PERSISTENT AND NON-PERSISTENT REAL ESTATE IMPLICATIONS OF COVID-19 

29.08.20 04:43 PM By Jon
There will be a lot to explore with respect to the impact of the COVID-19 pandemic on everything from healthcare, education, government, macroeconomics, geopolitics, debt level, global trade, and travel.   

Unlike other exogenous shocks of the modern era that bring people together, this pandemic defies conventional norms of human nature and in particular, our need for connection. We humans are social animals who throughout history have come together in physical spaces to govern, do commerce, educate, create, and entertain ourselves.  

As the founder of DHC and as a commercial real estate professional, I am a proponent and cheerleader of the noise that happens at the margin in a physical space and its impact on productivity, creativity, collaboration, and knowledge transfer in a modern economy. It is those moments that happen in a chance interaction, the five minutes before a meeting starts or an unexpected conversation at a pantry or reception. 

These are the moments where family pictures are exchanged, trust is built, information is shared, and new ideas are formed that drive innovation, sales, productivity, and engagement.  

The pandemic and this time of social distancing is challenging both conventional wisdoms, as well as recent disruptive trends that affect our understanding of, engagement with, and use of physical space. But, like all shocks, it is important to think rationally, turn off the noise, and try to differentiate the short-term overreactions and separate them from what will be lasting changes to how we do things.   

In the realm of a physical space, there are a lot of interesting questions to think through, including: 

  1. How will this crisis impact where we live and work?  
  2. What is the future of established and dense cities, like New York, versus secondary urban and suburban markets, like Nashville, Austin, and Salt Lake City?
  3. Will co-working survive? 
  4. What does the future of space-as-a-service and flexible space solutions look like? 
  5. What does this global experiment in working remotely mean for the future of commercial office space?  
  6. Will there be lasting headwinds to the business of conferences and events and what will be the impact on hotels, convention centers, and meeting space providers like Convene? 
  7. In what ways will this change the requirements and expectations of commercial tenants? Further, what changes will landlords need to make to building operations and amenities on a go-forward basis?   

Over the coming weeks and months, we will think through all of the questions above in detail as we consider the persistent and non-persistent changes for life and work in a post-COVID-19 world. As we start exploring these broader questions, I thought it may be useful to frame some preliminary thoughts and underlying questions on each.   

How Will This Crisis Impact Where We Live And Work?

The 2018 UN revision of the World Urbanization Prospect predicted that 68% of the world’s population would be living in urban areas by 2050 up from 55% today continuing a long-term trend of urbanization. That historical trend is also true here in the US with a mass movement of people to cities.  

Despite this fact, over the past four years, the Census shows that millennials are increasingly fleeing large cities and moving to suburbs as they marry and have kids. The consensus view is that this movement was primarily driven by the cost of housing and the quality of primary education.    

However, in a post-pandemic world, will we see that trend increase? Could we see a resurgence in the popularity of suburban office parks that offer control of the environment, less density, and the ability to better insulate employees?   

What Is The Future Of Dense Cities, Like New York, Versus Secondary Urban And Suburban Markets, Like Nashville, Austin, And Salt Lake City?

In the current climate, we are already beginning to see anecdotal evidence that people may be inclined to move out of cities like New York.  Dense cities make it difficult to create adequate social distance and families have had to confine themselves to small spaces. Some who fled cities like New York and rented homes elsewhere temporarily are enjoying the additional space and consequently are already reconsidering their lifestyle in the post-pandemic world.   

There are budgetary considerations, too, for these cities and even before this crisis, we witnessed a shift towards secondary markets, such as Nashville, Austin, Denver, and Salt Lake. Will this crisis accelerate that trend? Or, if we do experience a significant recession, will primary cities be first to recover as they were after the financial crisis of 2008? 

Will Co-Working Survive After COVID-19?

Co-working firms are shedding jobs rapidly while trying to negotiate better terms on their existing lease obligations. Fears mount as tenants refuse to pay rent on space they cannot use.  Limited security deposit and low initial capital investment by users (or members as they are called) increase the risk of non-payment to co-working providers. Further, increasing density standards popularized by firms like WeWork are not likely to come back into vogue anytime soon. 

Even if you believe in the value of collaboration in physical spaces, as I do, it is still reasonable to conclude that users will expect more area per person and are not likely to come back to neatly packed 4’ desks arranged in very close proximity to each other.    

There is a lot to unpack on this issue. From the impact to the leasing markets given the sheer volume of space that some these providers occupy, to the implications for startup firms who rely on these providers as a cheap and flexible occupancy solution. There are also things to think about in terms of the overall impact on the small space market, mainly the 2,000-10,000 SF users. 

What Does The Future Of Space-As-A-Service And Flexible Space Solutions Look Like?

Related to questions about co-working are the broader implications for the entire space-as-service model, flexible space providers filled an important need in the market for both landlords and users. Changes in GAAP accounting standards for leases provided an incentive for tenants to seek shorter lease obligations. Further, flexibility and particularly the ability to scale up and down rapidly drove increasing adoption of space-as-a-service solutions, not only by startups and small businesses but many enterprise firms, as well.  

Yet, long term liabilities matched to short term revenue streams can be disastrous as we are witnessing in real-time today. There are more questions, too. Who will be the winners and losers? What changes will we see in the delivery of these services? Will de-densification increase costs to a degree that forces tenants to seek conventional leases instead? 

What Does This Global Experiment In Working Remotely Mean For The Future Of Commercial Office Space?

Here, too, there are many interesting ideas to delve into. What is the productivity impact of working remotely? With so many firms being forced to rethink their workflow, will they seek to reduce their overall footprint as a consequence? Already some clients are under the impression that they can get by with less space. But, are those long-term trends? Is the future one of decentralized workplaces and distributed teams?

It is one thing to take a cohesive team and have them work remotely, but can you create culture and manage ideas in a decentralized workspace? What is the impact on culture, innovation, not to mention the impact and potential for distraction that is ever-present when working from home?   

Certainly, some companies may find that technology and video conferences are a reasonable solution for part of their workforce. If enterprises reduce office headcount, will that reduction in space needs be offset by decreasing density for the users who do intend to return the office environment post-pandemic?   

What Will Be the Impact On Conferences, Hotels, Conventions Centers, And Meeting Space Providers Like Convene?

The current pandemic affects every aspect of in-person interactions and there are likely to be broad implications to conference and meeting space providers. Hotels, convention centers, and providers like Convene relied heavily on revenues generated by conferences, corporate retreats, and large training programs.   

What will the role of such providers be in a post-pandemic world? Will online meetings, conferences, and webinars reduce the need for such venues? 

Companies are already adapting by shifting previously scheduled training programs and conferences to virtual or online equivalents. There are financial benefits to doing so in the form of lower costs associated with travel, lodging, food, and entertainment of legacy programs. 

At the same time, how can one quantify the value of seeing someone, face-to-face, while sharing a coffee during a break at such events? Conversely, if we do see an increase in decentralized workplaces, will that create a need for short term event spaces to bring distributed teams together for trust-building, culture, and collaboration? 

How Will This Change Commercial Tenant Expectations? What Changes Will Landlords Need To Make To Building Operations And Amenities?

When things do begin to reopen, what will tenants expect landlords to do differently? Will we see changes to cleaning specifications for class-A buildings? Will there be a push to de-densify tenant programs? How will these changes affect the construction cost of interior fit-outs, furniture, and suitable construction materials? How will building and tenant amenities change? Will we see changes to building infrastructure, such as HVAC? 

What about building security, touch-less doors, reduced elevator occupancy, or other attempts to create more physical distance in the workplace? What will these changes and emphasis on health due to occupancy costs and related to that, will those cost increases drive more tenants to seek alternatives to physical office space?   

Conclusion

These are just some of the ideas that are worth exploring as we seek to come out the other side of the epidemic, re-open our economy, and adopt to a new normal. One of the things that experiences like 9/11 and the 2008 recession taught me is that even after a severe crisis, people have incredible resilience and work hard to return to a semblance of normalcy. My guess is that, in the long-term, a post-pandemic world doesn’t look that much different than what it did before the breakout of COVID-19. 

We are social animals and while this has forced a shift in how we do things, my bet is that with time, human beings will again seek to collaborate, do commerce, educate, and meet in physical spaces.  This fundamental need for connection has been true for thousands of years.   

However, it is also true that there will be changes, and in the short to medium term, potentially significant changes to how we work, meet, and collaborate. I look forward to thinking through all of these questions in detail with you. 

In that spirit, I am interested in hearing your thoughts and ideas as individuals and organizations about any of these topics, or additional questions we should be working through together.   
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