Crystal Mortgages managing director Jo Breedon explains how the ‘new normal’ post-Covid has impacted the commercial property world.

Since the recovery from the global market crash of 2007-8 we’ve enjoyed many years of the UK economy being relatively stable and we’ve certainly all benefitted from the low interest rates and low inflation environments.

But that benign world all changed, firstly with the outcome of Covid. For most of us, the daily commute and working day spent in the office no longer exists.

Many of us have shifted to hybrid working to enhance our work like balance. This view was seen in the recent Mortgage Industry Mental Health Charter (MIMHC) Annual Report in which 50% of mortgage brokers polled said that the change in their working arrangements had improved their mental health in the last year.

All of which has had a dramatic knock on effect for this sector of the commercial property market. Companies have shelved or torn up plans to move to bigger premises simply because the space is no longer required. Some have relocated entirely to a different part of the country and some have had to reinvent and upgrade their office spaces to tempt existing workers back to the office or attract new talent in.

Another by-product of Covid was the acceleration of e-commerce in the UK. We shifted seamlessly from a trip to the shops to exercising our fingers to get our retail fix – and many of us haven’t gone back. According to ONS data, internet retail sales rose to 27% by May 2022 – from 20% in February 2020.

Here again Covid has had a permanent impact on the commercial market. Warehousing, distribution and logistics spaces are booming while traditional retail spaces in town centres are emptying at an alarming rate. This town is coming like a ghost town.

We are seeing commercial investors becoming inventive by mixing up spaces. Retail becomes residential, offices morphing into residential with many schemes adding flexible workspaces and leisure facilities into the mix.

Environmental concerns are also playing their part in influencing both the design, build and conversion of commercial spaces given the forthcoming EPC regulations where tenanted buildings must now have a certification of Grade E rising to Grade B by 2030.

Looking further ahead, is the net zero deadline of 2050. In the meantime, a company’s sustainable credentials are becoming increasingly important, emphasising broader societal trends and also acting as a recruitment hook.

While we all thought that the commercial and wider mortgage markets had settled since the ravages of the ‘mini budget’ of September 2022, the financial markets response to the April inflation data show that simply isn’t the case.

Markets are clearly still jittery and will react negatively to any dataset that doesn’t meet forecasts. Inflation is on its way down but not at the pace that the BoE or the markets want to see. Energy prices are reducing and will see the average household bill drop by 17% from July. Regulators are forcing supermarkets to reduce diesel process and there is a growing media noise around ‘inflationeering’.

We are going to see a further base rate increase when the MPC meets on 22 June and maybe one more after that. If inflation doesn’t fall at a faster rate, then we may see the same reaction to April’s figures with gilts, swap rates and fixed term funding rising again.

This all impacts the commercial space in the same way it does the wider property market. We are all seeing the repercussions daily. Investors are sitting on their hands trying to second guess when interest rates will subside and time their financing accordingly. The big deals are few and far between and are taking longer to complete.

That said, while economic growth is almost non existent and companies are not investing in new commercial spaces, they are using aspects of commercial financing to support their businesses. Examples include using invoice financing to shore up their cashflow, purchasing assets such as machinery that their current profits can’t facilitate or bridging finance.

We are also increasingly seeing businesses change use of some of their premises to residential space to support cashflow for the longer term.  Is it in these types of scenarios that specialist commercial finance comes into its own

While the residential property market is slow and not rebounding as many commentators expected, now is the ideal time for brokers to look to diversify their own business models and consider how they can support their local businesses. It is likely that many small businesses are simply not aware of the financing options they could access, and mortgage professionals are ideally placed to support them.

In our 2023 predictions survey, 70% of brokers said they planned to diversify in 2023, with 17% looking to expand into commercial finance.

Nothing ever stands still in property finance and neither should mortgage brokers. There’s a business local to you that needs your help to survive now, and your advice to expand in the future.