The industry’s turning point means it’s time to reinvent real estate through transformation, technology and flexibility.
What a difference a crisis makes. In just a few months, COVID-19 has turned the global real estate industry on its head. As is the nature of a freak event like a pandemic, the sector was neither expecting it or prepared. But it’s no exaggeration to describe the pandemic as a shock that is altering what occupiers want from space – an inflection point that will change the industry forever.
Lifted by low interest rates and buoyant tenant demand, commercial real estate was enjoying a golden age until the music abruptly stopped. Values in the US roughly doubled from 2009 after the Great Financial Crisis until their highs at the end of 2019, according to the Green Street Commercial Property Price Index. In the first quarter of 2020 they fell about 10%1, as economies entered lockdown, confidence collapsed and people started to social distance. While the US is the biggest real estate market, the pattern is similar elsewhere in the world.
In just a few months, people’s behavior has shifted dramatically, sparking equally dramatic changes in what they want from space. Valuations and rentals are falling, tipping the hardest hit sectors of real estate such as hospitality, retail and offices into turmoil, and even leading to corporate restructuring. But the shock waves are reaching all sectors, forcing many real estate companies to adapt quickly to a new, more challenging era.
By its nature, real estate is not used to rapid disruptive change. Buildings do not lend themselves to dynamic innovation in the same way as software or an e-commerce business model. Yet the crisis is compressing multi-year trends that were already underway into just a few months. It’s redefining how we think about space, undermining the sector’s basic truths such as the security of income and stability of valuations.
The result? While real estate companies must face the challenges of today, they should also focus on the longer-lasting changes — behavioral, geopolitical, macroeconomic and technological — that will result from the crisis. They should ask: to what degree is 2020 likely to be a turning point for real estate? The most far sighted are already planning how to switch their focus, while transforming operations and technology, to survive and thrive.
In this article we look at the broader trends affecting the industry and some of the implications for asset types. We also outline some actions that organizations can take to enable the transition by transforming businesses through innovation, investing in technology and building flexibility into business processes.