The commercial real estate scene has been through a torrid time in recent years. As the Legal 500 notes, this has especially affected the retail sector: “The traditional brick-and-mortar retail scene,” it says, “has undergone a seismic shift as once-thriving high streets now face the crisis of survival.”
Retail corporate occupiers and companies and organisations leasing or owning spaces on these streets have been at the epicentre of this transformation.
However, across the wider landscape – and after a remarkably gruelling period in the post-Covid road to recovery – the sector has recently witnessed encouraging signs of success.
Research published by Knight Frank earlier this year showed that prime city centre office rents in Edinburgh are rising at their fastest rate in nearly a decade and investment in the Glasgow commercial property market was swiftly continuing its recovery from the steep ascent in interest rates between 2022 and 2023.
Aberdeen, meanwhile, saw its highest level of commercial property investment in the six months between January and June since 2018.
There is, then, room for optimism but not for complacency as the sector faces ever rising environmental, social and governance (ESG) demands and increasingly stringent requirements surrounding sustainability – plus continuing cost challenges.
Indeed, some legal firms report a remarkable degree of resilience in the face of adversity. Anne McGregor, who heads the commercial real estate department at Anderson Strathern, has more than 30 years’ experience in commercial property transactions, acting for clients who range from multinational companies to local businesses including Braehead Shopping Centre, Royal Sun Alliance PLC; BMO Real Estate, Dandara and HALO.
“When the pandemic hit, everyone was obviously very worried as to what would happen, and we of course were concerned as well,” she says. “But in fact, our commercial real estate business was incredibly busy throughout that entire period. People were having to make all sorts of alternative arrangements – and there were some very interesting projects that happened by necessity.”
There were unusual developments such as cinemas being repurposed as courts. “However, the past two years have been record-breaking ones in terms of our revenue so we’re keeping ourselves very active, and our clients are being similarly positive.”
On the investment outlook, McGregor says UK funds not based in Scotland have had a programme of disposal of properties which are not Grade A, looking at maximising liquidity in the funds.
Johane Murray (left) of Brodies is seeing “increasing investor confidence” at the prime end of the market.
“But interestingly, these were sold fairly quickly to other funds who were inward investors but perhaps operating in a slightly different market and who were looking at how they could buy these properties and then work and add value to the asset.”
Carol Nisbet is a partner in the real estate group and managing office partner at CMS in Aberdeen and advises a range of clients including Knight Frank Investment Management, CBRE Global Investors, Cordatus and Alpha Real Capital.
She concurs with the “flight to quality” theme, saying that office occupiers are looking for smaller offices but better (Grade A) quality with enhanced amenities, location and environmental performance.
Requirements, she adds, are being influenced by the new hybrid working norms with many smaller occupiers showing a preference for “plug and play”.
“Investment activity had suffered from interest rate rises with many larger funds selling off parts of their portfolios, and buyers included overseas equity, high net-worth individuals and smaller property companies,” she says.
Currently, buoyant sectors include logistics, student accommodation, high-yielding industrial properties and energy.
“We’re seeing clients having a much greater focus on environmental and sustainability credentials as ESG policies become more embedded in their businesses,” she says.
A major consideration for developers in 2025 will be building safety, says Karen Manning, a partner in the construction and projects team at Burness Paull.
“In particular, the progress of the Scottish Government’s cladding remediation programme, which emerged in the wake of the Grenfell Tower fire. Scotland has an overlapping but distinct building safety regime to England due to separate building regulations and devolved legislation.”
It is estimated there are approximately 5,500 high-rise buildings in Scotland that are covered in flammable cladding, affecting around 25,000 residents.
“During 2024, there was considerable progress on building safety legislation, especially the passing of the Housing (Cladding Remediation) (Scotland) Act 2024, but many of the implications for contractors and developers – such as publication of technical standards, progress of the ‘developer remediation contract’, and further consultations and secondary legislation – will emerge in 2025,” she says.
Johane Murray heads the real estate practice at Brodies LLP and is the lead partner on many high-profile investment and development deals in the delivery of major projects across all sectors in Scotland, with a client base that includes various UK and US private equity firms and European real estate investment firms, in addition to many UK-based developers and investors.
She is similarly upbeat about a climate of recovery, again particularly at the prime end of the market. “There are several reasons for that, such as increasing investor confidence, the reduction in interest rates and the greater availability of debt.
“One investor client we work with is looking at prime office in Glasgow – and again it’s the flight to quality with requirements regarding ESG credits, location, tenant profile and so on but he has had three banks bidding to give him debt and that hasn’t happened for absolutely ages,” she adds.
“It’s this kind of narrative which is helping improve the general sentiment and we are definitely seeing offices being traded.”
The role of the lawyer is, in the world of new technology, a continually evolving one and that includes it moving from a traditional focus on transaction execution and compliance towards a more strategic and advisory role – one increasingly involved in deal structuring, risk management, and helping clients navigate complex regulatory environments, ESG and sustainable development standards.
“One of the things we’ve always prided ourselves on is being more than just advisers to our clients,” says Murray. “To be a good commercial property lawyer you need to be able to talk to absolutely every opportunity and understand the principles of investment.
“Every developer lawyer in our practice needs to understand how a development appraisal works – it’s not just about getting the title, the lease, and reporting to your client – you must understand the financial fundamentals of what the client is doing.
“That’s something that we really push our lawyers to get to grips with. Real estate is such a people business; it’s beyond black letter law and to be a true leader in your market you need to be good at that but also to be out there speaking to the clients.”
Carol Nisbet agrees, saying: “As lawyers we are increasingly involved from the early stages of transactions – being drafted in at heads-of-terms stage. We often work as an extension of our clients’ in-house legal teams and in collaboration with the wider project team such as architects, surveyors and project managers.”
Carol Nisbet (left) of CMS says clients have a greater focus on environmental and sustainability credentials.
She also underlines the growing demand for sustainability credentials. “The younger generation is looking for a very different workplace and sustainability is a huge driver for occupiers, meaning that developers are looking hard at hitting their corporate ESG objectives – leading to buildings that are geared to events, collaboration and in general a more attractive office space.”
Artificial intelligence is of course being touted as the way forward for many business sectors but like many others, the legal profession isn’t yet definitive about what the long-term tangible results will be.
“We’re being told that AI is going to be revolutionary, and there are lots of products being marketed to legal firms just now,” says Anne McGregor. “While I can see how those products can work – and they look as if they would do a very good job – some smaller legal firms might not be able to justify the cost now.
“However, it will inevitably speed things up. It’s something that every business is looking at which is reflected by the Law Society of Scotland publishing an excellent paper on the impact of AI on the legal profession.”
Why prevention is better than a day in court
The property industry is rife with conflict, so settling disagreements quickly and equitably can be the best ways of progressing with developments.
“It might seem counter intuitive, but as disputes lawyers, we want to help clients avoid disputes. Sometimes, clients have to engage in them for strategic reasons, and we can help mitigate the impact of a dispute,” said Joanna Fulton, head of dispute resolution at Burness Paull.
“But most of the time, clients don’t want to be in the position of reacting to something that is unexpected, and what we are hearing is that businesses would rather invest in trying to avoid the risk.
“Very often, we become involved in a situation, a dispute, or a crisis at a stage where a client is reacting, not planning for risk. Much as disputes lawyers love dealing with a crisis, it’s an uncomfortable experience for our clients.”
She says that the value lawyers can add as external advisers is working with clients on planning and putting preventative measures in place that help them navigate the risks faced by their organisation.
“One risk that is very much on our radar is climate change litigation. Typically climate change litigation is brought by groups of affected individuals or campaigners. In Scotland, there is a relatively new regime designed to make it easier and more cost-effective for groups of affected individuals to get together and seek compensation for alleged wrongdoing.”
Several sectors are at risk of a group action in Scotland, including the energy industry, given Scotland’s role as a global energy hub, as well as financial services and other consumer-facing businesses.
“Whether by virtue of a registered office, operational or manufacturing presence, or having Scottish customers, these all enable a group claim in Scotland.”