Institutional investors are grappling with the long-term implications of how the coronavirus pandemic will affect demand for various real estate sectors.
Many real estate assets will remain under pressure even as establishments across sectors are once again able to welcome customers, says Jeff Olin, president and chief executive officer at Vision Capital Corp., noting that retail is perhaps the most likely area to see a significant long-term shift in demand.
Prior to the coronavirus pandemic, e-commerce was already trending higher, taking up an increasing percentage of total retail sales. Then the pandemic hit. “What happened was you had an exponential increase from about 15 per cent to about 25 per cent due to pandemic,” he says. “So, if and when this is behind us, what happens? Does it go back to 15 per cent? No way.”
The pandemic pushed demographics that hadn’t yet latched onto online shopping to start using it for the very first time, says Olin. And they’re unlikely to go back now that they’ve discovered it, especially groups like the elderly with limited mobility for whom services like online grocery delivery have more than just the advantage of convenience.
Certainly, there will be a return to physical retail, he says, but the sector was likely to see e-commerce take up 25 per cent of total sales eventually, regardless of the pandemic. With firmly established, multinational businesses unable to pay rents, shopping malls will suffer long term, many to the point of closure. “That secular shift has just received a jolt up. We think people will still want to go out and shop, but things won’t be the same and rents are going to come down.”
As for office space, organizations have been slimming down their real estate use for some time before the pandemic, he says, citing digitization, less need to store physical records and overall shifts in how office space is laid out as contributors.
“Now added to the mix, chief executive officers at Goldman Sachs Group, Morgan Stanley, Shopify, Twitter, Facebook, the Bank of Montreal all came out publicly in the last few months and their workforces have worked very well in a teleworking environment. And they’re reevaluating their long-term demand for office space. Those trends are inexorable.”
That said, Olin notes the square foot of office space per employee has hit a floor and trends have pushed office workers about as close together as possible. But in the shorter term, demand will be higher because of the need to allow workers to physically distance. “If you’re going to be in an office space, you can’t be on top of your neighbour.”
One of the most surprising shifts in demand is the increasing requirement for manufacturing space in North America. “We’re going to look out five or 10 years from now and say, ‘There was a day in March 2020 when everything changed.’ There is a return of manufacturing to North America that is unequivocal.”
This shift will focus on manufacturing necessities like pharmaceuticals rather than consumer discretional, he adds. Disorganization around acquiring medical supplies when the pandemic began highlighted the need for self-reliance by individual countries, which Olin suggests will contribute to so-called re-shoring of manufacturing.