COVID-19 in Commercial Real Estate: Purely Destructive or Creating New Opportunities?
by Clara Giampellegrini |
Despite its reputation as a safe and smart investment, even the real estate industry takes a big hit from the pandemic. Covid-19 completely changed the way people interact within physical space and represents an unprecedented crisis for the real estate industry. The players of the market should think about how the landscape of real estate may be permanently changed in the future, forcing them to adapt their strategy, or even use it to their advantage.
Whilst having significant economical and psychological impacts on residential real estate (which will be covered in the next article of these series), the most prominent and visible impacts of the pandemic definitely concern the commercial real estate industry.
The commercial real estate situation pre-Corona: a promising market full of opportunities
In 2019, the total commercial real estate (CRE from here on after) investment volume in Europe reached €281bn, which represents a 3% increase compared to 2018. Out of all the categories in CRE, offices were the most demanded asset with a 47% share of the total volume. In fact, the European office market was thriving with vacancy rates hitting a ten-year low in many countries. With only 1.5% of empty offices, Berlin displayed the lowest vacancy on the continent, followed by Munich (2.4%), Vilnius (3.4%) and Luxembourg (3.6%).
A closer look at Luxembourg shows that the city ended the year at an occupation of 260,600 sqm, reaching its best-ever performance.BNP European Office Market Report, 2020
A closer look at Luxembourg shows that the city ended the year at an occupation of 260,600 sqm, reaching its best-ever performance. Several large deals contributed to this success, such as the move of Ferrero into their new 29,500 sqm headquarters or the occupancy of 39,750 sqm by the European Court of Justice in the 3rd Tower in Kirchberg. (BNP European Office Market 2020 Report)
Unfortunately, 2020 changed the climate and these exceptional numbers risk to be a short-lived glory.
Post-Corona: The disruptive character of the virus does not spare the CRE market
The pandemic challenges the way we do business and questions the conventional concept of workspaces; are home offices becoming the new regular? At this point in time, it is not possible to draw a definite conclusion as opinions about remote working differ. However, there has been a visible decrease in demand in office spaces as many companies have cancelled or postponed plans to lease additional space since the outbreak of the virus. Furthermore, new directives such as the augmentation of the square footage per employee in the workplace, the maximal number of people per office and the new Heating, Ventilation and Air Conditioning (HVAC) regulations present additional hurdles which will complicate the lives of real estate agents and tenants in the future.
CRE does not only concern office spaces but includes any property with a business-related purpose such as retailers of all kinds, hotels & resorts, shopping centres, restaurants, and healthcare facilities. Albeit differences in the nature and degree of the impact, all of these properties are in some way affected by the crisis.
The hospitality sector has suffered the strongest and fastest shock which might turn into long-term changes as the future of leisure travelling is still uncertain and business travelling, to a vast extent, will be replaced by video conferences and long-distance communication.
E-commerce in Europe is expected to increase by 12.7% by the end of 2020 compared to the previous year, which automatically implicates less need for retail property.E-Commerce News Europe, 2020
The shift away from physical stores to digital shopping indicates another big change in the commercial real estate market as department stores are seeing significant declines. E-commerce in Europe is expected to increase by 12.7% by the end of 2020 compared to the previous year, which automatically implicates less need for retail property. (E-Commerce News Europe), 2020
There are always two sides to every story
In every crisis there is an opportunity, and this applies also to the CRE market. When looked at from a different perspective, the way Covid-19 reshapes the way we live, work and operate also creates new needs in terms of properties.
As previously mentioned, e-commerce is gaining in popularity, which means that even though many new retailers enter the market with an online presence only, there’s going to be an enhanced need for warehouses and storage facilities for their goods.
Another upcoming trend is the one of “Ghost Kitchens” which are professional food cooking facilities set up for the preparation of delivery-only meals. This innovative idea to cope with the restrictions in the hospitality sector creates a new need for space and perfectly illustrates how the crisis leads to the rise of new business models. Again, the key is to stay up to date with these trends and to be the first one to offer suitable properties for new needs.
Despite being far away from a crisis, the healthcare industry also presents many opportunities as an increased need in testing centres and labs arise. In the same optic, senior-living facilities could prove they are best able to handle viral outbreaks, accelerating demand.
72% of CRE executives plan to maintain or increase their overall technology investments even if an economic slowdown occurs.Deloitte, CRE Outlook, 2020
Last but not least, it is always important to keep in mind that that the future is unpredictable and almost all forecasts will turn out to be wrong. This being said, companies such as IBM, Facebook, Apple and Amazon Music have recently been pushing ahead with plans for big office spaces, showing that it may be too soon to call an end to the office. Another key factor that will determine the future of the CRE industry is the technological advancement. Deloitte’s CRE Outlook for 2020 outlines that “72% of CRE executives plan to maintain or increase their overall technology investments even if an economic slowdown occurs”, indicating a certain degree of optimism regarding the CRE industry is linked to the enhanced use of digital technologies.
It is safe to say that Covid-19 will lead to changes in CRE. The key to success is to identify where and in what shape these changes will occur, and to be among the first to jump on the new arising opportunities. Even though the nature of the changes is yet unclear, the rise of the use of technology in the industry is undeniable and will be one of the determining factors of success.