For decades, operational real estate markets have been dictated by the opposing fortunes of the underlying business versus the real estate, with investors tending to focus on one or the other. The need to resolve this increasing tension has now been brought into sharp focus, as it has become obvious that drastic and immediate action is required for the survival of many businesses.

In March many of our clients’ hospitality businesses shut and healthcare assets were either requisitioned to support the NHS Covid response, or operating under extreme shielding measures. Although sectors are now opening up, many are operating under such restrictions that any kind of return to normality remains a faraway dream.

With this background Operational Real Estate occupiers and investors have reset old thinking. Three common themes for change have emerged:

  • Accelerating innovation – whether that has been restaurants moving to dark kitchens (offering delivery only), pubs building customer apps or hotels overhauling brand standards, there has been massive innovation virtually overnight, adjustments which normally would take years. The challenge is how to sustain this as we return to new normal and how innovation gets funded in the long term.
  • Working in partnership – recent challenges have been so big that industries have had to work together. From landlords helping tenants with supply chain issues to get buildings adapted and equipment installed, to the real estate industry coming together to enable the NHS to mobilise its COVID response, there has been a realisation that that a relationship between owner and operator can go beyond rent and service charge. Each has complementary skills that can support and enhance the performance of the other.
  • Dealing with distress – in our old-world, distress was dealt with on rails from rent demand through to repossession. In the middle was a stand-off with many permutations focused on the ability to sustain rental payments from the existing occupier or an alternative tenant. The Government standstill on repossession has forced a wider dialogue and a subtle but far reaching evolution of the CVA process. In recent processes courts have insisted on a landlords break option for affected assets. This has meant that landlords, can, if they wish, step into operational businesses if they think they or an operating partner can provide better returns than the existing tenant

There are real signs that these themes will radically change the relationship between real estate owner and operator, to the point where they will no longer be viewed as separate and conflicting. A few crucial steps have already been taken:

  • Consequences of evolving CVAs– Landlords are now totally aware that there are so many more options than an indexed lease, which are rapidly looking less than optimal for a hospitality business. The need for a deep operational understanding has never been more important to drive real estate returns  
  • Recapitalising businesses – Virtually every business in the hospitality sector has been forced to radically change its capital structure to ensure it has liquidity through to the end of 2021. Real estate capital and operational expertise will have to come together to access the opportunities by creating robust partnership structures. 
  • Access to innovation – Recent upheaval has shown asset owners that access to the consumer does not require the huge infrastructure that comes with big brands. Innovation comes from nibble entrepreneurial teams closely connected to their markets. Customer service delivery has become more important to every real estate owner and this has moved on from something that gets written by the marketing team to a way for asset owners and business operators to work together to drive performance

In response to the challenges raised by Covid and the need for a new approach to operational real estate, CBRE has launched OpReview – a service which supports a holistic understanding of the businesses and property in which our clients invest – and we have already reviewed £2.5billion of assets. Operational real estate investment has crossed the Rubicon and there is no going back. Investors and operators who embrace the new world will access the most exciting opportunities and returns, whilst those who fall back into the one size fits all approach, will find themselves tied to structures that are going to be increasingly less able to compete with more flexible and integrated competitors.