While the Covid-19 downturn hit more quickly and with more severity than prior downturns, the impact varies greatly by sector. Sectors such as industrial, apartments, and storage have seen more muted declines while sectors such as retail, lodging and to some degree office have been more severely affected.
Some smaller sectors that have been uniquely hard-hit by the Covid-19 pandemic have strong underlying drivers that should support demand once the pandemic passes. Student housing for example should rebound as colleges resume normal activities.
Additionally, while occupancies in seniors housing have been impacted in the near term with some state and local regulations preventing move-ins, there are already signs of demand for available units, as industry surveys have highlighted the desire for new residents to move in as restrictions ease and the demographic wave of baby boomers is very much still a tailwind for long-term demand.
While businesses are beginning to reopen, it will likely be two to four years before prior demand peaks are reached in the more severely affected sectors, but we still view these disruptions largely as cyclical declines. They should wane and reverse course at some point, but the economy will track the virus and the property markets will track the economy, so that point is difficult to pinpoint at this time.
There are indeed structural impacts that will result from the Covid-19 outbreak that are wide-ranging and in most cases will accelerate trends that were already evident.
Data centres are one of the primary sectors that has seen an increase in demand in recent months. On Verizon’s network, use of collaboration tools alone saw peak usage levels reach 1,200% of a typical pre-Covid day over the March to May period, and gaming (+257%), streaming (+47%) and VPN use (+83%) were also up sharply. More e-commerce, more remote work, more streaming, and just the general digitisation of society in this era has all supported data centre demand, which was already growing fast before Covid-19. Some of that excess demand may temporarily drop off as people return to the office, but network access has become even more integrated into everyday life under Covid-19 and the underlying structural demand trend toward more data usage has clearly shifted higher.
Housing is expected to see a structural shift, and single-family rentals have also held up well of late. Millennials who were considering a move to a less dense housing situation seem more inclined in today’s environment to consider a suburban lifestyle.
A recent Citi survey of 5,000 adults suggested that 15% were considering a move to the suburbs in the next three years compared to 7% pre-Covid-19. Among millenials, 19% were considering that move compared to 10% pre-Covid. These figures were higher yet among wealthier demographics and those with children. This change was probably going to happen eventually as millennials aged, but it has likely been accelerated by the pandemic and single-family rents have actually increased in many markets.
Many types of retail were in distress before the pandemic hit due to the ongoing shift toward e-commerce, and that trend has only accelerated. Some retailers will not survive this downturn in their current form, and this poses challenges for already hard-hit retail property sectors like malls and power centres.
However, there will be retail winners as some retailers have learned to operate in a more flexible manner, which will help their long-term survival. Models where people order food and goods online and pick it up at the store or even curbside are still operating, and there has been an opportunity for these same retailers to grab some of the shop-from-home demand. Retailers have been talking about building omnichannel capabilities for some time — they can sell to a customer online but ship from store, or buy online and pick up in-store, or use the store as a showroom but make the sale online and ship to their home from a warehouse, or simply make a traditional in-store sale. Those who have succeeded in building the capability to make a sale over every channel are well positioned both during the downturn and coming out of it.
Whether from newly relevant omnichannel retailers or traditional powerhouses like Amazon, it is very likely that e-commerce will gain share and that this trend has been accelerated by Covid-19. In the US, e-commerce may top 30% of sales this year, up from less than 20% last year. That share should come down as stores reopen, but it is unlikely to retreat below 20% again.
Beyond supporting retailers, this should boost industrial and data centre demand, particularly as the broader economy begins to rebound. Industrial will still see a cyclical reduction in demand while the outbreak lasts but e-commerce will provide some support to overall industrial demand and shift some space usage from traditional retail to industrial over time.
Other sectors are also seeing a structural impact from Covid-19. For some time, it has been possible to work remotely effectively, but few companies have allowed employees to do so regularly. By necessity, Covid-19 changed that, and in office-using sectors most employees have proven that they can be productive working remotely. This could reduce office demand post-pandemic if employers decide they need less space as more employees work from home.
However, at the same time Covid-19 will also likely increase space per person requirements to ensure proper safe distancing. While it is very unlikely that we would go back to an era of everyone having an office with a door, more physical separation will likely be desirable to employees. Prior to Covid-19, space per employee had been declining for decades, and to the extent this trend halts or even reverses it should offset some of the effect of remote work on office space demand.
Less clear is whether the pandemic will result in a long-term boost in demand for suburban office. Some analysts have suggested that it will as companies seek to decentralise and move employees out of high-density, high cost areas. While this seems plausible, it is not clear how much traction these efforts will get if employees can simply work from home. We will be monitoring leasing trends to see whether this theory stands up to scrutiny.
Russ Devlin, CFA, is director, research North America at AEW, an affiliate of Natixis Investment Managers.
