Disruption of Real Estate
Real Estate will perhaps be the worst-hit industry in the aftermath of this pandemic. Several industries are changing and one does not know what the future looks like. None is going to be as badly disrupted as Real Estate.
Real Estate is often classified into two categories - Commercial and Residential.
Demand for commercial real estate arises out of activities such as Retail and Office Spaces. In addition to this, there is what is referred to as value-added real estate which includes Hospitality (Hotels and Restaurants), Hospitals, Sports Complexes, Schools, etc which many people use. There are also factories and warehouses, which often low Residential real estate is pretty self-explanatory.
While Residential real estate is mostly developed and sold to the end-user or investor as might the case might be; a lot of commercial real estate is owned and operated by real estate companies. The operators can be a third party such as Marriott or Hilton in the case of hotels; malls operators such as Writers manage the tenants and help monetise the malls. In other cases, the real estate companies themselves decide to run that side of the business as well.
Commercial real estate is going to see their businesses get decimated in the coming months and years.
Trouble with Real Estate
Several IT companies who are also amongst the largest users of commercial real estate - tech parks et al - are not considering work from home as a norm. TCS went to the extent of announcing that it would probably let 75% of its workforce ‘work from home’. A company that has 4.5 Lac employees saying that should send shivers up the spines of many real estate developers. Amazon in the US has extended its work from home policy till 2nd October.
Silicon Valley startups that have put foosball tables, spas and what not, to keep employees happy and productive are finding - avoiding the 3-hour commute makes their employees plenty happy and also more productive. Many in the Valley are considering revising it to 2-day 'work from office' each week. Millions of square foot of commercial real estate would find its way back into the market. Who will occupy them? Also if this becomes the norm, what does it mean for future commercial developments?
In a way, I see an opportunity here for co-working spaces. If companies are going to allow 2-days-a-week 'work from office', the real estate needs are going to be ever fluctuating and co-working spaces can use a layer of technology and their per-seat model to cater to this dynamic requirement that many companies would have. If a company has 100 employees maybe 70 show up on Monday, 34 on Tuesday, 8 on Wednesday only for 80 to show up on Thursday and 3 on Friday. The question is would this become a norm for all companies. Just like the 9-5 was made a norm by industrialisation.
With the reduction in movement outside, fewer people are going to go out shopping; at least temporarily. Many stores will shut down in the short term. A lot of people have already moved to e-commerce for good in the meantime. What are the categories of retail which may never come back up - ones that do not provide differentiation or experience. Grocery Stores will find it very hard to climb up the ladder again. Also, it augurs very badly for any new FMCG brand that is being launched because discovery will become harder.
It is going to be worse for restaurants which will have to limit the number of covers because of social distancing. Implying that a restaurant meant to cater to 120 people at a time will end up with 40. I expect there to be far fewer dine-out options by December 2020. Maybe more cloud kitchens.
Hospitals, for now, are in high demands but the rise of tele-consulting authorised by the government of India and many others also means small clinics will begin to disappear. The doctors can save the commute and spend more time consulting patients. Only those engaged in procedures such as dentists would probably need to hold on to their clinics. This change will not happen suddenly but the gradual shift will occur over the coming year(s).
Education perhaps warrants an entire blog on its own. Apart from extra-curricular activities, education, at least in India, is a drab affair. None of which requires students to be in class. There is little to no team-based activities. If it is just about a teacher standing at the board and lecturing - kids, they do not need to be sent to a building to make that happen. This would be true of even engineering students (excepts for labs perhaps).
Broadly, I expect demand for commercial real estate to plummet and never come back up to the levels that it was at before this episode began. Offices will have to be reimagined and so will retail. Hospitality will have to undergo a drastic transformation of capacity. Air traffic and business travel may not resume to levels of December 2019 for a couple of years if not more. How to get locals to use this capacity more?
Which brings us to residential real estate. A developer who is a native of Trichy or Chitradurga will no longer NEED to be based out of Bangalore or Chennai if work from home becomes the norm. Also, if the visit to the office is once or twice a week, can I live further away from the workplace? Even if it is 40 Kms, I don’t have to travel every day. Further, if more and more people are working from home, traffic on the roads are bound to be lesser thereby making the commute faster. Would this change the face of our cities altogether? Are the days of the high rise, high density living over? In the US, more and more families are making a move to the suburbs where the real estate costs are lower and space greater. This is going to mean residential real estate will only be purchased by those who will ultimately occupy it. Over the next 12 months, expect a pruning in prices based on how the work situation pans out.
Different countries and markets might adopt different approaches to this. One thing is for certain, 100% of the workforce will not go back to work from an office. This will change the dynamics of real estate for certain. Where different markets end up remains to be seen.
P.S. A lot of the construction activity in India is predicated on migrant labourers. Many of whom were driven to starvation and had to escape the cities they came to. Will they ever come back? How long before they venture out again? Who will fill the labour gap while these labourers are not available? Costs of construction are bound to rise as local labour is harder to find and has a rich set of options when the economy re-opens.