We are experiencing a challenging time—both professionally and personally. Within the space of a month, COVID-19 has become a global top-of-the-matter subject. Economies are affected, markets are fluctuating, businesses are shutting down and panic surrounds us. One certain thing is that this time will surely pass. When all this mayhem fades away, what will be next? Here are some of the potential after-effects of the pandemic in the real estate sector.
Housing demand could take a hit
Humans unarguably feel the effect of COVID-19 the most. This pandemic will affect the way we live, work and interact with one another. Residential structures (such as the multifamily, the single-family, co-living space, condominiums, etc.) are closely bound-up and affect the way we interact. For example, high-collaboration spaces and higher density living could heighten the risk of contracting the virus. Therefore, property owners will need to develop mitigation protocols against potential outbreaks. This means they would need to allocate a certain budget for the regular disinfection of their property.
Checking from the investor’s viewpoint, the effect of COVID-19 will be less felt because the residential investments have developed defensive characteristics over time (stable cash flow and the ability to manage rent to maintain occupancy and to limit potential voids). However, reduced mobility and decreased consumer confidence will negatively impact property demand during this period.
Capital market implication
Real estate has continued to offer attractive returns when compared to other asset classes. However, the effect of the pandemic on the capital market cannot be underemphasized as it has been predicted that investors are likely to shift to more defensive assets. This will be a response to the uncertainty brought about by COVID-19.
In the short term and precisely in H1 2020, there is likely to be a slowdown to the global commercial real estate investment activities. This is as a result of investors trying to work out the best means of doing deals. Because of the quarantine policies, investors are currently experiencing a lower practical method of executing deals thereby more due diligence is needed before deals are executed. Delayed launches and extended transaction timelines in highly affected areas have shown this. However, in the long run, technology will be used to connect different parties, hopefully breaking some of the barriers to investment execution.
Moreover, the volatility of interest rates has a great effect on mortgage lenders in the price sizing phase. Because the market is currently unstable, lenders are finding it very difficult to price assets. However, this does not affect the availability of credit as its supply continues to be in abundance.
Office utilization reduces as working from home increases
The pandemic could put greater pressure on office utilization as the increase in remote working (due to the quarantine policy to curb the spread of the virus) is likely to reduce office utilization rates. In the short term, this could result in softer rental growth than previously predicted and could also create a potential delay for investment activities. Co-working space owners with short-term leases could be vulnerable and feel the effect if members decide to pull out of the deal.
Given the current emergency situation, we believe that this is the largest test of remote working in history, and the pandemic has forced corporate entities to start adopting, refining, and testing policies, infrastructures, and processes to prevent any form of delay to their production. In the long term and looking beyond 2020, we believe that investment in collaborative technologies will grow while the demand for remote workers will increase.
However, the increased adoption of remote working policies by companies is feared to be a threat to office investment. This is predicted not to be so because the pre-pandemic higher usage of office and co-working spaces have already driven efficiency and thereby resulted in limited space. Also, the increasing demand for workers in some sectors will likely outweigh the effect of remote working.