If we had asked people this time last year how they expected the new decade would start, I highly doubt anyone would have predicted a global pandemic. But here we are, wrapping up 2020 after a year like nothing we have seen in generations.
Needless to say, COVID-19 changed pretty much everything. It’s not just the fact that everyone is now using video conferencing or that we changed the way we shop. For the first time, entire communities have had to stay indoors for months at a time. This has greatly impacted our mental state but also completely transformed our relationship with the built environment. Our homes, our offices, shops, schools, hospitals and everything in between, suddenly play a different role in our lives.
All these changes have ramifications for the real estate industry and have been evident from the midst of the first lockdown in early 2020. In the first six months of 2020, there was a 29 percent global reduction in direct commercial real estate investments. As a result, construction fell at an unprecedented rate. In the EU-27 alone, construction rates decreased between 20 and 25 percent in March and April. Many construction projects were put on hold, or were even cancelled, causing significant turmoil in the market.
Despite the common cause, every real estate segment has been impacted differently.
It is Newton’s third law: for every action, there is an equal and opposite reaction. When all offices had to shut down because of the pandemic and the majority of the population started working from home, companies entered survival mode and cut down on their expenses as much as possible. One big expense is renting office space. This created big problems for office providers, and it is likely that the challenges will continue because of multiple contract cancellations.
However, nothing can be said with certainty for the office market. Many firms around the world value the role of the office, and for some sectors it is essential. Due to the necessity for social distancing and high-quality hygiene, there is even a scenario where the office real estate market grows as companies will require double (or triple) the space. The trajectory of this sector, however, is yet to be shaped and will be affected by many factors like how governments manage the pandemic or other new and unforeseeable structural changes.
One thing is certain: there will always be a need for offices, but there will be significant changes, perhaps most importantly to the recent trend towards open plan shared spaces.
The COVID-19 pandemic hit the housing sector particularly hard. The near total shut down of residential construction sites greatly impacted related transactions like mortgage lending and rental prices. Governments were quick to respond and implemented an array of policies to help tenants and homeowners cope with unstable finances. Around the world, we saw moratoriums on rent, temporary forbearance on mortgage payments and suspension of eviction procedures. Yet despite these measures, the residential market took a hit and there are fewer and fewer new housebuilding projects.
A ray of hope for the housing sector is that governments, both local and regional, might consider investing in social housing to deal with housing shortages as one tool to stimulate economic recovery post COVID.
Shifting gears, COVID-19 has had a drastic effect on the retail sector, but in an entirely heterogeneous manner. To put it simply, the impact on each retail sector is unique and depends on the type of goods sold and whether the business can serve its customers through the internet. There are also big differences between countries, depending on the timing and duration of the lockdown. A key trend underpinning all markets globally is that online shopping is booming and technology will play a pivotal role in reinvigorating of the retail sector.
The increased dependence on e-commerce has resulted in the supercharging of the warehouse sector. Retail companies are now competing for available warehouse space, which in Southern California led to a 10% increase in the rental prices. The logistics and warehousing segment of real estate has certainly grown amid the pandemic. Many new warehouses are already being built, especially in urban areas and closer to ports, and that will continue over the coming years as many predict the warehouse sector will see phenomenal growth.
While the effects of COVID-19 are not minor, there are reasons we choose to remain hopeful for the future. The pandemic turned everything upside down, the real estate market included, but buildings aren’t going anywhere. Our whole lives have been designed around the protection and comfort they give. It is in our best interest, and that of the planet, to make them part of the COVID recovery. If anything, we are now more sensitive to the built environment around us, and there will be an emphasis over the next few years on building back (and hopefully better and greener).
Many governments around the world will be channelling money into the construction sector as part of economic stimulus packages following the pandemic. In France, for example, there are 7 billion euros set aside for building retrofit. The government is also making investments for the renovation of public buildings and will award grants to public housing institutions and local government authorities to undertake energy efficiency renovations. South Africa announced that it will be investing $20.5 billion in a new infrastructure plan while the European Investment Bank (EIB) announced that 300 million euros will be invested in African nations, 25 percent of which is specifically reserved for renewable energy and climate change adaptation projects. In Chile, an extra $4.5 billion will be added to its public investment programme, with the aim to speed up the transitioning process to sustainable development and climate change mitigation.
Beyond warehousing, the big focus for next year will be affordable housing. With so much pressure on the residential market from COVID-19, governments and institutions around the world will be looking at affordable housing to cover a significant need in the market and support COVID recovery. Housing has always been a significant segment of the real estate market, especially in emerging economies, where it roughly constitutes 13 percent of a country’s GDP, so we expect to see many investments globally. Some governments have already made announcements. For example, in Kenya there will be investments in affordable housing construction and in Denmark the green renovation and housing agreement will ensure social housing undergoes green renovation.
Nobody can predict with accuracy what the real estate market will look like in the next few years, but what we know is that we are at a point of transformation. We must balance COVID recovery, the gap in affordable housing, and the pressure to address the climate crisis, all at once. Investing in the greening of infrastructure allows us to do that.
By building green, we can mitigate climate change, stimulate economic growth and drive the transition to a sustainable and equitable future.
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