Features Technology

The Great Disassociation & Its Effects on Commercial Real Estate

Photo by Alexandre Debieve for Unsplash

Long after the COVID-19 pandemic has abated, its effects on commercial real estate will remain. One of these is an intensification of what I call The Great Disassociation — the separation of activity and place. The trend was well underway in 2020, but the pandemic accelerated its progress, resulting in permanent changes to societal behavior and, by extension, to the real estate market.

The Great Disassociation is not exactly a new development. It began long ago with the telegraph and, subsequently, the telephone. Both enabled communication from afar. Then came radio and television, which allowed us to access news, sports and entertainment from the comfort of our own homes. The next milestone was the rollout of the internet, which further distanced activity and place through an information superhighway. With every technological advance came changes in societal behavior, changes in real estate followed. Below are more recent examples:

Teleworking was gaining ground before the COVID-19 pandemic, but in June of this year, 42% of the U.S. workforce was working from home full-time, according to Stanford economist Nicholas Bloom. This percentage accounted for more than two-thirds of all U.S. economic activity. Although teleworking was mandatory in many places at the time, the surprisingly high levels of productivity from off-site employees caused many employers to rethink their policies. If working from home becomes more widely accepted, the office market will need to adjust accordingly.

The ATM, which grew in popularity in the 1980s, spurred the movement to self-service banking. Today, of course, we don’t even have to visit the ATMs since we can bank online, another trend accelerated by the pandemic. Keefe Bruyette & Woods, a New York City investment bank, recently reported that teller transactions have decreased by 30% to 40% this year alone. With that figure in mind, we believe that we can expect additional consolidation of bank branches in the near future.

E-commerce has also been growing in popularity in recent decades, causing consolidation of retail space and prompting retailers and landlords to focus more on the in-store or in-mall customer experiences. But it’s not easy to enhance the customer experience while mandating social distancing, and the pandemic is contributing to further closings of malls, shopping centers and non-essential retailers while boosting e-commerce.

A study commissioned by the National Restaurant Association found that in 2019, rates of off-premises dining (drive-through, takeout and delivery) were already rising rapidly. When the pandemic struck, it encouraged restaurants to offer outdoor dining and expand off-premises options, including delivery partnerships with such services as Grubhub and DoorDash. This trend will only strengthen when colder weather arrives and demand for outdoor dining decreases in cooler parts of the U.S.

The four disassociations I’ve mentioned are only some of the many COVID-19-induced trends influencing the direction of commercial real estate. Others include entertainment (streaming of performances and sports), fitness (growth of home gyms) and education (distanced learning).

How should commercial real estate owners, operators and investors respond to these developments? I suggest that they consider two key dimensions as they conduct their analyses: change drivers and population trends.

Change Drivers
The first question to ask is whether each disassociation resulted from pre-existing trends or more directly and acutely from the pandemic. In other words, are the causes expected or unexpected? Take the growth of e-commerce. That was an expected condition, in contrast to the halt of on-site dining due to COVID-19. I like to use the following chart as a guide:

As you can see, the main distinction between the two columns is transaction versus experience. CRE executives have to assess the factors underlying each separation in future planning. Think about Nordstrom, which has always prioritized the in-store experience. In contrast, stores that offer only a commoditized transaction cannot compete with e-tail. Less-personalized experiences will remain in the virtual realm.

It’s harder to assess the acute disassociations since they lack a point of reference from which to predict the direction of a trend. In each case above, the driver was the need for social distancing. Outcomes will be determined by policies and perceptions of social norms and safety. It’s likely, however, that in the future, the desire for quality on-site experiences will increase demand.

This is especially true for office workers. Despite the productivity teleworkers displayed during the pandemic, it’s clear that collaboration is easier when physical space is shared, enabling unplanned interactions and fostering a sense of shared objectives and an inclusive culture. Demand for personalized experiences will also drive a return to restaurant dining, live entertainment and gym visits. In such cases, it is impossible to fully replicate the capabilities and facilities these venues offer.

Population Changes
The second dimension relates to population trends. As people became used to working from home and interest rates decreased, some city dwellers started moving out to the suburbs and to smaller cities, where they could find larger homes with more private space. The working-from-home trend, coupled with a fear of using public transportation, has further decreased the daily populations of central business districts.

Meanwhile, there are no sports games and cultural events to attract business travelers and tourists to the cities. All of these variables are interfering with the traditional “location, location, location” model of real estate.

So what do owners, operators and investors need to assess? They should attempt to predict whether foot traffic in a building, block or city will continue to decrease post-pandemic. They also have to consider the new norms of social distancing, ensuring that their properties support reduced density of space for office workers.

What’s Next
I have my own predictions, one of which is that commercial real estate will weather the storm, as it has done through the ages, through redevelopment, renewal and reinvention. Creative thinkers and entrepreneurs will continue to drive innovation. In the past, they pioneered the combination of retail and entertainment. In the future, they’ll look at repurposing properties, transforming factories and warehouses into lofts, industrial sites into reclaimed waterfront green space or into apartments and big-box retail sites into boutique retail or community facilities. Today’s historically low interest rates support these kinds of initiatives, facilitating access to capital.

The pandemic-related challenges the industry faces are daunting, but they are not insurmountable. Now is the time for careful strategizing. And that is an activity that owners, operators and investors can undertake from any location.

Sign Up for Newswire

    [ctct ctct-115 type:hidden 'Mann Report Newswire::#158']