Industry Watch – Real Estate – How Real Estate has Been Impacted by COVID and What it Might Mean for the future of the Industry

There is an interesting dynamic playing out in the Real Estate Market at the moment. 

In the midst of the COVID-19 pandemic, the effects of mass quarantines around the world has created a great deal of uncertainty.  The decision by many of the World’s largest Companies to permanently work from home, has left Landlords holding their breath as they wait to see what the market does.

A Decision to Make

As we move into the fourth quarter of 2020, Companies have a decision to make.

Do we increase our Real Estate footprint to accommodate social distancing in the workplace?  Or, do we reduce our Real Estate footprint and adopt a remote workplace?

Making this decision isn’t easy as there are far too many factors to consider. 

What may be right for one organization may simply not work for another.

The Market Is Waiting

Regardless, this uncertainty has the Real Estate market on pins and needles.

In an article published in Bloomberg on August 26th we find US Real Estate transactions down 69% from 2019.  That is a $14 Billion loss across all sectors.  In the same period in Asia, we are seeing signs of recovery from the 50% slump it experienced in the first quarter.  According to an August 2020 article from Elizabeth Utley in Mintiandi.com, Real Estate in China is up 95% compared to the same period in 2019.  Experts are viewing the improvement in China as a sign that other major Asia markets such as Japan and South Korea could see similar gains as those countries begin to lift their quarantines.

Similarly in EMEA Real Estate investment volumes fell by 38% with major declines in the U.K. (-56%), France (-57% and Sweden (-45%).  According to an August 3rd article from Michael Gerrity in World Property Record, global commercial Property investments are down 57%.

As the world waits for a cure that is likely to be a year away, Companies must go on.  How they go forward will depend entirely on the Company’s culture and whether their management teams can adjust to a remote workforce. 

This fundamental question will have a major impact on the fate of commercial real estate. 

When Will Real Estate Recover

So with all this lost volume one might think it’s a great time to invest in real estate.  Unfortunately, the uncertainty surrounding COVID-19 and the ambiguity about when a vaccine will be ready has caused Landlords to turtle up and wait. 

Landlords are offering little to no movement on the cost of commercial properties.  They are holding out in anticipation of things returning to normal and so at the moment, rates are not getting better.

This kind of hesitation cannot last forever and businesses cannot wait for the vaccine to make it’s way to the market before making a decision.

Depending on who’s point of view you follow, the market is poised for a boon or a bust.

According to Bob Fisch working from home creates dysfunctional and un-competitive company cultures while Kathryn Mayer says it’s the right thing to do.

CBRE expects that the market will experience a global rebound before year end, but Bloomberg has quoted Jim Costello Senior Vice President at Real Capital as saying “The worst is yet to come”.

Reading The Tea Leaves

I think we will see a mix of deep recession-like drops in demand for office space, coupled with an increase in industrial properties. 

This dynamic will be the result of corporate administrative roles opting to continue to work from home while manufacturing environments will seek to expand on-shore capacity.

On the residential front, multi-family units (already experiencing a surplus before COVID) will fall further, while sub-urban developments will experience a boon as remote working supports employee mobility and people move out of crowded cities.

Geographically markets will also be mixed with the US and EMEA experiencing a mixed recovery, but in Asia where the government has subsidized businesses through the pandemic expect a major drop off in retail as government support comes to an end.

Closing

So with all these dynamics in play, the next few months will be interesting. 

Businesses need to step up and decide whether they can operate remotely or need to add space to accommodate a socially distant workforce.  Landlords will need to adapt to the new way of working and accept that the market has evolved.

What do you think?  Will the market rebound?  Or will we become a WFH society?  Tell me your stories.

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