Dot Thought : Real Estate Sector in a post Covid-19 World.
By Luke Dixon
One’s first reaction during and even following the Covid-19 lockdown may be that every real estate sector is likely to be impacted, some very heavily. But governments around the world acted swiftly to enact policies to protect residential and commercial tenants from the negative effects of lockdown and social distancing measures. The temporary effects of eviction moratoriums, rent holidays, and mortgage relief have of course been positive for occupiers, but they mask the reality of unpaid rents, increased (and longer) void periods, foreclosures, evictions, and insolvencies that will emerge once these measures roll off. Tough times lie ahead. But (maybe) not for everyone, and not every sector will suffer the same impact.
In the early days of lockdown, research by McKinsey & Company revealed that the hardest hit real estate sectors were those with the highest human density1. Healthcare, lodging, shopping malls and student housing all sold off considerably. In contrast, data centres and industrial facilities were less impacted. But as time has passed and as we emerge from lockdown the landscape and expectations for real estate have changed.
Commercial Real Estate
According to Jones Laing Lasalle, emerging growth opportunities exist in the digital economy, online entertainment, healthcare and real estate technology2. We explore some these areas and broad real estate sectors in more detail below.
Retail and Industrial
The e-commerce trend has been in place for two decades, resulting in the gradual decline of traditional retail as more and more shoppers make their purchases online. Out of necessity, Covid has made even more people shop online, having everything from food and medicine to home office and school supplies delivered to their doors. Businesses that previously had little online presence or lacked a delivery service have had to adapt to serve their customers and stay relevant. At the expense of traditional retail, online stores with the ability to deliver swiftly are thriving.
The need to deliver online purchases quickly has created a boom in logistics assets. To shorten delivery times online retailers have been buying or leasing logistical assets ranging from large out-of-town warehouses to local, “last mile”, delivery depots. Covid will only accelerate this established trend that favours logistics at the expense of traditional retail space.
E-commerce and cloud computing have changed the way many traditional businesses operate and impacted the type of real estate they require to run their businesses. Data centres are purpose-built facilities that house huge arrays of computer servers and telecommunications equipment supporting a wide range of businesses. Whilst these have been a popular investment for institutional real estate investors for some time the need for these facilities is only likely to grow.
Despite the early concerns highlighted by the McKinsey & Company report, healthcare may be among the few sectors to benefit from Covid-19. Different countries and regions within countries have shown varying capabilities in dealing with the pandemic. According to research by Colliers, this may result in increased funding from state and local governments for healthcare staffing, research, facilities, and equipment3. The critical nature of healthcare has been brought into sharp relief so it’s reasonable to expect greater investment from government and the private sector to create and maintain a high standard of healthcare provision.
Like traditional retail, the hospitality sector has been heavily impacted by Covid protection measures imposed by governments. Lockdown forced the closure of virtually every restaurant, pub, café, hotel, and theme park in the world, throwing millions of people out of work or onto furlough schemes almost overnight. Tourism has been similarly impacted, with some airports and entire airlines being put in mothballs since lockdowns began. Even as lockdown measures are eased, and people slowly return to restaurants and pubs or seek to fly again, social distancing measures will reduce the number of customers and therefore revenue and profit (if there is any).
But with countries imposing a wide and confusing variety of international travel restrictions and with families going stir crazy at home following a long period of isolation, home working and home schooling, domestic tourism may be a bright spot as social distancing and regional travel restrictions are eased. Local and regional attractions and lodging (hotels, B&Bs, glamping and even camping) may be the first to recover as individuals and families seek an escape from their homes over the summer.
With office workers forced to work from home for 3 months many have discovered that the work-life balance benefits of homeworking can be achieved without sacrificing productivity and teamwork. Research from Cushman & Wakefield, one of the world’s largest commercial real estate services firms, suggests that the modern office workplace will adapt to the new realities of social distancing and employees’ desire for remote working, with little or no impact on companies’ need for office floor space4. However, the way office space is used will change. The modern, post-covid, workplace will devote more space to developing and fostering corporate culture, forming bonds within and between teams, and to education and training, alongside client meeting areas.
Residential Real Estate
Once government measures such as eviction moratoriums and mortgage relief run off there will be a shakeout in residential property. Which sectors are most exposed to economic slowdown and rising unemployment? Which housing trends may reverse, and which ones are here to stay?
Widely considered the most defensive residential property sector, multifamily may be the least impacted by Covid-19. As the economy shrinks and job losses mount more and more families may be forced to downsize from their existing homes and turn to rental apartments, providing a boost to demand and putting upward pressure on rents. Social and affordable housing, a sub-sector of multifamily, is the residential housing backstop – when things get really tough economically, families that can no longer afford commercial rents turn to the state for help. Institutional investors have been allocating capital to social and affordable housing for several years, motivated by both the steady income yields as well as the societal benefit of creating quality social and affordable housing in new communities – expect this trend to continue.
Densely populated shared living has been another trend in property for the past several years but is another sub-sector that might struggle under social distancing guidelines. With most tenants on short-term leases the impact could be immediate as tenants move out and return to live with family. However, Vonder Europe5, one of Europe’s leading co-living providers, has said that demand is strong and being driven by the loneliness felt by individuals during lockdown. The communal aspect of co-living arrangements can break the isolation of living alone.
That said, Vonder’s model of co-living is not the standard; Vonder offers self-contained apartments rather than merely ensuite-bedrooms, which is the norm in this sub-sector. Having your own cooking and living space in a Vonder property places you at less risk than if you must share cooking and living spaces with other tenants. So, whilst Vonder may see an increase in demand there is less certainty in the more traditional variations of the co-living sub-sector.
Student accommodation has been an extremely popular sector with institutional investors for several years due to its historically defensive, counter-cyclical characteristics and steady income. Expectations a few months ago were that student accommodation would suffer badly under Covid protection measures as campuses closed and learning shifted online. This culminated in an article in The Guardian newspaper on 19 May that said that Cambridge University was planning to shift all lectures online for the 2020-21 academic year6.
However, according to a recent article in IPE Real Assets research by Bonard, a student housing research firm, paints a better outlook for the sector; bookings for student accommodation are running at about the same level as last year, and in some cases are better7. Student housing is viewed as a better option for social distancing than sharing a flat or a house with other students. With student demand surprising to the upside and short-term leases providing for annual rental resets, student accommodation could see a rise in demand as investors shift out of beleaguered retail and hotel assets in search of higher and steadier yields.
Covid-19 and the measures taken to control its spread have taken a heavy toll on individuals and businesses, and the property they occupy is not immune to those affects. However, it must be remembered that property is a long-term investment, one that has adapted well to the changing needs of commerce and communities over the decades. Bricks and mortar may have permanence, but its use can be changed so the property remains relevant and in demand.
The emerging reality appears to be that Covid has merely accelerated trends that were established a decade ago and created attractive buying opportunities for well capitalised investors. Opportunistic property funds are best placed to take advantage of the opportunities to acquire under-developed properties from stressed sellers and to convert them to the new spaces required in a post-Covid world.
- McKinsey & Company (April 2020). Commercial real estate must do more than merely adapt to coronavirus.
- Jones Laing Lasalle (20 April 2020). COVID-19: Global Real Estate Implications, Paper II.
- Newbold, Stephen (2 April 2020). COVID-19: Implications for U.S. Healthcare Real Estate. Colliers International
- Cushman & Wakefield (23 June 2020). The Future of Workplace.
- Lane, Matthew (3 July 2020). Will Covid-19 actually increase the demand for co-living?PropertyInvestorToday. https://www.propertyinvestortoday.co.uk/breaking-news/2020/7/will-covid-19-actually-increase-the-demand-for-co-living
- The Guardian (19 May 2020). Cambridge University moves all lectures online until summer 2021.
- Musah Baba, Razak (July/August 2020). Student housing: Staying the course. IPE Real Assets
- Calanog, Victor (14 May 2020). Multifamily and Commercial Real Estate Performance Metrics. Moody’s Analytics
- Said Business School, Oxford University (4 June 2020). Post-COVID-19 scenarios for the real estate industry. https://www.sbs.ox.ac.uk/oxford-answers/post-covid-19-scenarios-real-estate-industry