A Catalyst for Change
In a presentation last year, I cited pandemic as one of the black swan risks to the long-term value of real estate. I was speaking tongue-in-cheek – it got a few laughs – but we’re not laughing any more.
The problem with black swans, a term coined in this context by the economist, Nassim Taleb, is that by definition they are unpredictable. No amount of business planning can effectively prepare one for something about which we can have no knowledge. The tools to guard against such risks are horizon scanning, scenario analysis and the prudent financial management of a business that creates value for one’s customers. However, in the moment, the ability to respond decisively and pivot to the changing conditions is essential.
The coming year will be one that is unprecedented in the living memory of virtually everyone on earth. Many businesses face short-term cashflow issues; some will not survive. Governments around the world are pumping monetary and policy relief into their economies as quickly as possible. And people are fundamentally changing how they work, shop and live; something that would have been met with incredulity just a month ago. At first this was going to mean a couple of weeks of disruption, now the Government rhetoric has shifted to 3 months, and research papers released last week suggest 6 months to a year. The honest position is that we cannot be certain how long the present conditions will last.
My colleagues around the world have been listening to their markets and their clients and have produced some excellent analysis of what is happening right now. You can read more, including first-hand experience of those in the markets which are at the frontier of COVID-19 here.
But what of the longer-term impacts?
When the dust settles on COVID-19, as at some point it inevitable will, some things will go back to normal, but other things will be changed more permanently.
Around the world right now, we are rethinking how we do everything, out of necessity. Many people who have never ordered online in their life have created an Amazon account. All of us are becoming more honed in the use of Skype and running online meetings. And we are substituting the pub and the gym for solitary walks in the countryside. They say that necessity is the mother of invention, and I have seen evidence in our own business of incredible ingenuity and adaption in the face of adversity. Some of these practices will be found to be better or cheaper or both than the previous way of doing things, and these will survive the pandemic.
How should we assess the future in view of this uncertainty?
At its simplest, futurology is just an exercise in looking at what is likely to continue, and what could plausibly change based on what we know about trends and technology. Just 25 years ago, being asked to work from home for three months would have meant business closure; and not going to the shops would have meant starvation. The incredible advance of communications technology and cloud computing over this period (another black swan), has now substantially mitigated this position. However, in many respects this technology has not been used to its full capacity. Many of the change factors I point to in this blog, cite how these kinds of technologies are likely to alter the real estate landscape. This position is unchanged by COVID-19. However, what is changed, almost certainly, is the pace at which these changes will take effect. The biggest barrier to change is not typically the progress of technology, but rather a cultural willingness to adopt it. COVID-19 is the catalyst for breaking existing patterns of activity, inventing new ones, and over a period of months, hardwiring them.
What kind of changes?
The principal effects of the pandemic are public health, the economy and the practice of social distancing; each of which has a bearing on real estate. It is for others to comment on the first two; however, the move to social distancing is forcing us to shift deeper into the digital world. This means working remotely and decentralised from an HQ, talking to colleagues via video calls and not in meeting rooms, shopping online and not in shops, and taking up new leisure pursuits. We are about to genuinely test the value of proximity rather than estimate what it is.
Some will argue that after a year of hunkering down, there will be an explosive demand to become social again. I’m not so sure. Coming of out this period, people, and importantly businesses, will be cautious and the inertia on cost pressures is likely to persist. Set against conventional rhetoric about the desirability of face-to-face talent interaction, and visiting shops for experience, will come the questions of: ‘was it actually so bad without it?’ ‘is it important enough?’ and ‘what is the cost delta?’ and perhaps even, ‘but weren’t we more productive at home?’ Those commuting into our cramped and polluted cities might actually prefer the time that they got back to spend with their families, and introverts (typically the forgotten minority in real estate design), might prefer the solitude of home working.
The outcome will probably be less polarising, but will hasten the departure of the old office, and the secondary shopping centre, and put greater focus on a plural approach to working, shopping and living, where one-size fits all solutions to changing activities will no longer work.
Format innovation, the flexibility to dip in and out real estate, and a focus on adding value beyond the cheaper alternative will be the subject of new and evidenced demand. Those investors who are out of the blocks quickly in response to these changes stand to clean up in the medium term, as is typical for first movers at points of structural inflection.
Finally, as the panic and disbelief give way to the war time spirit that we are now starting to see across the world, there are hopes that a better and more caring society will rise from the ashes of COVID-19.
Pulling together is reinforcing local connections. People are offering to pick up groceries for the neighbour that they have never spoken with previously. Campaigns are being arranged to support the elderly and keep the local café afloat. The UK government has even underwritten the wages of its entire population.
The zeitgeist for change is likely to strengthen the importance of the corporate response to ethical standards, wellbeing and the environment.
Perhaps that is the more enduring black swan that will come from year ahead.