What will 'the new normal' for real estate look like?

The coronavirus pandemic has had a widespread – but unevenly felt – economic impact. The risk of contagion has forced behavioral changes in how we work, where we live, and how we socialize. And perhaps nowhere is this felt more keenly than in the real estate office, retail, and entertainment segments.

The central question underpinning most financial projections is ‘how long will these conditions last?’ That question can only be answered with another question: when can a safe and viable vaccine be broadly distributed?

The last few weeks have brought promising results from the pharmaceutical companies working on coronavirus vaccines. If these continue to show good results and no side effects, we may begin contemplating a return to ‘normal.’ But what will the new normal look like?

The 2020 pandemic year was marked by significant and rapid adaptation, from the individual to the corporate level. Work-from-home and school-from-home went from rarities to a standard approach. Facing widespread collapse of restaurants and bars, cities made rapid accommodations to allow outdoor dining. Affluent families with the ability to work remotely shifted from city apartments to suburban or rural areas. And there were experiments in adaptive reuse that yielded interesting results.

When the pandemic is under control, how many of these innovations will remain part of the new normal?

Work-from-home and the office real estate segment. Zoom meetings … From a cost perspective, it costs businesses money to have office space and to provide an average of 300 sq.ft. per employee. Going forward, will employers want to return to the expense of large office buildings now that the viability of a distributed workforce has been shown? There is also the sense that for many businesses, the expense of office space had been shifted onto employees rather than the employer.

The outcome of this was not entirely negative. Many people found that this relaxed their schedule by removing the morning and evening commutes – along with the environmental benefit of reducing carbon dioxide and other emissions.

Deutsche Bank recently offered a bizarre proposal to tax people working from home an additional 5%, which seems like a perverse incentive to maintain the pre-pandemic status quo.

Will cities continue to encourage outdoor dining? In many cities, archaic zoning laws and high fees made it difficult for small restaurants and bars to have outdoor dining. Previously, this just expanded their seating capacity and provided a more enjoyable experience for diners in the summer months. During the pandemic, outdoor dining became a public health issue – the concentration of exhaled viral particles in a closed space could lead to a spike in infections – as well as an economic necessity for the restaurants to survive.

Three-season outdoor dining is nothing new in Europe, but America has treated its street life very differently. Places like Boston and New York City have benefited from livelier streets as a result of outdoor dining. It will be interesting to see whether American cities tighten their permissions or charge high municipal fees for outdoor dining, or whether this will continue to be allowed or even encouraged after the pandemic.

The shift from urban to suburban and rural living – will it reverse? For approximately two decades, there has been a shift in preference from suburban to city living in the United States. This was in part because of proximity to high-paying or high-potential jobs, as well as the social life offered by increasingly safer cities.

This was reflected in a bifurcated housing market where city housing prices grew steadily, while those in the suburbs were relatively flat or even experienced slight declines. The pandemic upended these long pricing trend lines. With the ability to work remotely and often the need to attend school remotely, many families with the means to do so moved from the city to larger houses in less densely-developed areas. Even in market-defining cities like New York, rental vacancies rose while asking rents dropped. Each month seemed to bring unwelcome new records in terms of falling rents, rising rent concessions, and reported vacancies.

Post-vaccine, will those who left the city return? Or will it be a mistake to treat them as a monolithic group. Perhaps the pandemic accelerated the decision to move for some who were already contemplating leaving. Perhaps others realize that they cannot wait to return to the city as soon as it is safe to do so. And perhaps there will be others for whom the falling rents make it feasible to move to the city now, and participate in the economic recovery.

Adaptive reuse had been largely limited to repurposing former factory or office buildings as multifamily residences. But the needs and challenges of the pandemic resulted in some significant creativity. In England, pubs were repurposed as socially-distanced co-working spaces. In the United States, some firms proposed reusing their empty movie theaters as classrooms. In Sweden, the Hotel Reimersholme, cleverly used its vacant hotel rooms rooms as private dining rooms in order to keep the restaurant going.

This is the sort of thinking that makes cities fascinating and unexpected places. Some of these ideas will – should – continue even as conditions return to something more normal and predictable. But we tend not to innovate unless it is necessary to do so.