Evolution not revolution? How we will work and shop post-COVID

COVID-19 currently dominates our lives, dictating where we can travel, whether we can go into the office and even how we shop. Despite the widespread disruption, the world will move on at some point, but exactly when is subject to plenty of scientific debate. The question on everyone’s lips is how will we emerge from this crisis? Will the way we live our lives be changed forever or will we embrace a return to the comfort of pre-COVID normality? Answers to these questions may be found in the world of real estate where form and function are inextricably linked and changes in behavior are often manifested in bricks and mortar.

For many of us, most of our working lives have been spent in office-based employment, with its daily commute and cubicle culture, it’s client lunches and drinks with colleagues, it’s hierarchies and it’s gossip. But do fears of contamination, the need for social distancing and the work from home culture mean that the office is now dead?

I think there is a case to be made that regional differences between Europe and Asia may see different outcomes for the office and Hong Kong is a prime example. In first tier Asian cities such as this one, where the service sector has long since replaced manufacturing as the major employer, land prices (among other things) have given rise to very high population densities, small apartments and multi-generational living. None of this is conducive to working from home and many employees are keen to return, particularly businesses where collaboration and client contact are essential elements. Many employers also hold quite traditional views about the need for staff to be at their desks!

In Europe on the other hand, more generous housing conditions and the availability of outside space make the home office a welcome choice for the harassed commuter. Here the WFH model seems more appropriate environmentally and socially where traditional models of urbanization can be refashioned around a New Urbanism which focuses on communities which offer a rounded mix of work-live-play real estate uses, as an alternative to the tyranny of the daily commute between residential, work and leisure zones. Surveys suggest that most employees would be happy to spend one or two days a week at home with added benefits for family life and lower travel costs. Employers would also save on rental overheads which can be substantial in CBDs.

But maybe WFH is a distraction from the immediate threat facing office markets – corporate solvency. Governments have thrown everything in their monetary and fiscal armoury at protecting businesses and livelihoods and yet firms are still being forced to downsize or close and vacancy rates are ticking up steadily in office markets from Milan to Mumbai. This means rents must fall, and fall they are, with fears for more closures once stimulus measures are inevitably withdrawn.

In capital markets, real estate funds have traditionally cherished office assets as a stable and reliable investment and they form the bedrock of many institutional portfolios. Many fund managers view the pandemic as a catalyst for existing trends, rather than a disruptor. We were already moving to more flexible office workstyles, and this change will accelerate. As part of this change, we are likely to see more displacement demand for office space in suburban hubs. This space might be provided by specialist flexible space operators or conventional landlords.

We should also not forget the cyclical impact of COVID-19 which has hit GDP and consumer demand in the short term. The longer-term impact on office take up, however, will ultimately rely on the timing of recovery but also on the characteristics of the demand which emerges as some sectors are likely to rebound more strongly than others, altering the traditional corporate landscape. New economy companies are the ones to watch in this respect.

But if offices are seeing accelerated change, the evolution of the retail sector, already the subject of much discussion pre-COVID, has been brought right to the fore. Whether you’re in Hong Kong, Milan, London, or New York the retail industry has gone through a traumatic time in 2020. Retail sales have collapsed as people have stayed away from the streets and the shopping centres preferring to shop online instead. In most cities retailers were already grappling with the impact of online sales on physical stores and evolving consumer demand when the virus struck, suddenly accelerating the rate of change.

It is a similar story worldwide but has been particularly bad in Hong Kong where rents are at world beating levels. Occupancy ratios have reached unprecedented highs, way above the norm, and as a result vacancies are rising at a significant rate both on the street and in shopping centres. A lack of mainland tourists has hit the city hard, in common with many tourist dependent markets globally and their return will be key to any recovery. As travel restrictions look likely to remain a fact of life for some time to come, only the strongest domestic markets will make it through unscathed while others will have to wean themselves off high spending tourists and accept a more locally focused retail offering.

On the street landlords are being more flexible and this has been particularly the case in Hong Kong with the Savills retail prime street rental index posting a dramatic fall of around 70% since the peak in 2013. Reasons for the dismal performance don’t just lie in COVID, however, as trade wars, political protests and a weak Renminbi have all taken their toll. As we move forward most retailers agree that the city’s golden retail era is over for now and sales are unlikely to surpass 30% to 40% of what they were in 2018. Retailers are adjusting to this new norm by cutting back on stores, managing their cost base and finding new and innovative formats.

It would be far too early to pronounce the office or the shop dead, but their evolution is experiencing an unprecedented period of acceleration which is likely to see both changed forever.