The Impact of Covid-19 on Real Estate Markets
February should bring better news and it’s a good time to refine recovery plans, balancing the harsh impact with emerging opportunities.
The Covid-19 pandemic has been a catalyst for change; accelerating innovation, increasing reliance on technology, altering work practices, and above all, making us value people and relationships. Darwin taught us that a sustainable future depends on being the most adaptable rather than the strongest – those that adapt flourish and survive.
This theme is prevalent across society, not least in property, which has seen profound changes over the last 12 months with temporary, and sometimes permanent, closure of premises across commercial sectors.
The leisure, retail and hospitality sectors have been particularly hard-hit. Retail has been deeply affected and in particular the non-food (or as we now know it, the ‘non-essential’) segment of the market. To put this in context, Primark went from monthly sales of £650 million to zero during the first lockdown (the retailer does not offer online sales).
However, many of the changes we have seen in the commercial sectors were evident pre-Covid – the pandemic has simply served to accentuate and accelerate them. For example, a shift in shopping trends from in-town to out-of-town retail centres where people feel safer and find it easier to access.
And of course, internet shopping, while already popular pre-Covid, has seen a marked increase during the past year. Many smaller retailers have adjusted - setting up online shops, introducing click and collect – and have survived as a result. Globally, Covid-19 has forced rapid change in many countries, where lack of infrastructure and inability or unwillingness of consumers to pay electronically has previously delayed the development of the online ecosystem – these countries are now seeing an ecommerce revolution as consumers embrace online shopping.
The increase in ecommerce is having a knock-on effect on logistics, giving rise to corresponding demand for warehousing and order processing facilities. What is clear is that for bricks-and-mortar retail to survive post-pandemic, innovation will be key – retailers will need to think of new ways to entice shoppers and encourage spending in their stores.
In the office sector, flexible working has been allowed and encouraged by many firms for decades, but nothing on the scale of what has been witnessed over the course of the pandemic. Despite the enforced shift towards homeworking, offices are by no means redundant. But we will see a change in corporate location strategy, office design, amenity and the way in which business uses real estate with greater flexibility.
Data centres have thrived during the pandemic as we have integrated and adapted new uses of technology into all aspects of our lives, be it working from home, learning online or a virtual doctor’s appointment. As the Covid-19 crisis is resolved, some of this demand may abate, but permanent structural changes will remain that will continue to drive increasing demand for purpose-built data centres.
Meanwhile, in the residential sector, we have seen a clear shift in demand from city to country markets, as families relocated to more rural areas for greater amenity in the light of more flexible working with less commuting.
It is clear that the gap has widened between those sectors that have already evolved, or been in a position to embrace change and those that have not. Covid-19 forced changes in ways we do things that would have otherwise taken years.
Wise investors are taking a two-pronged approach: identifying those sectors set to benefit from long-term changes in society and the way we work and at the same time identifying those that have seen significant repricing and but with the potential for healthy returns as the economy recovers.
Businesses used to seek and pay for certainty. In today’s world flexibility is vital, with the ability to change without the hindrance of long leases or tied commitments. This is the true cost of Covid. Those who adapt quickly will survive and flourish. Knowing how, and when and where to adapt will be key to future success. The speed at which traditional models of strength are being challenged is, by any standards, exceptional. It is in these challenging times that being able to rely on expert advice, based on incisive, creative and well-informed insight, becomes paramount.