Whether we have lost someone close to us – my father passed away from COVID in April, or lost our job, or are worried about our health or the future; it’s difficult to imagine that anyone reading this article has been left untouched by COVID-19. Each of us has a unique experience in dealing with the pandemic and each of us has a unique view of the future. It’s our view of the future that shapes the actions we take now; our pessimistic side will counsel caution and the optimistic side will see opportunity.
The macro impacts of COVID-19 on global Real Estate are an expression of the sum of all of the actions we take as individuals as we navigate through this new reality. There is no precedent in living memory we can look back on to guide our thinking. It’s what makes the future so difficult to predict.
So, what does the future hold for global real estate? On the residential side, a recent report by The Business Research Company predicts that the global rental market will grow by 1.6% (from $1.76 trillion to 1.79 trillion) in 2020, attributing the low growth to COVID-19. The report goes on to predict recovery and growth at 8% from 2021 to reach $2.22 trillion in 2023.
On the Commercial side, almost 40% of US adults were working from home as of April, with a similar number in Canada. The CEOs of Morgan Stanley and Goldman Sachs have said that working from home for many employees could be the new normal, so what will happen to office space as leases expire? The expectation is that the requirement for physical distancing in offices will offset the reduced need for office space as more employees work from home. What’s not clear is the extent to which these will balance.
The co-working space providers, such as WeWork have been especially hard hit as their month-to-month leasing models leave them with no income to offset the long-term leases they hold with building owners. WeWork was already floundering before the crisis – this may accelerate their demise. However, this business model provides affordability to entrepreneurs and greater flexibility than traditional rental or leasing agreements, which large companies can leverage to expand or contract as the shape of the economy unfolds over the coming years.
COVID-19 has also placed acute pressure on the traditional brick-and-mortar retail sector, which was already experiencing a paradigm shift with online retailers luring shoppers away from Main street. With a series of Chapter 11 filings by major US retailers, it’s clear that many retailers will not survive this latest challenge. To counter this shock, governments are stepping in with hardship funding and landlords are exercising flexibility in deferring rents. For retailers with physical locations, the ability to suspend operations and minimize cost outlay will be a critical factor in weathering the storm. There is also pressure on governments, globally, to balance the health risks of the virus with the economic pressure a prolonged lockdown is placing on the retail sector, which is a critical part of the economy. In some cases, it has become increasingly clear that the rush-to-reopen may provide a short-lived respite if a further large-scale lockdown is required because of a spike in cases.
Consumer confidence will be critical to drive recovery in retail. This will add further costs to the operation of stores at least until we are on the other side of the pandemic. Reductions in the number of shoppers allowed in stores will further delays recovery, however, there is an accumulation of pent-up demand that has built during the shut-down and retailers will need to figure out how to safely tap into that demand and lure shoppers back.
The shift in retail from brick-and-mortar to on-line is fueling demand in the industrial sector for warehousing capacity. With online buyers returning purchases at almost four times the rate of purchases made in-store, the space requirements on a per-foot basis are up to three times higher for e-retailers. The demand for warehouse space will likely increase as companies react to the closure of borders by developing local storage of goods coupled with local manufacturing facilities to provide essential items within their community.
We’re adaptable, we have to be, and we’re strong, an inherent robustness that takes us through these epochs. COVID, like any crisis, is precipitating a fundamental shift in every aspect of our lives from work to pleasure. The casualties of the crisis, and there will be many, will include those businesses that were unable to adapt and those that failed to re-engineer their core business models around the new norm. Businesses must become comfortable with adaptation. Businesses must structure themselves to be more robust. None of these will be easy or welcome, but they may well be essential in these unprecedented times. I expect the predictions offered by the Business Research Company will bear out. We will see an overall slowdown in growth in the sector, with Residential, Commercial, Retail and Industrial each reacting to the distinct pressures and opportunities outlined above. The crisis will have a finite life even if the ripple effects linger for years to come. At the end of the day, however, the fundamental human drivers of community and commerce will restore vitality to the Real Estate sector starting in 2021.
This article was written by Hugh Moleneux, President at Refined Data.