Page 153 - COVID-19: The Great Reset

The heated debate over whether (or to what extent) we will
work remotely in the future, and as a result spend more time at

home, has been taking place since the pandemic started. Some
analysts argue that the fundamental appeal of cities (particularly
the largest ones) as vibrant centres of economic activity, social life
and creativity will endure. Others fear that the coronavirus has
triggered a fundamental shift in attitudes. They claim that COVID-

19 has been an inflection point and predict that, all around the
world, urbanites of all ages who are confronted with the
shortcomings of city pollution and undersized, overpriced

accommodation will decide to move to places with more greenery,
more space, less pollution and lower prices. It is too early to tell
which camp will be proven right, but it is certain that even a
relatively small percentage of people moving away from the
biggest hubs (like New York, Hong Kong SAR, London or

Singapore) would exercise an outsized effect on many diverse
industries (profits are always made at the margin). Nowhere is this
reality more apparent than in the real estate industry and, in

particular, in commercial real estate.

The commercial real estate industry is an essential driver of
global growth. Its total market value exceeds that of all stocks and
bonds combined globally. Prior to the pandemic crisis, it was
already suffering from an excess of supply. If the emergency

practice of working remotely becomes an established and
widespread habit, it is hard to imagine what companies (if any) will
absorb this oversupply by rushing to lease excess office space.
Perhaps there will be few investments funds ready to do so, but

they will be the exception, suggesting that commercial real estate
still has much further to fall. The pandemic will do to commercial
real estate what it has done to so many other issues (both macro
and micro): it will accelerate and amplify the pre-existing trend.

The combination of an increase in the number of “zombie”
companies (those that use debt to finance more debt and that
have not generated enough cash over the past few years to cover
their interest costs) going bankrupt and an increase in the number

of people working remotely means that there will be far fewer
tenants to rent empty office buildings. Property developers (for the

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