Pandemic Predictions (Part 2)

In the previous post, I talked about when we might go back to normal. Today, let's think about what possible long-term ramifications the COVID19 pandemic might have. It would be an interesting thought exercise to do this for a variety of economic sectors. For this post, I'll start with the most obvious long term impact: the impact on commercial real estate. This first became obvious to me about a week or two into North America being hit, and it has been pointed out by a number of writers.

This is a living post - I will update it as I think this through more deeply.

Prediction

I think commercial real estate is going to see a permanent drop in demand and therefore in prices. This does not hold true for all types of commercial real estate, but it does hold true for many.

My Reasoning

An anecdote: my company recently got acquired by a bank. When we joined them, just a few months ago, people steeped in bank culture found the idea of remote work not only alien, but somewhat disturbing. On the other hand, walking 20-30 minutes between multiple towers in downtown Toronto for a meeting is something they don't bat an eye at.

In 2020, there is no legimate reason why business needs to be conducted that way - specially in technology-focused businesses. This was not a failure of capability, as much as it was a failure of culture. Coronavirus has shattered that culture. Everyone at those offices is now working from home. This is not to say that everyone likes working from home right now (I've noticed having children is a particular impediment in enjoying WFH). But they've all been forced into a mandatory two-month-long trial, which is likely to continue. It's a similar story across all sorts of businesses, of course.

Once we're through this pandemic, I expect everyone to return to business-as-usual. But I expect some key lessons will be learned from this about the benefits of remote work in cultures that would otherwise never imagine it.

When the pandemic is over, more workplaces will be offering remote work options for more types of roles. With this, lack of remote work options will become an impediment to hiring top talent, as it already has for tech hires.

When the pandemic is over, many workplaces will be reviewing how much they got done with everyone working from home, and they'll be eyeing the expense line on their cash flows as a top candidate for cost-cutting. Even workplaces that are primarily office-based may need a reduced capacity as some portion of their workforce can work remotely at any given time. Large corporations that own their own real estate may see it as less essential and will be more likely to divest, increasing supply.

Culture shifts take time to be ingrained, but the pandemic has massively accelerated the shift.

Outside of office space, many businesses will be innovating with a lower reliance on expensive, prime real estate. Cloud kitchens, for example, were a trend pre-pandemic, and that will only continue. If Amazon had habituated us to buy things online and get them a few days later, pandemic will take this to the next level, with delivery of all essentials becoming not just a preference, but a matter of safety.

One big impediment to remote work is legal. When I bought my apartment, I had to commute for approx. 45 minutes to a lawyer's office, sign a few documents in front of her (which took 5 minutes), then commute back for 45 minutes. This was and is infuriarting and nobody should accept it as 'normal' or 'okay'. We have better ways, and the pandemic has also set the stage for updating our legal frameworks to be more remote-friendly – changes that would otherwise move at a glacial pace. For now, many of these changes are poised as temporary measures, but that's how it'll start.

All of these factors will conspire to decrease the demand in commercial real estate. You've heard about the obvious winners in the current circumstance: remote communication tools, e-commerce, to name a few. This is the flipside of that coin - commercial real estate is the obvious loser.

We're going to be spending less time in wasteful commutes, and more time getting shit done. We'll be happier, and in the very long term, we may even have more beautiful, less car-focused, more environmentally-friendly, and more decentralized cities.

(The impact of this change on the urban landscape is another very interesting thread - to be pulled on in another post perhaps.)

Not all types of commercial real estate will see this drop in demand, of course. As we spend more time in our homes, and more time away from a "downtown core", we'll need increasingly better infrastructure to serve our needs where we are. Many services that are currently concentrated in business districts will be downsized and spread more evenly across the urban landscape, closer to where people live.