Is commercial RE largely screwed for next few decades because of COVID?

First of all, I don't work in this space. I do a lot with retailing equity coverage though so I'm fairly tuned in to some of the larger forces at work in RE (although I'm sure there are plenty of gaps in knowledge). Here is my working thesis on how COVID has at a high level affected Commercial RE:

1) Office space - permanently screwed due to proliferation in remote work. Economy in past century has moved from manufacturing to services to digital, so unlike past pandemics / tail risk events where people had to move into offices & cities to work, COVID has unleashed remote working possibilities never possible before. Already seen significant compression in both commercial & residential rates in highly urban areas (NYC / SF) as you have seen solid quantum of people moving out. Companies are reassessing physical space in a big way (i.e. Twitter, Facebook, etc.) and while I don't think most will go fully remote, even going remote on avg 20-30% of the time means losses in office space. This trend to remote was already happening pre-COVID but COVID has shown exactly how possible it is and office workers (esp. the most skilled ones) will largely refuse to work for companies that don't allow for this flexibility.

2) Store space for retailers - also permanently screwed. E-com penetration pre-COVID in U.S. was 14-15%, COVID has carried it well into the 20s. This is a structural shift given many advantages of e-commerce (time, convenience, endless shelf, etc) & AMZN truly changing the game w/ 1 day shipping (just as they changed the game w/ 2 day shipping some time ago). We've seen significant increase in Prime memberships among lower-income HH which were traditionally naturally harder to onboard to the platform. Also have Wal-Mart for even cheaper inventory & Shopify enabling many SMBs.E-com penetration seems likely to go well above 30% over next decade which will further compress CRE opps.

I'm sure there will still be pockets of opportunity in some areas (like there are in frontier market bonds for instance) but space largely seems to be a structural loser. What are your thoughts? Whether agree / disagree / point flaws in thinking / fine tune ideas, interested in hearing from more knowledgeable folks.

 

How much space do you think you can save by having some of your employees working from home for 1-2 days a week? How many times do you tour an office building and see the desks being 100% full? How many executives who have their own offices already work from home or on the road couple days a week?

Facebook and Twitter and the likes, they are just using this WFH buzz as a public stunt to give themselves more leverages against landlords in an already extremely tenant-friendly environment when it comes to big techs. If you ever read a lease of those big tech names, you might be able to find jaw-dropping provisions, like getting part of the profit if the landlord sells the building. What are you, a tenant or equity partner? Those big techs have tremendous amount of leverage against landlords, and their greedy nature undoubtedly will lead them to never give up any chance to further that leverage.

 

I see your point but I've come across stats that even pre-COVID, 50% of middle class HH globally were able to work at least 1-2 days a month remotely on weekdays. Admittedly on the high end of estimates but I've also seen low end that ~29% of U.S. can work remotely in COVID, most of which weren't doing so before. It's not just some employees WFH 2 days a week but now a share of the company's workforce can almost permanently WFM. If that's even 15% of desk jobs, that's a massive impact on office space. And that will only continue to grow over time, esp. as COVID has shown it is possible. 

Plus what about the point on retail space? Hard pressed to see how this ever comes back

 

In the last 10 to 20 years there's been a push towards less office square feet per employee, which is a trend expected to reverse due to social distancing concerns. So even if you have fewer employees in the office at a time, it's offset by the larger space needed pee employee. People are also going to be more wary about sharing desks on different shifts for the same reason.

 
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I think it is difficult if not dangerous to assess what long-term looks like during the middle of a still active short-term event (i.e. pandemic)

Just a few notes..

1. After 9/11, was speculated/predicted no more high rises would be built and occupancy would fall, also travel would be reduced for a very long term

2. After 08 GFC, home prices would take 20 to 50 years to rebound, and homeownership rates would fall to 55% or so in the US

3. This one is fun... Late 99s rise of broadband internet... business travel would be greatly reduced (less office due to WFH was a lesser point but made) due ability to have video conferences

Notice a trend, all of these were 180 degrees wrong. Travel kept hitting new record levels, int'l business (and leisure as well) travel exploded as global communications became cheap/free, home prices recovered to pre-08 levels by 2013, and homeownership rates started going back up in 2010. 

Bottom line, it's more important to think about human psychology and desires than technological substitutes. Do humans really not want to see each other in person? That is the actual question. The smaller office foot print has been a trend for decades, with WFH flexibility being one justification. We could have been doing this years but didn't, why? That is the real question. Right now we are all equally forced to stay home in essence, do you really want to be one of the people on a video screen when the rest of the team is in the conference room? If you are aiming and gunning for promotions, do you really want to stay at home when the boss is coming into the office? 

Answer those questions, and you can get a better sense of what may happen.  

 

There is no doubt commercial real estate largely screwed for the next few decades because of COVID. According to the latest reports, it will take 2-3 years for the distribution of the covid vaccine. I believe after a few years all the Real Estate deals will be done online and those who lead the digital marketing will hit the industry.

 

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