The great re-opening

How will real estate respond?

June marks the transition from spring to summer in the Northern Hemisphere and fall to winter in the Southern Hemisphere. The changing seasons help mark the passage of time when many familiar routines have been disrupted by the pandemic. These inconveniences pale in comparison to those who have paid a much higher price – in lost lives, lost livelihoods and separations from friends and family. Never in the post-war history of the modern world have so many endured so many months filled with such uncertainty and trepidation as the first two quarters of 2020. So, the gradual re-opening of economies and the coming of the Northern Hemisphere summer should represent a huge relief.

Yet, the second phase of the pandemic has the defining characteristic that we still must live with COVID-19. While some countries, led by China, South Korea and Germany, are already several weeks into re-opening, others are just starting. The concern among some epidemiologists is that certain jurisdictions may be re-opening segments of their economy before tracing and testing is fully in place. The total number of COVID-19 cases is still rising in many countries, even though the rate of growth has tapered. Recurring infection spikes could force countries to lock down segments of their economy again. Successful re-opening will depend, in part, on how well each country follows prescribed social distancing and safety measures, as well as whether their healthcare system has the capacity to handle a second wave.

The degree of containment success during Phase Two of the pandemic will have impacts on real estate performance. The speed of retail sales recovery at brick-and-mortar stores is uncertain, but this month’s deck shows how we can track rising mobility and footfall at properties as re-opening gets underway. Closure of physical stores led to double-digit and in some cases triple-digit ecommerce sales increases. Some of this shift could be permanent, especially for stores that cannot easily adapt to social distancing or run profitably at highly controlled density levels. On the other hand, retailers that can more easily adapt to click-and-collect models, are already seeing sales recover. Office workers are expected to face a different world when re-opening occurs, including physical distancing for everything from elevators and washrooms to floor plan layouts. In May, some prominent tech office users, including Twitter and Facebook, announced that their employees will be able to work from home for the remainder of 2020, or in some cases, permanently. This has the potential to significantly reduce aggregate office demand if other firms follow suit. On the other hand, other office users may require more space to enable social distancing. The tug of war between these two forces will play out differently for each tenant; but we will be watching aggregate patterns that will determine what happens to overall office demand.

These are issues investors must take a view on, long before the answers are known. To help guide our colleagues and clients, in this month’s deck we examine:

• A comparison of the TomTom Traffic Index congestion levels for two cities at different phases of re opening: Shanghai and Toronto (slide 4)
• A status update of different countries in terms of re-opening and transitioning to Phase Two (slide 6)
• Revised GDP forecasts from Oxford Economics, which now surpass IMF forecasts from April in terms of degree of decline in 2020 and a sharper recovery in 2021. Global growth of -4.8% in 2020 is forecast, while several countries’ 2020 forecasts have declined by three to seven percentage points compared to Oxford’s forecasts in March and April. (slide 8)
• A forecast decline in global trade which is expected to surpass the sharp decline seen in the 2008-09 downturn (slide 9)
• The latest monthly readings of CPI Inflation moved negative in Canada, Sweden, Spain, Switzerland and Ireland, and has plunged in other countries as consumer prices fall amid the pandemic (slide 15)
• In May, the U.K. joined Japan, Germany and other European countries in selling negative yielding debt, reflecting the investor view that paying a modest amount to own bonds is safer than other investments in the midst of a global recession. It also indicates how central banks are using their QE powers to keep bond rates low or slightly negative. (slide 27)