The coming shifts in Real Estate due to Coronavirus

Sink or swim for Real Estate, as COVID-19 ripples become a tsunami.

As COVID-19 strengthens its grip on society, the nine to five office, already something of a relic with flexible work practices, is almost certainly breathing its last. This will obviously have huge implications for the commercial property market that are set to ripple across the entire economy. (Check out our other article on the Third Industrial Revolution and the Covid-19 impacts)

That the next five to 10 years will start to see movement in property markets, as society starts to shift into a new way of working, is indisputable. And while we have yet to see whether the potential cost savings from smaller office spaces come at the expense of productivity, companies are already expressing confidence in more agile work arrangements. But exactly how the wider economy responds is abundantly less certain.

Like many of you, I have had to work from home over the last six months.  At first, I was skeptical as to how well this would work and the impact on my, and colleagues’, productivity. Unfortunately, two months in, I found myself without a contract as companies started to cut back, and was thrown back into the jobseekers pool.  Fortunately, after an aggressive search and shameless networking, I secured a contract with a major bank.  Being so accustomed to face to face interaction, critical in consulting, I worried that my productivity would take a hit with the virtual approach. In fact, it didn’t take long to realise that it wouldn’t, as new colleagues put in the time and effort to make the adjustment easier. I’ve started to get used to the saved travel time each day and it has allowed me to better use my time to work on other business ventures. Personally, it’s a no brainer. I’ll pop to the fridge to grab a snack and a drink during the day, throw some washing on between meetings and for once, I can actually receive parcels from online orders!  I’m quite used to it now, and when I ask myself would if I go back to the office full time, the answer is clear and categorical no. A couple of days a week, perhaps, but full time, no.

A quick vox pop with friends, family, and colleagues showed that I am definitely not alone in this sentiment. While anecdotal, it seems that the desire for the type of flexible work arrangements COVID has shown us we can have, is firmly established. We’re also realizing that flexibility need not be a productivity killer. In fact, experts have been telling us for years, that is likely to be the exact opposite. 

It’s a very compelling argument, but one that is set to have a dramatic impact on the property market.  Let’s imagine I agree to go back four days a week. Already you can see the fallout for the property market, with fewer bums on office seats. Add to the mix the current hot-desking trend, where we can turn up, find a spare desk and start working, and you have a very different picture. Organisations would only need 80 percent of their office space at any given time. Extrapolate further, and a picture emerges of four out of every five commercial towers disappearing due to the heavily reduced occupancy. 

This is going to have quite the ripple effect, with landlords feeling the pinch as tenants stop renewing leases and vacancies picking up. No doubt, we will see a few developers and property trusts go bankrupt and fail to service their debts.  The backstop of this debt will be the banks.

Those favored financial institutions that pay a stable dividend and slowly climb in value will suddenly find themselves seizing assets and going to market to sell them. It’s not hard to imagine how such a crowded market will see assets being unable to cover debts, and the subsequent drop in profits.  Inevitably, the cheap property will become viable as a block, which will be converted into a residential tower.  A simple and logical option, however, not the salvo you might imagine.
An increase in the supply of residential apartments in plum locations hitting the market will almost certainly lower residential property prices. At face value, lower-priced apartments and full occupancy is a win for buyers and developers. Except it isn’t. Consider a further ripple, which may well constitute a wave for an economy already drowning in the effects of the pandemic. Converting a building isn’t as resource intensive as building a new one from scratch, potentially meaning less construction work and fewer construction jobs. Government investment in large infrastructure and nation-building projects, such as high speed rail, will surely provide infrastructure companies with the silver lining they badly need. However, with governments still reeling from the cost of stimulus payments, something will have to give. When you consider that the give will likely come from higher taxes, reduced spending on essential services, or most likely both, the short-term economic picture becomes less rosy.

As you can see, those ripples are starting to look more like a tsunami, with the potential to hit sectors far beyond what you would initially imagine. Finally, just remember this was the best-case scenario imagine what would happen if we decided to make it more than one day a week from home, it certainly gives food for thought!

14th September 2020

At the time of writing this:-

ANZ – $17.53 – Negative view

Westpac – $16.81 – Negative view

NAB – $17.15 – Negative view

CBA – $65.80 – Negative view

Stockland – $3.61 – Negative view

Dexus – $8.94 – Negative view

CIMIC – $19.75 – Positive view

Real Estate and Covid