Preparing for Re-Entry and the ‘New Normal’
Businesses will not go back to the way we knew before the pandemic, but will reinvent themselves to be more resilient, adapting their operational models to the 'new normal.'
The short-term impact for occupiers is proving to be significant as their business-as-usual activities are affected with changes occurring on a daily basis. The immediate shock and realization of the outbreak is now over and the majority of occupiers are in response mode after a short phase of preparation and immediate actions. Occupiers are preparing for 're-entry' of their facilities and sending their workforces back to work in several waves.
Planning for 're-entry'
There is currently limited visibility on the timing of this next stage but companies are now planning for re-entry. This phase is complex to navigate, requiring some restructuring and courage from business leaders and their workforces. Occupiers must determine the level of modification required to return to business: prepare, redesign and fit-out workplaces ready enough to invite employees back to the office, combined with remote working capabilities and a robust triage approach. It is not about getting back to the office as soon as possible. Rather the opposite approach. It is first and foremost about technology. What does it take to 're-entry' facilities that were closed weeks ago, bring people back to work and return to a stable business activity? What functions must come back when the 're-entry' option is available?
Real Estate policy
Countries around the world have implemented changes to real estate policy in order to lessen the burden on tenants and in some cases landlords:
In the U.S., many decisions are made at the state and local level, and at least 34 states have temporarily prohibited evictions. At the same time, the federal government issued a 120-day moratorium on evictions from federally subsidized housing or from a property with a federally backed mortgage loan. Major mortgage lenders, including Citigroup and JPMorgan Chase, suspended mortgage payments. Some U.S. states have halted construction on all projects unless essential, such as medical facilities.
In Europe, several countries, including the U.K., Germany and France, have suspended evictions. A number, like the U.K. and Italy, are providing temporary mortgage relief. In various locations across Europe, commercial and residential tenants have been offered mortgage and rent holidays. Some countries, such as France and Italy, have suspended construction. Banks in Europe are being strongly encouraged to give forbearance and not to foreclose on late payments, while governments have granted retailers tax relief.
In parts of Asia, some landlords have offered temporary rental rebates and rent discounts. Meanwhile, some countries, like Singapore, are considering legislation that would protect commercial tenants who cannot pay rent for a period of six months.
Over the long term, Real Estate remains an attractive asset class
Although investment into real estate has fluctuated over the years through various downturns, the overall trend has been for higher allocations to real estate, and we see no reason for this trend to reverse. Real estate continues to offer good risk-adjusted returns that are less correlated to other asset classes. This portfolio diversification advantage of real estate investments is only emphasized in periods of increased volatility in the equities and commodities markets.
Finally, the spread between real estate yields and government bond yields remains at levels that more sufficiently reward the real estate investor. Given this, we expect to see continued flows (and potentially an increase) of capital into real estate over the medium to long term.
The evolution of 'mega trends'
The COVID-19 pandemic will undoubtedly change the way we live and work for the foreseeable future, and new trends will emerge that will become part of our 'new normal.'
But what about the more familiar structural trends which have been shaping the world over the past few decades? JLL has identified and been tracking several so called 'mega trends' impacting the real estate sector for many years – the growth of corporate outsourcing; rising capital allocations to real estate; rapid urbanization and city building; the adoption of new technologies; and the imperative to build a more sustainable future and to take urgent action to combat climate change. Their role in shaping the sector has been undeniable over the past decade but, looking to the new post-pandemic world, what influence will they now exert?
All these trends look set to continue, although with some new characteristics and points of focus:
Growth in corporate outsourcing. The ongoing health crisis should accelerate the trend of outsourcing over the long term. Occupiers will increasingly seek third-party real estate services to sustain business continuity. There will be increased demand for new workplace design, including more digital, flexible and health-oriented working solutions.
Rising capital allocations to real estate. The low interest rate environment and financial asset price volatility will support the case for portfolio diversification. 'Flight to safety' in real estate, which continues to offer better relative returns in comparison to other asset classes, looks set to increase.
Urbanization. The pandemic is unlikely to slow the long-term trend in growing urbanization, but will prompt a rethink in urban design, increasing the imperative to develop truly scalable smart city solutions, to put a much greater focus on public health and safety, and to deliver greater investment in public infrastructure.
Technology. The mass adoption of remote-working technology through the pandemic phase will likely increase the pace of the Fourth Industrial Revolution, including even more emphasis on robotics, the Internet of Things (IoT), Big Data, and unmanned vehicles.
Sustainability. There will be an increased spotlight on corporate social responsibility, and through this, greater awareness of the fragility of our society and ecosystem.
Our 'new normal' will take time to evolve. New trends are already starting to take shape as governments, businesses and communities begin to adjust to the post-pandemic environment. But equally, there will be other consequences to the pandemic that will surprise us and that are not yet possible to predict.
Source: JLL Research, April 2020