Getting Real About Real Estate: What are the implications of the pandemic?

July 4, 2020

2 min read

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What's going on here?

Closed offices, remote working, e-commerce. Businesses are learning that the old brick-and-mortar locations are replaceable. Big firms are already ditching the office for good. Twitter has announced that it will allow its workers to work remotely permanently. But what does this mean for the real-estate sector?

What does this mean?

First, it is clear that big firms are rethinking their office needs. The pandemic has proven that work can be done remotely without great losses and disruptions. Most firms will be eager to put in place permanent remote working arrangements to significantly reduce costs. According to FactSet, rental costs amount to between 2.7% and 5.9% of turnover for big corporations and even more for SMEs. To pay less will surely be a relief.

What's the big picture effect?

The office will not go away overnight, that’s for sure. Some believe that it may even keep its old significance. The CEO of Brookfield, one of the biggest real-estate management companies, has argued that maintaining a corporate culture cannot be done remotely and that offices are the necessary backbone of any corporation. True or not, companies will want flexible, shorter-term leases for less space.  An early sign of this is an increased offering of sub-leases. For example,  First Republic Bank is offering 100,000 sq ft on 10th Avenue, with Allianz offering 50,000 sq ft on Broadway.

The digital economy has also become a bigger part of many businesses’ repertoire. E-commerce has been booming, with Amazon raising more than 50% in value in the last few months. Most businesses have moved their activity online. This could translate to lower demand for brick and mortar shops, landing a hard blow to real-estate developers. Construction accounted for 18.1% of the GDP in the US last year. This could soon change.

Property values are down 1.3% in March. Developers are getting anxious and are even resorting to litigation. Simon Property Group, the biggest mall operator in the United States, has sued GAP for nearly $66m dollars in unpaid rent.

From a legal perspective, several practice areas could “benefit”. Real-estate will undoubtedly be involved in helping clients negotiate new leases and finding flexible solutions. Labour practices could also play a big part. The digital labour market is still relatively uncharted territory. New types of employment contracts and new performance indicators will need to be found as the old 8-hour working day model dies out. Litigation could also see a temporary increase in work-flow. As Simon Property Group showed, real-estate managers are ready to put up a fight to secure the most cash out of their clients. Suits concerning unpaid rent and lease breaches will surely increase. Even banking and finance could be involved. There are $2.38tn of commercial real estate loans on their books As more tenants are falling behind on their rents, more landlords will try to restructure loans to avoid defaulting.

Real-estate has been touched more than most by the pandemic and is likely to change in ways as yet unseen. Law firms, as usual, are at the forefront of everything going on. They will play a big role in finding adequate solutions for tenants and landlords alike.

Report written by Bogdan Ciacli

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