Building Immunity Through Real Estate Post-2020

Amidst lockdowns white collar employees have largely enjoyed cutting the commute to work, which has given them back more time for activities that will improve their wellbeing such as sleep, exercise or spending time with family and friends. Ultimately the amount of time employees spend in offices on average will decline from pre-pandemic levels, and some occupations and roles will increasingly occur at home. This trend won’t sound the death knell for office demand but instead will present an exciting period over the next several years as workplace practices evolve in conjunction with office lease expiries. Technology will be pivotal to this evolution, coinciding with the rollout of 5G networks and the growing trend towards cloud computing. Demand for data centres will increase partly as a result of more people working from home.

Lockdown saw a structural nudge upward in online retail sales, with many consumers buying products online that previously they wouldn’t have. We expect that even once the pandemic passes, online retail penetration will remain higher than if COVID-19 hadn’t hit. Accelerating an existing trend, this increase in ecommerce will drive demand for new warehouse space and infill delivery hubs. Additionally, demand for cold storage will increase as more grocery shopping is done online.

An initial impact of the COVID-19 pandemic on Australia and New Zealand was supply chain disruption due to China being the first country to enter lockdown. China’s global-leading role in manufacturing and goods trade exposed vulnerabilities when the product flow effectively stopped. As a result, governments and businesses are reviewing supply chains, and over the coming years there will be a gradual increase in supply chain diversification. Resilience in sourcing will diversify suppliers and could also result in a small shift to local manufacturing – some forms of manufacturing will return to local shores while other forms could stay local rather than being transplanted to locations in Asia with cheaper labour costs. Onshoring could also be a theme that plays out to the benefit of the office sector. Telstra is a large corporation that is permanently moving call centres back to Australia – will others follow?

International border closures have devastated the tourism sector, and unfortunately this is likely to remain the case until the second half of 2021 at the earliest. The hotel sector must brace for prolonged lower levels of international tourism. Domestic borders in Australia will reopen sooner than international borders; the tourism industry needs to almost exclusively focus on attracting interstate travellers. In New Zealand, elevated levels of domestic tourism since lockdown restrictions were lifted have already manifested themselves in positive hotel occupancy trends. A one-way (New Zealand to Australia) travel bubble opened in October – hopefully that extends both ways in early 2021.

The retail sector is being adversely impacted by closed borders because lower levels of international tourism and overseas migration is reducing retail spending. The lack of overseas tourists is impacting retailers in CBD and holiday destinations the most. Reduced temporary migration is also impacting the student accommodation sector because it primarily caters to overseas students. Although there is a push to bring overseas students back en masse for the next school year, at this juncture that scenario seems unlikely, and universities and student accommodation providers will continue to experience lower incomes in 2021.

The H1 2020 recession and prospect of prolonged weak economic growth is causing many businesses and households to cut back spending, a trend that will continue in 2021. From an office occupier’s perspective, the search for savings could see an acceleration in the evolution from traditional office workforces to hybrid workforces to reduce occupancy costs and increase flexible working practices. Part of the money saved on occupancy costs will be spent elsewhere because occupiers will invest in technology to better support remote working.

Economic uncertainty will cause some office occupiers to defer making long-term financial commitments such as signing long-term leases for office space; instead, they will adopt short-term solutions provided by flexible space operators such as co-working providers. Over the longer term, some occupiers may deem flex space an optimum solution that enables them to efficiently dial up or dial down their space requirements. Despite the near-term challenges faced by flex operators, flexible office space is here to stay.

The COVID-19 pandemic has increased acceptance of white-collar employees working from home. Combined with Australia and New Zealand’s largest residential markets remaining amongst the least affordable globally, there is a notion of people leaving the major cities and working remotely fulltime from regional locations. This will occur in some instances but won’t be commonplace. Our view is that housing affordability will remain an issue in Sydney, Melbourne and Auckland, but remote working doesn’t mean people will move to regional areas in droves.

Travel is a luxury less affordable during an economic downturn. Businesses and households tightening their belts will reduce the amount of corporate and leisure travel even after borders re-open, an immediate surge in pent-up travel notwithstanding. Hotel demand and spending in major city CBD F&B operators will improve once borders re-open, but a full recovery could be years away. Another way that businesses can undertake cost containment amidst the climate of weaker economic growth is to lower their wage bill. But rather than just short-term gains from cyclical redundancies, investment into technology that drives automation will reduce labour costs over the long term.

The economic downturn has caused some companies to cease to operate, and this will likely intensify in 2021 as Government support packages such as the insolvency moratorium in Australia expire. This will create higher levels of vacancy in most types of real estate. Survival of the fittest will play out across the broad spectrum of businesses; in the retail sector, large retail chains with stronger balance sheets will absorb smaller or boutique operators.

When the pandemic started to take hold in March, Australians were pondering over changes needed to help avert another episode of the catastrophic bushfires last summer, and the New Zealand Government was in the process of establishing the Climate Change Commission. Concern for the planet quickly shifted to concern for self as the deadly virus spread around the globe like wildfire. Measured, long-term responses to the bushfires and pandemic are still to play out, but they will, and where government action is deemed inadequate, businesses and households can effectively shape policy through their choices. The importance of sustainability and societal impacts of companies will only increase in the coming years. The pandemic is another factor that will accelerate the importance of Environmental, Social and Corporate Governance (ESG) to investors and occupiers.

Lockdowns around the globe caused carbon emissions to decline. COVID-19 has further intensified climate change sentiment, given its prospect of presenting a similar yet more devastating impact to human health globally. Even prior to COVID-19, there was an increasing trend of ‘flight shaming’ triggered by the ‘Greta Effect’; the combination of environmental concerns, business cost containment and wider adoption of virtual meetings will mean a slow recovery for corporate travel.

Workplace health and safety has become more important than ever in an attempt to stop the spread of COVID-19. Sanitisation protocols and measures in place now and over the foreseeable future will be more rigid than pre-COVID, but that’s unlikely to remain the new normal. On top of that, social distancing will be temporary. One thing more likely to persist, however, is heightened vigilance around potential sources of (any) virus infection within a workplace. White-collar employees sniffling behind a computer monitor won’t win many friends in the office. Looking ahead, we could see a lasting trend where workplace wellness improves as workplace sickness declines.