businesses, high-end restaurants are most affected by the coronavirus lockdown, as they often serve foreigners. (Oleg Petrasiuk)

The only sector of the commercial real estate market that will do well is warehouses. Online trade in Ukraine has skyrocketed in the past two months. Medicines, food and other staples are still in demand.

The construction of new warehouses has not stopped even during the quarantine. For example, the second phase of the Amtel logistics terminal, which has a total area of 52,000 square meters in Kyiv Oblast, is expected to be open soon, according to Nataliia Sokyrko, head of Industrial and Logistics Brokerage at investment firm CBRE Ukraine.

“The real estate segment of warehouses will remain the most stable and has fairly broad development prospects due to changes in consumer habits,” said Sokyrko.

Office market

The conditions for Ukraine’s office market were favorable at the beginning of 2020: With soaring demand, insufficient supply, and increased rental rates, landlords expected to expand their office spaces, which occupy over 2 million square meters in Kyiv alone.

Now, however, developers who planned to construct new business centers have to stop and review their initial plans, because tenants will have new requirements for offices in the post-COVID world, said Volodymir Gelyuta, a managing partner of real estate consulting company UTG.

After seeing how effective remote work can be, Ukrainian firms already don’t want to pay office rents as much as they used to. According to the CBRE survey, over 40% of its respondents want to review lease agreements with landlords and 15% want their office spaces reduced.

And landlords have no choice but to agree: In the first quarter of 2020, Ukraine’s office vacancy rate rose to 10.7%, compared to 7% in 2019. As the demand drops, landlords will try to retain their clients by offering temporary discounts or other perks.

Astarta Organic Business Centre, for example, has launched a car-sharing program for its tenants and reduced rent for some retailers.

“Business center tenants are primarily our partners so we managed to strike a balance,” said Yuliia Shchaslyva, CEO of the business center.

A man walks by the Astarta Organic Business Centre in Kyiv on May 18, 2020. During the coronavirus lockdown, Astarta continues to work as usual. To protect its visitors and residents from the virus, the center has obliged them to wear medical masks, keep a safe distance from others, and to undergo temperature screenings before clocking into work.
Photo by Oleg Petrasiuk
Visitors of the Astarta Organic Business Centre in Kyiv undergo a temperature screening before entering the building on May 18, 2020. During the coronavirus pandemic, business centers have strengthened sanitary protection measures, installing dispensers with antiseptic and obliging people to wear medical masks.
Photo by Oleg Petrasiuk
A woman sits at the reception desk in the Astarta Organic Business Centre in Kyiv on May 18, 2020.
Photo by Oleg Petrasiuk
A person enters the Astarta Organic Business Centre in Kyiv on May 18, 2020. During the coronavirus pandemic, business centers have asked people to keep a safe distance from other people to prevent the spread of the virus.
Photo by Oleg Petrasiuk
A box for collecting used medical masks and gloves in the Astarta Organic Business Centre in Kyiv on May 18, 2020.
Photo by Oleg Petrasiuk
People walk by an antiseptic dispenser installed in the Astarta Organic Business Centre in Kyiv on May 18, 2020.
Photo by Oleg Petrasiuk

Innovation park Unit.City, which in normal times provides over 100 tech firms with office space, has re-negotiated the rent with each tenant. It reduced rent for some and stretched the payments for others, said Olga Motriy, who is responsible for renting space in Unit.City.

At the beginning of March 2020, the highest rental rates for Class B office properties were $23 per square meter, while premium offices rented a square meter for $30.

The current rental rate is expected to decrease within the next few months, so the office market will be more favorable for tenants than landlords, CBRE managing partner Radomyr Tsurkan said.

However, it is still too early to talk about medium and long-term consequences in rental rates, because the COVID‑19 pandemic and the current economic situation is too unpredictable, according to Alexander Nosachenko, the managing director of real estate firm Colliers International.

To build or not to build

Many developers are looking ahead with uncertainty.

Local developers promised to commission 20 new business centers in 2020. The quarantine has canceled plans for two of them — they were put off for at least a year. Restrictive measures have undermined the supply chain, including the delivery of equipment and furniture.

In all, the pace of construction in Ukraine has slowed down. In March 2020, the output of non-residential construction increased by a mere 7%, compared to a 20% increase in January this year, before the pandemic, the State Statistics Service reported.

“When a business activity is suspended for an indefinite period, you cannot predict the revenue growth as expenditures also increase,” said Andriy Ryzhykov, CEO of the real estate development company Evolution.

Force majeure situation

Since the Ukrainian government declared the quarantine a force majeure on March 17, businesses could ask to postpone rent payments during the quarantine. But many entrepreneurs were refused and still have to pay. They are struggling to survive the crisis, experts say.

“The quarantine laws and the declared state support clearly passed the real estate segment by,” said Solovei.

Naumets believes that the government adopted this law “inadequately,” as only several types of businesses were allowed to postpone rent payments because their activities were banned completely. This includes hairdressing salons and dental clinics.

But it wasn’t clearly indicated what types of businesses, in particular, could temporarily stop paying rent or get a discount. That’s why few landlords allowed their tenants to do it, and it was legal to refuse.

“I personally know one old business center, which is not in good shape, but its owners made a 90% discount for everybody,” said Naumets.

But these are exceptions. Many owners simply told businesses “to pay or to leave.” Kolo, a news agency based in the city of Poltava some 350 kilometers east of Kyiv, ended up in such a situation.

Despite the fact that Kolo had rented the space for five years, the owner did not grant any discounts for the quarantine period, its chief editor Tatiana Tsyrulnik wrote on Facebook on May 1.

The main argument of the owner was, “I was counting on this money,” she claimed. As a result, Kolo moved out and the business center raised the rent by 30% for remaining tenants.

“For 5 years, we had strongly put down roots there. I had 10 pairs of shoes there, and also furniture and equipment,” wrote Tsyrulnik. Moving to a smaller new place, however, didn’t scare her.

“The main thing is the people” to whom Kolo could continue to pay salaries, said Tsyrulnik. “To keep them you have to sacrifice something.”

The quarantine also caused a major problem for intermediaries, who would take a space in bad conditions, make renovations, buy furniture and then subrent them to other businesses.

If the space was re-rented to a beauty salon or a dental clinic, intermediaries would need to keep paying to the original owners during the quarantine, despite not having any subrenters.

“Many fell into this trap,” said Naumets.

Obtaining certificate

When a business owner and a landlord cannot come to an agreement on the rent, there is one organization that gives out special force majeure certificates: the Ukrainian Chamber of Commerce.

However, some experts are not sure that the chamber will be efficient in issuing these certificates as, structurally, it’s torn between defending the interests of businesses and its owner — the state.

“I’m sure the chamber of commerce won’t choose any adequate position and will do everything in order not to give businesses these force majeure certificates,” said Naumets. And even if a certificate is issued, the chances are very high that the decision will be overturned in Ukrainian courts in favor of owners.

“It is today’s trend,” Naumets said.

People walk past a closed Ukrainian branch of German travel company TUI Group, on May 20, 2020 in Kyiv. Ukraine imposed the nationwide quarantine on March 12 to prevent the spread of the novel coronavirus during the global pandemic. Under the quarantine rules, many businesses were forced to shut down but had to continue to pay rent. (Oleg Petrasiuk)

However, Mykhailo Nepran, vice-president of the Ukrainian Chamber of Commerce, denied any accusations of being pressured by the government.
“No one called us (from the government), insisted or gave any instructions on issuing certificates,” Nepran told the Kyiv Post. “I don’t understand where this information and such emotions come from.”

Overall, the chamber has received nearly 13,000 calls since March from different businesses in order to find out what this force majeure actually means and how to act in the current situation. Mostly, people had rental payment complaints and nearly 90% of them were peacefully resolved between owners and renters.

So far, of 2,000 certificates requested by entrepreneurs, 1,000 have already been issued, and these businesses either received discounts or were allowed to put off payments during the quarantine.

“It was a test of how civilized Ukrainian business is,” Nepran said. “Luckily, most owners and renters showed maturity and were able to agree amongst one another.”