How the Pandemic Changes Real Estate

July 2020 – 21 min read
The global pandemic is changing the way we live, work and play. Such behavioral changes have been felt acutely across commercial real estate markets, and the impact may only accelerate from here. But which changes are short term and which are here to stay?

Executive Summary

In this article, we discuss the results from an internal survey of Barings professionals from around the globe and highlight key conclusions, including:

  • How work-from-home (WFH) trends may equate to similar office footprints, but with lower costs,  as well as larger living spaces
  • Why lower density, lower cost U.S. cities and suburbs will likely be winners from the increased focus on health and hygiene 
  • Why e-commerce gains may stick, related impacts on the logistics and retail sectors
  • How warehouse demand could be boosted by occupiers’ embrace of resilience
  • How investors should consider all of these trends from a portfolio allocation standpoint

Real Estate’s Reaction to the Shock Felt Around the World

The global economy is climbing out of a deep recession brought on by the coronavirus pandemic, a truly exogenous event. The unique nature of the pandemic and the containment measures employed to mitigate its impact have placed commercial real estate at the epicenter of the crisis. Due to the contractual nature of lease income, real estate normally offers some protection from disruptions in the economy, or a more muted, delayed response. But unlike most economic shocks, the pandemic has not only disrupted property cash flows with immediate effect across all property types, it also is challenging long-held ideas about the future demand for and use of different types of real estate and locational preferences.

Indeed, if there is one takeaway for the real estate industry from the past few months, it is that connectivity and the virtual world enabled by technology increasingly can act as a substitute host for many of the activities that previously could only take place in physical space. Although the timing and severity of the impact vary widely by property type and market, the virus and efforts to contain its spread are having a profound effect on leasing and transaction activity. Both have slowed dramatically for practical (lockdowns) and sentiment (uncertainty) reasons, and both will likely remain subdued for as long as the economy is forced to operate at reduced capacity.

Beyond the pandemic, however, the more interesting and relevant questions for real estate investors concern how COVID-19 might affect the long-term outlook for different property types and markets. The experience of living with a potentially deadly virus has elicited a broad range of actions and behavioral responses to adapt to life in a pandemic. Although many of these will fade away once the threat from COVID-19 recedes, some changes will be durable and will impact real estate demand and use well into the future. Investors, therefore, need to re-examine their pre-COVID expectations for each property type and market to assess whether and how the pandemic might change the distribution of future possible outcomes, and how portfolio allocations might need to change in response.

Want to read the full article?

View PDF

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.