April 21, 2020 | 1 minute read

Rethinking the future of real estate

Maples Teesdale

McKinsey have written a very insightful article highlighting the challenges facing the real estate industry in the current climate and the ways in which the real estate players will have to adapt and reinvent.

Physical distancing has changed the way we interact with physical space and the knock-on effects of the virus outbreak have made the demand for many types of space go down which has created an unprecedented crisis for the real estate industry.

We are likely to see transformative and lasting changes in behaviour. Consumers forced to shop online because of closed shops may permanently adjust their buying habits. Before the pandemic, consumers were already shifting their spending away from physical stores to e-commerce.

This long-term trend may accelerate faster after the crisis – especially as many previously struggling brands are tipped over (the likes of Debenhams, Oasis and Warehouse struggling does not come as a surprise to us) the edge into bankruptcy or forced to radically reduce their footprint. This shift may also further boost already high demands for industrial space and self-storage.

Within commercial office space, the multiyear trend toward densification and open-plan layouts may reverse sharply. Many real estate players will change how they make portfolio and capital expenditure decisions. In the residential real estate market, many have invested in their digital offering by doing virtual open houses and showings.

Over the past several years, industry leaders have been diversifying sources of revenue, pursuing digital strategies, and focusing on tenant experience. The COVID-19 crisis has accelerated the need for those strategic changes—and highlighted that those that haven’t yet made such investments will probably need to catch up quickly. For leading operators, the need to overcommunicate—to both make sure they fully understand tenants’ needs in this moment and help protect everyone in their ecosystem—is leading to some changes in behavior. This may make the practice of communicating as a company-level brand (rather than property-level brand) more common, speeding up an existing market trend. In B2B environments, such as offices and retail stores, CEOs and management teams may join asset managers and property managers and engage directly with tenants. They should follow up quickly on the actions they have discussed with tenants. Not only are such changes the right thing to do—they’re also good business: tenants and users of space will remember the effort, and the trust built throughout the crisis will go a long way toward protecting relationships and value. Thanks to the richness of available behavioral data, select real estate leaders will use analytics to generate fact-based insights on local epidemiological and economic scenarios, what is happening to competitive assets around a property, and the impact of the crisis on individual tenants. These perspectives can inform highly targeted decisions, rather than a one-action-fits-all-tenants approach. Some landlords are now starting the process of thinking ahead to when the crisis is over. Strategic review processes aim to understand how real estate usage might change going forward. However, rather than relying on traditional economic or customer-survey-driven approaches, real estate leaders are looking to psychologists, sociologists, futurists, and technologists for answers. Will employees demand larger and more enclosed workspaces? Will people decide not to live in condominiums for fear of having to ride elevators? While uncertainty currently reigns, by employing a range of creative personnel and using new methodologies—such as deep design interviews—business leaders may find new and more predictive insights.