Residential investment has risen steadily in popularity in recent years, due to increased demand for liquidity and capacity to produce income. Furthermore, with millions of people around the globe suddenly obliged to work from home for a relatively sustained period during 2020, the capacity for the right sort of residential asset to also perform the function of an office asset has revealed itself.
With this revelation, even when people can return to the office, the office will now be in competition with the home and other remote work places in terms of comfort and safety, leading to redevelopment of assets. With office rental costs in city centres already constituting a significant operating expense, many companies must also be considering reducing city centre office space - making the work-from-home shift of 2020 a permanent one and/or looking at alternative office locations.
The following are some of our predictions for the residential and office asset classes.
New requirements will lead to value-add projects
Whether or not a permanent shift towards office workers working from home comes to pass in the post-COVID long term, demand for both residential and office assets is likely to change in terms of space, size and design.
New importance will be placed on work space and best-in-class connectivity within homes, superior air quality systems and distanced desks will be demanded within offices, green spaces will be integrated wherever possible in both types of development, etc. A recent BBC News article on this topic even envisaged the likes of temperature-checking facial recognition entry barriers in what they called “pandemic-proof office space”. Smart building adoption will be accelerated no doubt, too. Consequently, we would expect a surge of interesting “value-add” refurbishment projects to become available for investment over the next year or two.
Nonetheless, as pointed out by CBRE in their recent “Future of the Office” report, “cost savings will be top of mind if recessionary conditions persist”. Their research, conducted among top global real estate executives, while optimistic about global economic recovery starting from H2 2020, expects that a return to pre-COVID economic growth levels will take several years. This means that, despite COVID-related concerns, cost-efficiency driven trends such as hot-desking or “free addressing” are likely to accelerate, as companies try to make the most of high-cost premises (and offer their workforce more flexible working options).
Secondary market locations will get a boost
A key structural economic trend since the major global financial crisis a decade ago has been the outperformance of cities over secondary areas. Reasons why major urban areas around the world have continuously attracted further growth include their superior potential for liquidity, income and capital growth – all of which also translate into lower risk in investment terms.
But, according to Eurostat definitions of cities, towns and rural areas by population density, less than 10% of European areas can be classed as cities. This means high competition for quality assets in attractive primary markets. In other words, city prices will always be high.
Increasing numbers of individuals, organisations and CRE investors have begun to think seriously about secondary cities, for their affordability. Certain secondary markets – such as rural areas well connected to cities – have become attractive propositions.
COVID19 has supplied further reasons to seriously consider the selling points of assets located in less densely populated areas. Savills UK concluded, in July 2020, based on their latest research, that “it seems likely that organisations may move to a ‘hub & spoke’ model, with a city centre presence but also regional and local office hubs.” Certainly, reduced and redesigned city centre presences seem likely, as staff work in a more hybrid way.
The CBRE report, meanwhile, remarks on a lack of uniformity in quality, size and availability of office property outside of CBDs, noting that “this could be an area of opportunity as the multi-node concept in real estate evolves”.
Cities will not lose their attraction in the long term, for either asset class
This possible COVID consequence of “reverse urbanisation” is also discussed in a recent article by PWC, but the think-tank argues that it would be precipitous to assume that it will persist beyond the short term. Cities still have much to recommend them – so-called “agglomeration economics” – and it is quite probable that they will weather this storm and retain their attractiveness both for people and for economic development. PWC points to Shanghai and Hong Kong, cities strongly impacted by the SARS epidemic in 2013, which have rebounded and not experienced reverse urbanisation at all.
The CBRE report shares this view, stating that the role of city centre headquarters is unlikely to disappear, but employees will have more choice over where they work.
There is also the practical consideration that corporate leases are often several decades in length, which might put a brake on immediate, radical change.
A probable outcome, then, is a bit of both, a more balanced situation. An increase in popularity and perceived and actual value of secondary locations for both residential and office assets, combined with investment in city assets to redesign them to offer more space and safety.