When we think of real estate, we think of homes, skyscrapers, and other buildings. These physical spaces, while a large part of real estate, are not all-inclusive of the magnitude of impact that the real estate industry has on a vast grouping of people. Historically, the real estate market has been known to fluctuate and cause drastic changes for the American economy. The 1873 stock market crisis, Wall Street Crash of 1929, Great Depression, and 2008 mortgage crisis have proven that real estate market cycles impact the greater economy, from investor trends to employment rates. While not as drastic as the prior empirical examples, the real estate market can expect changes after the pandemic ends. Why? The answer is two-fold: online shopping and Zoom meetings. The virtual nature of the average American’s lifestyle during the pandemic created a new culture of online work and consumerism. This newfound dynamic is going to have drastic impacts on the real estate industry in the post-pandemic world. The work from home model (Zoom meetings) and rising dependence on e-commerce (online shopping) are leading the nation into a new reality of office adaptation and the risks of property obsolescence.
Work from Home Lifestyle
The work-from-home (WFH) lifestyle that the pandemic cultured directly shaped the real estate industry; companies are looking to adopt the model in the future, resulting in the repurposing of workspace. Although initially intended to combat office closures per public health demand, the WFH model proved to be more efficient for employers looking to maximize their office productivity and cut costs. Boosting productivity would in turn allow a company to put its resources to better use. In other words, one worker can do the job of two.
Since the pandemic onset, the Harvard Business Review estimates workers are spending 12 percent less time drawn into lengthy meetings and nine percent more time working with clients. In addition, they reveal people find their work more meaningful and worthwhile, as the number of tasks people deem tiresome has dropped from 27 percent to 12 percent. This statistic reveals that workers have a mindset shift when given the opportunity to work from home, creating opportunities for employees to reach higher potentials in their work when they don’t have to commute, can be in the comfort of their homes, and operate on a flexible schedule.
Because of the success that many companies are seeing with WFH in the pandemic, research reveals that the companies are looking to keep this WFH model in the future. Estimates predict that 20 percent of workdays will be done from home post-pandemic, predicted to lift productivity by five percent overall. With such a promising future with a WFH system, offices are looking to adapt the amount of workspace they need, and office space is most likely going to shrink for these companies. This means that companies are going to adapt the way their offices look — and your workspace may change too.
With a hybrid model of virtual and in-person operations, companies may look to repurpose the extra space in their offices that is not required for individual personnel. Rather, offices would divert to having more collaborative spaces for meetings and group work instead of an employee-station setup. This change would be supported in a flex-and-flip model in which high-level investors redevelop building spaces so that they can sell the properties in conditions conducive to high occupancy rates in the future. Post-pandemic, this would look like repurposing offices to adapt to a more team-oriented office layout, and might possibly include making changes to retail spaces as e-commerce grows.
The WFH model is one of several catalysts of change for the post-pandemic real estate industry, but it is certainly not the only one. As people followed stay-at-home orders amid the pandemic, shopping diverted to e-commerce as online shopping was more accessible and safer, given the conditions. E-commerce grew 33.6 percent in 2020 — increasing by over 800 billion dollars. While people may not have realized, their increased reliance on Amazon and online Target purchases foreshadowed a new trend in one of the five real estate asset classes: retail spaces.
By 2025, it is estimated that 25 percent of America’s remaining 1,000 malls will be shut down due to the ascent of e-commerce. While mall closures were inevitable in the future, the pandemic accelerated this reality and raised a new concern: what happens to the retail space? The nation’s largest mall owner, the Simon Property Group, has been predicted to be working with Amazon to convert vacant Sears and JCPenney stores into fulfillment warehouses for Amazon. This is the first of many conversions of empty retail space into manufacturing space, as Moody’s Analytics REIS predicts retail development post-pandemic will fall 15.7 percent and industrial development will increase 3.6 percent.
Even U.S. retail investors are following suit in this trend — a study by S&P Global Market Intelligence of 250 businesses reveals that every eight in ten retail investor organizations are prioritizing e-commerce investments after the pandemic. The study furthers, “More than half of survey respondents, or 54%, said their organizations plan to prioritize e-commerce experiences in areas such as mobile payments and online services, including buy-online, pick up in-store and curbside pickup.” This transition, from an investor’s perspective, is defining for the future of retail spaces that are likely to be repurposed, obsolete or need immense focus on restructuring.
The rise of e-commerce and the announcement of Amazon taking over old warehouse spaces poses a threat to the present dynamics in the retail world. While Amazon is only looking at a few facilities, the rising demand seen in online shopping signals that Amazon will need to expand its production capabilities in the future — meaning repurposing more retail space for e-commerce centers. This transition goes on to impact the workforce, as the retail industry will have significantly fewer job opportunities with the rise of a virtual retail space.
Adaption and the Future
Companies looking to adapt in the future have a few different options: a) sell part of their space which could possibly have the risk of asset obsolescence, b) change their layout, or c) repurpose the space for the future. Different companies will take different avenues of alternatives that best suit their work environment in the future. For example, the finance and insurance, management, and information industries have the most potential for a WFH model in the future that would actually boost productivity. As such, these spaces are most likely going to be restructured to accommodate collaboration rather than have office spaces suited for daily, individual work.
While the pandemic has been an economic rollercoaster, with an all-time-high unemployment rate of 14.7%, the future holds promise for high investment opportunities. Investors recognize that the pandemic is causing changes within the business realm, creating opportunities for redevelopment that would lead to profitability in future market conditions. It is difficult to pinpoint whether this upcoming shift within the real estate industry has more positives or negatives. On one hand, the rise of e-commerce will shift the job market and everyday lifestyle the average person lives — rather than going to the store, you’d order something directly to your house. On the other hand, the market is attracting investors to adapt to upcoming changes, creating a new workforce dynamic that maximizes the potential, efficiency, and productivity of workers. These changes go on to affect more than just the physical properties; they impact employers, workers and shoppers. While the future of the real estate industry still remains uncertain, like much of the post-pandemic world, the industry is one that is catching the attention of many.
Featured Image Source: USA Today