COVID-19: Global Real Estate Implications. As COVID-19 impacts more people every day, coronavirus contingency planning is of the utmost importance. Explore the pandemic’s potential effects on the economy, real estate sectors and investors and occupiers.
Governments, businesses and communities are facing up to the reality of COVID-19. The short-term impacts on economic growth, business activity and individual behaviour are undeniable and, while the current consensus is for a rebound in the global economy in H2 2020, the exact trajectory is unknowable. We therefore suggest a scenario planning approach, rather than betting on any bold predictions, with a focus on preparedness for either a mild to moderate slowdown that is transitory in nature or for a more severe and sustained slowdown.
The outbreak of COVID-19 and its rapid spread across the globe has taken many by surprise, and businesses, communities and governments must now confront the reality of the seriousness of the situation. There is a wealth of information (and misinformation) to be consumed on a daily basis and, in such a fluid situation, the facts and consequences are changing quickly. While individuals and businesses remain focused on health and well-being, this paper will highlight the potential implications for real estate.
In the short term, the impact on global economic growth is undeniable, with those countries that are the most advanced in the outbreak already feeling the effects. At the time of writing, the consensus forecast is for a sharp shock to the global economy in the first half of 2020, followed by a bounce-back – reminiscent of the recovery after the SARS outbreak in 2003. Although the immediate hit to demand has been very evident in the retail and hospitality sectors, certain industries are more susceptible to the disruption of supply chains. Disruption has already started in sectors such as automotive, aviation, chemicals and consumer goods, and the full effects have yet to filter through. Conversely, pharmaceuticals and healthcare are most likely to experience a surge in demand.
Health authorities, governments and financial institutions globally are uniting in their goal of protecting and treating their populations, containing the spread of the virus, and ensuring the stability and health of businesses. Many central banks possess limited ammunition, but further rate cuts and quantitative easing, targeted liquidity support, and macroprudential forbearance will provide some cushioning to the slowdown. Fiscal policy measures could be implemented, yet they would likely be most effective in targeting industries most acutely affected by a loss of revenue and higher costs.
Our current base case is guarded.
The further the outbreak widens and the longer it persists, the greater the chance of a more prolonged impact on the global economy and, by extension, real estate markets. At this point it is difficult to separate the actual current and likely economic impact from the fear-gripping news sources and financial markets. The exact trajectory of the outbreak and the resulting economic effect is unknowable. We suggest a scenario planning approach, rather than betting on any bold predictions, with a focus on preparedness for either a mild to moderate slowdown that is transitory in nature or for a more severe and sustained slowdown.
For our clients to better address the situation, we have compiled an initial assessment of the impact and implications on real estate sectors globally which we shall be updating as the situation evolves.
Corporate occupiers and response timeline
The health and well-being of employees will be the initial primary corporate concern, followed closely by business continuity plans. Given the rapidly changing situation, businesses need to be nimble and flexible. We advocate a corporate response that focuses on Preparedness, Protection, Monitoring and Communication.
Operational resilience will be a longer-term focus for real estate decision-makers as businesses develop the ability to respond quickly should they face another similar event in the future.
A challenging environment for corporate activity
Corporate occupiers must remain nimble and able to react quickly to this rapidly changing situation. We recommend a focus on the four areas where the implications loom large: Business Operations, Workforce, Finance and Communications.
Preparedness is critical. Despite the existence of business continuity plans, for many firms the outbreak has exposed gaps. Business operations may be hit, and consideration should be given to changing or closing operations in affected areas and transferring business to new geographies or knowledge to key employees.
Supply chain disruption should be anticipated and counteracted. Supply chain visibility is also a challenge across industries and one that corporates should seek to improve. Manufacturing facilities may face immediate and lasting interruption, as will product distribution channels. As a result, businesses are addressing logistics, labour costs, productivity and hedging risks across supply chain locations.
Strategic decision-making processes will face interruption. It is unclear at present when we will know the extent and the duration of this impact; in the meantime, businesses will be fast-tracking contingency planning measures to deal with a potential prolonged period of disruption.
People protection and wellness are the priority. Wellness needs to be put at the forefront as a basic corporate duty of care to employees and to ensure workplace productivity. Contingency plans need to be implemented for employees unable to commute, travel or occupy corporate locations, and access to sites for visitors, suppliers and the public also needs to be reviewed. Social and professional ‘distancing’, absenteeism and illness are likely to cause disruption and present a potential impediment to operations and sales. Your buildings can also act as barriers to contamination. In the longer term, ‘building health’ (including building ventilation, air filtration, and cleaning) and facilities / management preparedness will all become increasingly important.
Remote working is key to ensuring the continuity of your activities. Difficulties communicating with colleagues and clients, IT system capacity issues and the risk of workforce shortages will also affect productivity. Mitigating policies and procedures and an increasing adoption of effective remote working will help reduce some of this impact.
The financial impact on corporates will be multifaceted. Businesses are required to finance the emergency response along with the mitigation and resilience costs around planning, ‘solutioning’, training and recovery from the outbreak. Additional costs for hiring should be considered – the availability of temporary replacement workers and other substitute resources may be difficult. The cost of distributed technology investment and telecommuting tools to enable remote working where feasible should be evaluated.
Deploying new technologies and solutions (e.g. PropTech and MedTech) to control the level of infections of employees will require capital investment. Not all investment will be recoverable, but this will leave a legacy of improved and more robust operational measures and systems.
Communication is essential to provide transparency. Establish protocols and guidelines to communicate information to employees and business partners on your infectious disease outbreak response plans.
Avoid miscommunication and ensure the appropriate dissemination of information, and also avoid ‘fake news’ or ‘infodemics’. (An ‘infodemic’ is an overabundance of information – some accurate and some not – that makes it hard for people to find trustworthy sources and reliable guidance when they need it.)
What is your Corporate Response Timeline?
The corporate response to COVID-19 needs to start immediately and we advocate Preparedness, Protection, Monitoring and Communication. This is an ongoing process and priorities will change over time as businesses review long-term decision-making strategies. We can already see that COVID-19 may have long-lasting consequences (both positive and negative) that will affect corporates’ decision-making strategies for the long term.
Contributors: JLL Research & Strategy