Firms Like Remote Working – Commercial Real Estate A Big Short?

Since COVID-19 has proliferated on a worldwide scale, the face of commercial real estate may face a string of fundamental shifts, stemming from changes in consumer behaviour as well as firms. And, some of those shifts could still be unknown.

The pandemic has transformed the way we live and work in a record time. At the same time, the implications of globalisation and a largely inter-connected world has helped the virus to enter new jurisdictions very fast.

What has happened with themes that were supposed to pan out over a medium to long term period is that those themes are accelerated by the COVID-19 crisis, which are likely to be more visible as we come out of this crisis steadily.

E-commerce has a strong momentum now

Companies from the ASX boards are increasingly signalling that online sales have been gathering momentum as a result of COVID-19, rightly so – because households have greater concerns regarding their health and going out could be a bad idea when you can order literally anything online. Moreover, online retailing has become a necessity instead of a choice for some.

Businesses that already have strong presence in online space are likely to have benefits over the others. Meanwhile, companies have to increase investments in the digital infrastructure, including fulfilment centres, warehouses.

Over the past decade, there is a long list of retailers that have fell into bankruptcies or administration, primarily due to rising costs, suppressed sales, skewing profits and inability to service near term obligations.

Online sales penetration in the retail sector is gathering pace. If retailers were to shut stores in an increasing fashion over the future, the face of commercial real estate in the space may have to transform to benefit from the changes in demand of customers.

A shift in the needs of commercial real estate tenants to digital infrastructure will likely induce tailwinds for real estate owners that have stakes in warehouses, storage REITs, fulfilment centres etc.

At the same time, retailers may also transform the existing stores to distribution hubs as click and collect services are very popular among Australians. Of late, large Australian retailers have been offering omni-channel retail experience to customer base.

Industrial real estate market within commercial real estate appears to be better placed to capitalise on arising opportunities, especially in the metropolitan cities where large number of consumers live as retailers looking to meet the delivery timelines according to the terms.

Related: Real Estate sector under scanner: Rental vacancies surge, Mirvac plans Sydney’s tallest building

Reassessment of supply chains

As countries closed borders, there was a disruption in supply chains of the businesses, which effectively means disruption in business. In a highly globalised world like we have today, the end product is a function of a range of variables that are usually manufactured in other jurisdictions.

Corporation could be forced to stress on the parts that could be manufactured domestically rather than sourcing them from other side of the world. If critical parts of an end product are sourced from other country, the production of that product might have witnessed delays due to supply chain issues.

Businesses are likely to revisit their continuity plans, which may prompt management to consider moving manufacturing to the home country in an effort to reduce risks of any exogenous shocks.

Japanese Government has set up a fund to promote moving supply chains from China to other countries. Media reports note that over 150 Japanese companies have already relocated supply chains from China to similar nations like Vietnam and Thailand.

If new supply chains are incorporated domestically, it will likely provide boost for the demand for commercial real estate, especially in the manufacturing and production space.

It is wise to note that China has devalued its own currency in the past, and devaluing currency would deliver additional benefits for the businesses producing and exporting from China.

Employees are efficiently working from home

Many workplaces are left empty since COVID-19 crisis has intensified and employees are forced to work from home en masse. Although some of the employees may not be as effective as they are from office, the silver lining is that operating remotely could help businesses lower operating costs.

Businesses that are well-capitalised could service their obligations pertaining to lease, but companies with small business and less-resilient cash flows may face difficulties in servicing lease obligations, prompting such businesses to reduce operating costs.

Flexible working culture and widespread adoption of remote working could reduce the demand for office properties in the central business districts/downtowns. Since businesses need to follow social distancing measures, the existing office spaces could not be enough to accommodate the same headcount at the same space.

Some companies have given indications to operate remotely for longer

Most of the service- based business see working from home as a viable option in continuing business as it could drive the cost benefits. Media has been reporting below stories of late.

Facebook has said that it can allow employees to work remotely on a permanent basis. Over the next decade, the Company could move half of its workforce to work from home culture.

Google has confirmed that its personnel could keep on working from home until the end of this year (2020). Microsoft has allowed its employees to work from home until October this year.

Amazon noted that employees who can effectively from home could do so until the start of October. Twitter has allowed its employees to work from remote location permanently.

Shopify also said that employees would work from home until 2021 and possibly on a permanent basis. Spotify has recently announced that employees could work from home until the end of this year.

What’s the take of a famous bargain hunter in the real estate space?

Sam Zell is a prominent distressed real estate investor. He notes that the pandemic has induced dire consequences for businesses in the travel, leisure, retail space. And, that these businesses may be open now but whether they would be doing business or not remains a concern.

Sellers at the time have relatively higher expectations for considerations, and there is a wide gap what buyer intends to pay. He also said bankruptcies are inevitable to clear markets and end recessions.

On retail sector, he said that the attractiveness could fade away as traffic in the space is diminishing due to the social distancing measures implemented by the Governments.