The commercial real estate market is very different now to how it has been over the last 25 years - which is a welcome relief for so many property investors.
Largely spurred by the pandemic, a wealth of new opportunities and challenges are currently shaping the property market. These include financial implications on occupiers, permanent adjustments to consumer behaviour and legislation changes that make it easier to profit from property (more on this here).
Moreover, the commercial market is rife with opportunity thanks to new use classes and Permitted Development (PD) rights. For example, the UK Government has put in place a raft of PD rights to try to revitalise town centres.
Whilst the market is incredibly prosperous right now, the great news is that it’s expected to continue. The end of the Covid-19 pandemic is predicted to create a massive bounce back in commercial property, particularly in retail, leisure and restaurants.
So how can you leverage these commercial opportunities? In this blog, we cover the top 10 commercial property development strategies for 2022.
But first, let’s look at the importance of niching and how this should underpin every strategy…
Every sector, every location and every type of property is responding slightly differently to the pandemic and Brexit. Therefore, to be a generalist in this market, it will be really challenging to find, assess and purchase property. If you niche by location, for example, you can become incredibly knowledgeable about one area which makes it easier to find less risky and more profitable property development opportunities.
These are the four considerations for a niched approach that will help to refine your formula for success:
Research - Thoroughly research the trends in your location to truly get under the skin of what works in your investing location.
Requirements - Research what people are looking for. This includes which tenants want to locate in the area, what the requirements are for space and whether there are conversion options.
Multiple exits - Make sure that you've got multiple plans in place in case your ‘Plan A’ doesn't work.
Returns - Fundamentally, is this going to be a profitable strategy?
💡 Top tip: Commercial property is a relationship market - it’s key to properly get to know your local agents and all of the people that can support you in delivering your new strategy.
Class MA (Mercantile to Abode) is one of the most exciting changes to Permitted Development rights for decades! This new PD right allows for most properties that are registered under Use Class E to be converted to residential.
This unlocks huge potential from commercial buildings such as shops, restaurants, cafes, offices, light industrial, medical centres, creches, day nurseries, indoor sports centres and more.
Whilst this is an exciting development, there are a few limitations to be aware of:
Applies to England only - if you are looking outside of England, you will require a planning application.
Covers Class E uses - up to 1,500 sqm can be converted.
Minimum space standards apply to all PD after 6th April 2021. For example, natural light is expected for all ‘habitable rooms’.
Not available on a listed building but you can use it in a conversation area.
Commercial units must have been in Class E use for 2 years and the building needs to have been vacant for a period of 3 months prior to the application for approval. You can’t convert to HMO afterwards.
57-day prior approval period for; transport & highways, contamination, flood risk, noise from commercial areas and if the conversion ‘might affect businesses nearby’. Once granted, you have three years from the date of the prior approval to carry out the work.
No section 106 / affordable housing but the Community Infrastructure Levy (CIL) may apply - which has cheaper application fees.
Viability depends on average end values.
💡 Top tip: Elite+ from Nimbus Maps will save you hours of time as it highlights the viable Class MA opportunities in any location.
Since the changes to general permitted development rights in England, investors and developers can add new floors to existing buildings without the need for full planning approval. This applies to buildings under Class A, AA & AB where the buildings are not controlled by the residents.
Prior approval is required and there's a huge list of reports you need to send to local authorities. Like with strategy one, there are limitations to be aware of:
Applies to England only.
Airspace PD rights - Prior approval is needed for:
Transport and highway impacts of the development.
Air traffic and defence asset impacts of the development.
Contamination risks in relation to the building.
Flooding risks in relation to the building.
You also need to consider:
The external appearance of the building.
The provision of adequate natural light in all habitable rooms of the new dwelling houses.
The impact on the amenities of the existing building and neighbouring premises, including overlapping, privacy and the loss of light.
💡 Top tip: We would recommend airspace conversions for more experienced developers and for those that are well-advised by planning advisors. But, there are multiple opportunities available for new flats above existing buildings and you could do your development in phases. For example, you could use permitted development to convert the existing space and then apply for airspace (or vice versa). There are many different PD rights in England so speak to a planning advisor to get advice on the best ones to use and in which order.
Thanks to the rise in eCommerce, industrial property development now has high potential. It’s a hot sector but it doesn’t have to be in logistics or be super expensive. There’s a huge demand for small flexible spaces in most towns and cities.
It’s highly likely that there will be lots of distressed sellers at present so it's a great opportunity to get a good price. However, this has also made it a very competitive market right now.
Typically, we find that a bigger unit will have a lower rental value per square foot than if you buy large units and split them up. With the surge in prices for industrial units, the opportunity to split units could generate a strong return on the initial investment of purchasing and splitting them.
💡 Top tip: Always find out the demand and supply first. Then research the cost of splitting units and the potential income. Commercial agents can help with this.
Most employees now want the flexibility to work at least part of the week from home. But they don’t necessarily want to work in their bedrooms and dining rooms and so there’s an increase in demand for spaces where people can work locally. Of course, this will depend on the location so you would need to research popular commuter areas.
If you set this kind of operation up, you can either let it to a co-working operator who you could operate on a lease, or more likely, you can run it yourself and have it as a managed operation.
💡 Top tip: Watch the finance on this strategy. If you're doing this and running it yourself, keep in mind that banks prefer to have a commercial unit with a tenant on a lease who will pay the rent. If you don't have that, you might need to get two or three years' accounts before you can actually refinance because they'll treat it as a business refinance.
There’s an opportunity to redevelop existing commercial property into higher yielding property. For example, garages and workshops in high value residential areas could be redeveloped under permitted development into a high value commercial property, mixed use or residential.
💡 Top Tip: Elite+ from Nimbus Maps will highlight properties that meet this criteria with just one click!
Whilst this may not be one you would consider, an ‘experiential’ bounce back is happening. People want to get back out there and live again. With this in mind, beauty salons, hairdressers, chiropractors and dentists will likely remain in demand.
For retailers that are less in demand, evolution is required to survive. For example, those that opt to offer an experience such as personal shopping will seek the ‘experiential’ market and come through this.
What’s worth noting with retail is that lower rent costs and better lease terms are being offered and so we’ve seen lots of startups taking advantage of lower entry costs.
💡 Top tip: Research footfall, local population and even the local deprivation index to assess if an area is suitable - these are all available on Nimbus Maps Elite.
The effects of the pandemic on a lot of landlords haven’t fully been realised yet. The Tenant Eviction Ban ended on 25th March 2022 and so there will likely be a spike in properties available at this point if they can’t settle tenant disputes through arbitration.
💡 Top tip: When doing direct-to-vendor marketing, you can flag the tenant eviction ban ending - many landlords will be feeling some distress at this time. Now is a good opportunity to speak to distressed vendors to see how you can help them in an ethical and mutually beneficial way.
This is rarely talked about but is a large opportunity. We can’t ignore climate change as the drive for carbon-neutral, renewables and energy efficiency won’t go away.
With this in mind, due to corporate responsibilities, blue chip companies won’t move to a building unless it has renewables in it and it is carbon neutral. Some investors won’t even consider developments unless they are sustainable and this can be a massive competitive advantage for developers.
It's definitely something all landlords need to consider. By 2030, all properties have to be energy efficient rating EPC B or above or they can’t be let - unless it's listed (with some exceptions).
Another opportunity here is to flag this to potential vendors. This is not widely discussed and so it’s suspected that many people may be unaware of the impact this could have. Some vendors may want to relinquish properties that need major work to make them EPC B or above, like commercial office buildings. This is a great direct to vendor opportunity targeting distressed vendors.
💡 Top tip: Flag the EPC standards and carbon neutral requirements to vendors in your direct to vendor marketing. Look to get ahead of the curve in improving the EPC’s across your business and use this as a competitive advantage to obtain investment.
This constantly remains in the top 10 and it's one of the least known strategies.
If you want to keep your property as a commercial property, there are several ways you can improve asset management, such as:
Let a vacant property (a tenanted property is worth more than a vacant one) - and aim for a longer lease and higher rent.
Change the use on the property to create a higher value use (using Class E).
You need to aim for a valuation uplift. Unlike residential, where bricks and mortar and upgrading increase value, in commercial it's based on a multiplier of the rent. Valuations are based on better yield, better tenant/rent certainty (like a blue chip client) and longer leases, which make them less risky and more attractive deals. Income from day one and multiple exits make them attractive investments.
Fundamentally, buying the right property in the right location is key. This is why it's important to focus on your niche strategy, your research and requirements.
💡 Top tip: You can restructure leases to make properties more attractive. Opportunities exist to do this when there is:
A short lease (e.g. unexpired terms less than 5 years) - as you can apply a lease extension.
Less than ‘institutionally acceptable’ leader terms that could reduce value (to the valuers).
Break clauses.
Rent review clauses (or no rent reviews).
Other leases clauses that could be changed.
The tenant occupies the whole property but they don’t use part of it - surrender/part surrender of leases.
This could be a niche strategy - for example, targeting shops / properties with short leases - which are income producing from day one but with the potential to extend them and obtain a value uplift.
This is where a business owns a premises where they operate from and they hold that property on the balance sheet - for example a printing company. Due to covid, businesses are trying to recoup capital and some are looking to sell freehold properties and take a lease back as property management isn’t part of their business model.
💡 Top tip: You can find these opportunities on the open market and so it's easier to do direct-to-vendor marketing - but the ease of finding these deals makes it more competitive.
It's a great market to leverage investors - interest rates are low and you can usually offer investors much better rates than banks. Investors will be looking for compliance and due diligence to ensure sufficient security - so having this will help you stand out against the competition.
Whilst there's an abundance of investments out there, stick to your niche to manage risk and maximise profitability.
Savvy commercial developers are leveraging online property tools to source these opportunities and quickly qualify them. Trusted by 1000’s of property entrepreneurs, Nimbus Maps enables property investors and professionals to find the best off-market commercial opportunities and make decisions quickly and with confidence.
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