Getting real about realty: Asset owners need to be creative to outlast COVID-19

When the outbreak first started, we thought it would be a matter of months but the reality today is that we may be looking at yet more months of disruption and permanent change in norms. In my opinion, new consumer behaviours formed during COVID will become long-term habits.

The pandemic continues to disrupt real estate in different ways depending on the region and property type. Urban centres see a sharp increase in abandoned spaces as many businesses are forced to close. Property owners need to adapt to the new reality as some asset classes may never go back to pre-COVID times. Because of the adverse effects of vacancy, it's important to activate these spaces temporarily or repurpose the property keeping in mind the future business requirements.

Retail’s digital transformation

Let’s face it, online shopping has become a part of our lifestyle. Why drive around town when it can be delivered to your doorstep. The pandemic has dramatically, perhaps irreversibly changed the way the retail industry operates. Even before the pandemic dealt a heavy blow to the economy, retail stores were turning to e-commerce business models. Going forward, many retailers should decide if a physical store is viable as data from Mckinsey shows that consumers are expected to continue making a portion of their purchases online.

In a post-pandemic scenario, the retailers who continue to operate a brick and mortar store would prefer revenue-sharing agreements with owners to mitigate risks. Retailers need to rethink customer journey and offer a seamless e-commerce experience, integrated services like “buy online pick up in-store”, and same-day home delivery.

The shift to e-commerce will create new demand for another property type: warehouses. According to the Deloitte Center for Financial Services, “industrial real estate demand is expected to increase by 850 million square feet, to 14.8 billion square feet, by 2023.” As the concept of consolidating warehouses in a single location becomes challenging, having multiple distribution centres in different localities seems more appealing. This presents an opportunity for converting existing retail spaces instead of building new warehouses.

Rethinking the hotel experience

The hotel industry is among the hardest hit. A prolonged period of depressed occupancy is fatal to most hotels with largely unchanged fixed costs. As hotels face the prospect of a long recovery process, owners need to develop alternate revenue streams to preserve their investment. In the short-term, many hotels can position themselves as a quarantine space for the duration of the outbreak.

Hotels could also be repurposed to offer office spaces. As many companies move into smaller offices, converting a hotel room into a dedicated workspace that can be rented out on an on-demand basis without the annual lease agreement or deposit required by most commercial real estate. In the current scenario, a private suite is much safer than a co-working space.

Post pandemic, we expect economy hotels and short-term rentals to recover first and luxury hotels to have the slowest return. Accommodation providers have to rethink their entire guest experience with digital check-in that enables guests to pick up their keys and walk directly to their room without having to stand in line in the lobby and virtual concierge services that respond to requests like ordering room service without the need for guests to pick up the phone.

Pivot or persist

Asset owners need to take a hard look at trends to determine if a temporary activation or a complete transformation is required to sustain the crisis. There is no right answer - it all depends on each properties’ circumstances like location, demand profile, etc. The shift to e-commerce and the long recovery of the hospitality industry would lead to the transformation of underperforming assets. As for the assets that persist and outlast the crisis, they will emerge stronger than ever before.