Commercial Real Estate: Post-Coronavirus Market Outlook
The world has changed dramatically since the coronavirus outbreak, and global real estate markets have not escaped its impact. The pandemic has magnified and accelerated a number of sector trends for the longer term. Even in a post-pandemic world, it is widely accepted that many of the new practices, such as increased remote working and greater e-commerce, will continue to be observed. Here, we’ll take a look at three core commercial property sub-sectors and how they might be affected by the recent changes in how we live and work.
The pandemic meant a sudden and disastrous hit for high-street retailers in cities around the world who were forced to close down, halting their revenues, while many costs remained. This resulted in some well-known names entering administration: J. Crew, J.C. Penney, Victoria’s Secret and Debenhams, to name a few. Retail experts at KPMG previously expected the UK’s high-street retail space to shrink by 25 percent by 2025, but now see that happening up to three years earlier. Online spending could reach 50 percent of the UK total by 2025—five years earlier than previously anticipated. With the hospitality sector also facing unprecedented struggles, the empty space left on high streets and in city centers could have negative repercussions. In the U.S., there is a sad tradition of retail parks and malls being abandoned if they are not making money or cost too much to refurbish. The impact of coronavirus could also see this trend increase. The pandemic has shifted focus onto the relationship between retailers and property owners, and this needs to be urgently addressed if we are to avoid long-lasting damage to malls and high streets. This may mean repurposing the space—as has been done with some malls in the U.S., which have been converted into tech company headquarters, churches, libraries or even community spaces.
Warehouses and Logistics Centers
The rapid global shift to e-commerce caused by the pandemic has seen warehouse and logistics markets receive a timely boost. E-commerce increases demand for space because online retailers must stock a wider variety of products to match consumer demand. Amazon reported a 26 percent year-over-year increase in sales in the first month of lockdown, and we’ve seen both Chinese and overseas investors looking to increase stakes in China’s logistics property sector. In the U.S., it has taken decades for online shopping to claim a double-digit share of retail spending. The e-commerce share is now as high as 40 percent, with statewide lockdowns rapidly accelerating the shift. Consumers who realized the benefit and convenience of e-commerce during the pandemic may not be rushing back to the high street any time soon.
A gradual shift in working patterns before COVID-19 meant we were already seeing fewer and fewer companies looking for traditional long leases, opting for more flexible working space. As a result, co-working space providers have surged in recent years. Now, many commentators are heralding the success of remote working during the pandemic as the dawn of a new work-from-home revolution. This may be far-fetched, but the need for office space and the accompanying large overheads will undoubtedly be questioned by businesses that managed just fine with remote-working staff. The property industry is all about people, and apps such as Microsoft Teams, which, while incredibly useful, do not provide face-to-face contact. As things slowly creep back toward a semblance of normality, we will likely see a mix of new and old. Companies will be looking to keep some office space, but perhaps reduce the size as they allow for more remote and flexible working. Firms may look for buildings where they can better control the environment and ensure the well-being of their workforce—in some cases expanding space to allow for greater social distancing within the office. Skyscrapers in cities like New York, London and Seoul, where thousands of people pass through every day and access higher-level floors by cramming into elevators, may suffer.