Istanbul. Image: Szeke, CC BY-SA licence.
Some argue that the Covid-19 pandemic is just a temporary crisis, and that when it is over we will quickly return to our lives from before 2020. To prove the resilience in real estate, they may point to the global financial crisis of 2008-09, where a very dramatic collapse of the economy was followed by a relatively fast return to economic stability, with a surprisingly small impact on how we use indoor environments (despite important implications for real-estate finance and investment). Or the example of North African and Turkish hotels, which continued operating despite armed conflicts in both regions. Indeed, cities in general have a remarkable ability to recover from even the most devastating events. Perhaps the clearest example of this is that populations of both Hiroshima and Nagasaki returned to their pre-war growth trends after being devastated by the war.
This point of view suggests that when the pandemic is over real estate will return to the way it operated before 2020. That’s not to say that it will stagnate, but rather that changes will happen at the same rate as before Covid-19. The opposite view is that the virus is here to stay, and that, even though we're developing vaccines, we have to change the fundamental ways we interact with our built environment to make sure that we avoid infections.
This approach is motivated by previous public health policy interventions in real estate, such as banning smoking indoors or enforcing strict fire safety rules. A ban on smoking indoors had a dramatic effect on how we behave – while it increased the comfort levels for non-smokers, it was a real issue for many smokers. However, the rules clearly resulted in health benefits to both groups.
Fire safety rules have a big impact on how buildings are designed and operated, and on the kind of activities that can be accommodated indoors. While many lives are saved by these rules, they come at a cost. Following the rules not only creates a financial expense but also an opportunity to use real estate differently. Since Covid-19 spreads extremely fast in poorly ventilated spaces, indoor environments are currently developing new rules to avoid infections. If the virus is here to stay, these rules may also become permanent.
However, it is worth noting that real estate is an extremely traditional sector, and any new rules take a long time to be adopted. It is also unclear what rules actually work. Furthermore, the rules we develop to prevent infections from Covid-19 may be completely ineffective against other infections, which would limit their public health benefits.
Hiroshima street scene. Image: Imahinasy on Photography, CC BY 2.0 licence.
A view that attempts to reconcile these two extreme views claims that while the crisis may be temporary it will induce some permanent changes – notably that many interactions will permanently move online. Many companies are already appointing heads of remote working and reducing their office presence; doctors are helping more and more patients remotely (either on the phone or by videolink); and online learning is becoming more popular than ever. Offering these services remotely is more efficient, as it reduces travel times and demand for real estate. Therefore, it is likely that many of these changes are here to stay. This is the case not because they help us fight the virus, but because they help us switch to a more efficient way of working.
At the same time, some things cannot be done remotely, while others are more efficiently done in an office. Indeed, while offshoring back-office activities was very popular in the mid-2000s, many companies discovered that keeping their workers in one place had considerable benefits. Offshoring is still a viable strategy, but only under very particular circumstances. Indeed, many urban economists argue that remote working cannot be as efficient as office work because it lacks the benefits of high density. This suggests that remote working is likely to be a new important trend in real estate, but that changes will happen slowly – and some may be reversed.
In the short term, demand for commercial real estate is expected to fall while forced adaptation of our activities continues. When the pandemic is over, some uses of real estate will return. This is especially applicable to services where human contact is valuable. However, some activities will continue the gradual process of finding the best way to take advantage of habits we formed and skills we developed during the pandemic – and this will mean a long-lasting change to the way we use real estate in the future.
Associate Professor in Economics and Finance of the Built Environment, The Bartlett School of Construction and Project Management