Over the last three months we have seen the Covid-19 pandemic affect just about every part of our daily routines. It has changed the way we work, shop and most certainly play. Global listed real estate markets experienced quick and often violent corrections as investors attempted to price-in quickly changing fundamentals in the space. This has proved to be by no means an easy task as tangible transactional evidence is lackluster due to the inevitable material slowdown in leasing and investment activity. This is further complicated by the disparity in views on how long and deep the recession might be.
Real estate is heterogeneous and despite the all common “bricks-and-mortar” base, the uses and dynamics of each property type can differ dramatically. We are all aware that physical retail is in an increasingly difficult situation with most of the pre-Covid trends only accelerating. For many real estate owners in that space the next few months and years will be a true battle for survival. We can also all agree that logistics real estate is largely “eating the physical retail’s lunch” with strong and accelerating fundamentals. This sub-sector came up strong in keeping the essentials of the economy going and asset owners in that space are profiting. Residential and living (barring some difficulties in student housing) is also arguably an essential social good, and thus few governments want to risk causing a crisis in that space which makes the sub-sector resilient.
One real estate sub-sector which leaves the biggest question mark is offices. It is an area which has generated meaningful debate amongst industry experts and investors. We outline our thoughts on what the future might look like for this space. We explore several themes which have seen an interesting shift in trends which will affect offices in the future. These are mainly: urbanization, globalization, digitization and densification, mass transit and government policy.
Office detox
It is a fact that this pandemic has seriously changed the way we work (for those that still have a job). Several years ago we probably would have thought that working from home (WFH) was an excuse to catch-up on household chores as technical difficulties connecting to the workplace network were all too common. Fast forward to today, and managers are desperately appealing to their employees to take breaks during working hours to prevent burnouts as employees seem to be working longer and harder at home with the help of stable technological infrastructure and fluid communication lines.
We do not believe that offices are dead and that we are all going to work from home every day. However, we are convinced that flexible working will spread over to many industries that traditionally wouldn’t have given it a chance. This means that there will undoubtedly be some obsolete office stock, often in suburban clusters or outdated in age/design in central clusters. These buildings will experience an increase in structural vacancy, especially if they are in secondary locations to begin with.
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