COVID-19 as a game changer – People. Planet. Profit.

Many sectors of the economy are struggling to cope with the effects of the corona crisis. The consequences of the pandemic on the real estate markets are not fully known currently. 

At the beginning of the corona crisis, the markets have just experienced a significant shock. This is shown by many indices. However, the indices have not fallen quite as far as they did during the financial crisis of 2008 and are already on an upward trend again. But the long-term consequences are currently still underestimated. Behavior changes, even if everyone hopes to return to normal life as soon as possible. Technology is used more intensively, also for new work concepts. The local business has played a major role, due to closed borders. Resilience is taking on a new significance and supports sustainability issues. How can we assume that bricks and mortar will not change?

Particularly hard hit by the pandemic are retail real estate, hospitality and leisure. There are also initial indications that changes are to be expected for offices. But especially in the non-food trade, which was already in a difficult situation before the crisis, things are getting serious, as store closures have led to extreme sales losses. The slowly rising consumer mood and changed consumer behavior will not help here to quickly return to the starting level. Hotels, restaurants and event locations tend to be among the losers in the crisis, as although they have now been allowed to reopen, the measures to contain further infections are leaving their mark here as well. 

The office market is being watched cautiously and announcements by major occupiers regarding their plans to return to the office do not bode well for space requirements. Many factors play a role here that suggest a change in use. On the one hand, the stigma of the home office has been lifted and its functionality has been proven. The expectation is that future office space planning will take a higher home office share into account. Does this immediately lead to reduced demand? Probably not in the short term, because distance rules require more space. But in the long term, there will certainly be some impact. It is probably not to be expected that the top city locations will become nothing more than business clubs and are more geared to meetings. Nevertheless, the industry is taking a close look and preparing for a transformation. 

Local logistics and residential markets are less affected by the crisis and are more likely to benefit in the long term. However, the recovery in the real estate sector is heavily dependent on growth in the real economy and we will have to wait and see how individual sectors recover and get back on track.

Another story is the behavior of landlords and tenants during the crisis. On the one hand, residential tenants were protected by the COVID-19 mitigation acts if they were not able to pay their rent claims. In the commercial real estate sector, tenants and landlords were dependent on negotiations, which were not always characterized by solidarity during the crisis. There have been saints and sinners. Both sides experienced payment difficulties, tenants were unable to pay their rent due to defaulted sales and landlords had to deal with the lack of payment flows and their obligations to banks and service providers. Care should, therefore, be taken to ensure a balance in contractual agreements on rent payments. In best-case scenarios, both parties managed to reach an agreement and to legally secure and improve their liquidity. Flexible adjustments in contracts, suspension of rent payments, flexible contracts that make use of rent reductions and rent-free periods, deferrals and rent-free periods have been agreed, to give just a few examples. However, anyone entering into such agreements should involve their bank at an early stage and keep an eye on possible adjustments to statutory regulations.

Tenants and landlords who now manage to treat each other fairly and in solidarity can improve their business relationship in the long term. The expectation is that it will not be possible to take stock here until the second half of 2020. To this extent, the figures and payment flows are still under detailed observation. In the course of the opening scenarios, further questions arise in connection with operator responsibility and agreements on the payment of additional services as a result of the crisis and the measures taken. Contractual agreements between tenant and landlord, therefore, remain the central instrument for finding quick and tailor-made solutions.

Many banks are currently under a lot of pressure because they must help with loans everywhere. However, the banks are part of the solution rather than part of the problem as in the 2008 financial crisis. If there is nevertheless a delay in payment, the bank can usually interpret this as a reason for termination. When dealing with the bank, therefore, trust and cooperation should be observed. State subsidies such as financing and guarantee programs can also help to secure existing financing. Much has been and is being done to mitigate the economic downturn.

But the crisis was and is also a catalyst for new topics and has shown us what happens if we are not prepared. Two trends that can clearly be seen alongside increased management in the crisis, digitization and sustainability, are right at the top of the agenda. The resilience of business models and different types of usage in the real estate portfolio is being questioned intensively. Some questions are crisis-induced, ultimately accelerating solutions to critical issues, such as the issue of retail in city centers, which was already known from the crisis.

Nevertheless, for ten years the real estate industry has only known one direction – upwards. High demand and low supply have determined prices. Now it can be observed that investors, asset managers, but also banks and insurance companies are dealing more intensively with the requirements for a sustainable and resilient real estate economy. The crisis is acting as a catalyst for environmental, social and governance (ESG) issues, which were on the agenda anyway in the course of regulation and investors’ sustainable investment strategies. But it is not only the “E” but also the “S” and “G” factors that have become the focus of attention as a result of the crisis. More questions must be answered in the future. Also, digitization and the availability of data for analysis, transactions and valuations are seen as important factors for resilience. Be sure, you will need more data than you think today.

In this respect, it is to be hoped that ESG will also reach the portfolios and not just the mind of decision-makers. “People. Planet. Profit.” could become the new paradigm in the assessment of investments.

This article was written by Susanne Eickermann-Riepe, German Real Estate Leader at PwC, Chair of RICS Germany (Royal Institution of Chartered Surveyors) and Deputy Chair of ICG Germany (Institute of Corporate Governance in the German real estate sector).

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