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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.

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