My World: June 2021…
This is part of a series of articles where our contributors describe how they think things will look a year from now.
The crisis brought about by the coronavirus utterly paralyzed the normal functioning of society on a global scale. Some countries have fared better than others, regardless of their political systems. Effectively fighting the virus at the national level requires a collective response that is both swift and rational, a leadership that believes in science and professional expertise and is trusted by its constituents, and a public that can identify a shared vision of future.
The current pandemic intensifies underlying social, economic, and political tensions and accelerates preexisting trends. The fragility of the public health infrastructure in many countries around the world has become evident, as has their depletion of state and institutional capacities in coping with public health crises.
Going forward, whether the coronavirus will be successfully restrained by a new vaccine in 2021 remains unknown. The US’s performance in the pandemic tarnished its leadership position and credibility worldwide—more so in people’s perceptions. In 2021, the world will watch whether the US declines further as a global leader in crisis management and economic recovery or instead presents to the world its prowess in post-crisis ascendancy and savvy in strategic cooperation with its allies and China. The November 2020 elections may provide an important hint. A divided public beyond the political realm makes important tasks harder to achieve. That being said, the Federal Reserve occupies a unique position in providing liquidity domestically and beyond its borders, thereby playing a crucial role in managing the economic distress resulting from the coronavirus crisis. Successful action in this regard, together with the fact that US treasuries are still considered a safe harbor for risk-averse investors, will likely safeguard the US economy.
China has demonstrated its success in effectively combatting the coronavirus through collective efforts under the government’s leadership, but its lack of clarity in the initial stages of the government’s reaction to the outbreak may nonetheless harm its image. Objectively speaking, any government would need time to confront the deep uncertainty surrounding the transmissibility and lethality of the virus during its initial discovery stage and navigate between the risks of overreacting and causing unnecessary fear and panic in the public or, alternatively, not being responsive enough to a major crisis. Nevertheless, China’s decision to prioritize life over immediate economic performance was largely applauded by its own citizens. As life gradually returns to normal in many cities in China, by summer 2021, the critical test for China will be its trajectory of economic recovery. Local governments’ and state-owned enterprises’ mounting debt is likely the most onerous burden for its economic stability. However, at the same time, its focus on the expansion of its public health infrastructure, domestic consumption, and the acceleration of development in less developed areas of the country might help stimulate the economy.
Implications for global real estate
Within these macro environments, there are profound implications for the real estate sector. The most evident effect is the abrupt halt of real estate transactions as investors move into a wait-and-see mode, with delayed investment decisions and pending financing possibilities.
In the longer term, as the pandemic forces us to recognize that our physical built environment is ill-prepared for emergencies, certain building typologies will undergo unprecedented scrutiny and adjustments in design, construction, and operation. Relatively speaking, multifamily residential and logistical assets have been exposed to lower operational and financial risks during the pandemic and have performed better in the capital markets; thus, they will continue to be the preferred asset classes. Hospitality and retail real estate, where services drive growth, have faced unprecedented challenges, with many smaller retailers and hotels confronting basic challenges to survival. Similarly, for the office asset class, we expect transitory downward pressure in the near term. Investors and users will scrutinize the pre-crisis emphasis on densified communal environments that the co-working office typology embraces that emerged from the last recession of 2007-2008.
In addition, the physical flexibility and adaptability of buildings and spaces in the long run will be highlighted as a necessity for investors and owners to demand premiums in terms of resilience at times of crises and as an insurance against operational risks. Digitalization, which refers to digital connectivity provided by broadband Internet and data analytics associated with artificial intelligence provided by digital infrastructure, needs to be considered at various physical scales. At the building scale, digitalization is to connect individual households and render working from home and long-distance collaboration a possibility; at the urban scale, digitalization is vital so that government efforts can rely on the data to assess and forecast the coronavirus’s current spread and aspects of other emergencies in the future, while also mitigating the associated impacts under appropriate management protocol.