From pandemic to endemic

Similarly, many countries in the Asia Pacific region are also transitioning to living with COVID-19. The Asia Pacific region has been relatively successful in keeping the coronavirus at bay over the last two years. As a result, some countries in the region, like China, were able to restart their economies relatively quickly and limit the economic impact of the pandemic. However, the emergence of the highly contagious Omicron variant has pushed governments in the region to re-impose strict measures to give their healthcare system time to recalibrate and set the stage for living with COVID-19. While many countries in the Asia Pacific region are moving towards living with COVID-19, China has maintained a zero-COVID policy. Since March 2022, the Chinese government re-introduced mass PCR testing and lockdowns in “high risk” neighborhoods of several Chinese cities to curb the Omicron variant outbreak. In April 2022, the IMF and other economists gave China a modest downgrade on its growth outlook, although these revised estimates remain higher than any major European or North American economy. On April 28th, President Xi made a solid commitment to increase infrastructure spending to counter slowing growth. In addition, the People’s Bank of China’s has re-committed to easing monetary policies. These efforts are expected to offset some negative impacts from the zero-COVID policy. We expect the recovery of occupier markets in China to be delayed, but not detoured.

Australia, Singapore, and South Korea are among the leading countries in the Asia Pacific region that are making the transition to living with COVID-19, helped by their stabilizing infection rates, and rapid vaccination/booster rollout. As of the end of April 2022, Australia, Singapore, and South Korea have eased nearly all COVID-19 safety measures and re-opened their borders to fully-vaccinated foreign visitors without the need for quarantine. Japan is also moving toward living with COVID-19, albeit at a slower pace than Australia, Singapore, and South Korea, after its quasi-state of emergency was lifted on March 21, 2022.

The relaxation of public health measures and the transition to living with COVID-19 have been highly beneficial for real estate demand. In the Asia Pacific region, the relaxation of social distancing measures and the strong willingness to return to offices has supported the recovery of office demand, especially in countries leading the transition from pandemic to endemic. In this month’s deck we track work from home expectations around the world (see p.3). Office markets like the Sydney CBD and Seoul saw vacancy rate improvements since the height of the pandemic, while other office markets, such as the Singapore CBD, had a positive net effective rent growth. Although rents in the Tokyo Central office market continued to decline in the first quarter of 2022 due to the quasi-state of emergency, the average vacancy rate in the Tokyo Central office market remained the lowest among major office markets in the Asia Pacific region. Major office markets across Europe show a similar recovery, although North American office markets still lag and the recovery in the largest US office markets is tepid at best.

Looking ahead, the transition from the pandemic to the endemic stage is expected to continue to support the recovery in real estate demand. However, other macro forces are now taking center stage as Covid retreats. Russia’s invasion of Ukraine, rising inflation, and interest rate hikes could cast a shadow on the recovery. Therefore, as shown in this month’s deck, the pace of improving real estate fundamentals varies greatly in cities around the world. Investors will need to pay close attention to these cross currents when underwriting new investments and adjusting portfolios.