Real Estate Recovery:Bouncing Back After the Global Pandemic

How the Real Estate industry will bounce back from the global pandemic

As the Covid-19 pandemic continues to disrupt businesses across the world, one of the biggest debates being played out is the future of property – in the city centres and suburbs; in office space, commercial and residential.

Just what will the world of real estate look like at the end of 2021? Will cities return to normal, and office space and retail malls remain the same, or will they be changed forever?

Most legal and financial advisors in the real estate sector agree there is an element of crystal ball gazing, but likewise there are now clear signs of how things might just look in the near future.

One telling example of this new reality recently came in the form of Salesforce in the US. The company announced that all staff could work from home indefinitely – or for the foreseeable future, at least.

While this huge work-lifestyle balance will be beneficial to many Salesforce employees, real estate professionals are quick to point out that only two years ago the tech giant opened its new Salesforce Tower to much fanfare as San Francisco’s tallest building. It’s also worth noting that the company is the city’s biggest employer in the private sector. What happens to all that office space?

Over the pond in London and much of the EU, meanwhile, similar predictions of empty office space and the near extinction of the city’s retail outlets is causing sleepless nights for tenants, landlords and lenders alike – regardless of government financial incentives and tax break.

Nevertheless, amid the gloom professionals in real estate do have cause for cautious optimism. This all depends where you are in the world, of course, but trends are emerging across different jurisdictions that defy some of the more doom-laden commentaries and blogs appearing online.

Fact. It’s almost universally agreed that most businesses will follow the Salesforce example and introduce remote working and flexitime into their operations. Some people will attend the office, while others work from home and then swap. This will clearly create problems for the now partially empty, formerly prestigious city centre office blocks from Berlin to New York City.

At the same time the paradox is that premium office space in city centres may well be in greater demand. With smaller offices and fewer employees on-site many predict there will be a move back into city centres by businesses that had previously migrated to outlying suburban districts for costs reasons, negotiating favourable rents with eager landlords. One London landlord called this a “flight to quality,” a move from tier two to tier one.

As IR Global member Philip Otvos says in the following Real Estate Virtual Series, city centres have the infrastructure, the services, the prestige and the durability. The pandemic will not change this fundamentally.

Meanwhile, this race to downsize could well help to reignite interest in residential inner city living. Empty office blocks could be transformed into high rise apartments, particularly for millennials who prefer city life but have not been able to afford it to date.

Elsewhere, predicting retail and hospitality is more problematic. City centre and suburban retail and hospitality real estate has suffered significantly during the pandemic. In London alone 57 of 264 stores on Oxford Street permanently closed, according to the New West End Company. City wide, retail landlords are reportedly only receiving half their usual rents from tenants. These rent reductions are common across Europe and the US and landlords and lenders will need to try to work out what the “new normal” will look like in retail.

This will be particularly acute with the larger suburban shopping malls where many of the tenants have closed or been forced to downsize. Landlords and tenants are already thinking creatively about how to repurpose the space they have, particularly as much of the shopping has now gone online.

Even amid this gloom many professionals are cautiously upbeat about the urban retail space. They predict that shopping centres will need to consolidate and then rethink their overall business strategy. The new malls could be more focused on creating a cross-generational experience. Children, parents and grandchildren using the mall as a family entertainment and retail park. People shopping together and also using it as a leisure activity.

As shopping moves online tenants will need to use their retail outlets more as showrooms for products rather than retail shops, according to many professionals. Consequently, tenants and landlords will need to rethink how they both profit from online shopping, calculating new rents accordingly.

It’s a timely, fascinating subject and in the following pages our IR Global members give their invaluable insights into the state of real estate in their jurisdictions – and do some crystal ball gazing as well.