Founder: Turnaround Talk
Remote work has been one of the biggest business disrupters that the world has experienced in modern history.
Remote work has traditionally been received with significant scepticism from bosses. I remember the look the CEO of the first company I worked for used to give his journalists when they asked him if they could work from home or complete the rest of their workday from home if they had a conference/event that ran into the early afternoon.
Granted, the world has changed in 2007. Access to the internet has become more widespread and has become more stable with the introduction of fibre. However, C Suite executives were unconvinced that a business could be run remotely. The remote work theory was tested in 2020 when a health pandemic changed life as we knew it.
How has remote work proved to be the ultimate disruptor? Not only was it proven that companies can be effectively run remotely, but C Suite Executives are also now seeing that not having a massive office space can offer significant financial benefits to companies who were already looking for fat to trim from their budget.
This is wreaking havoc on property management companies and commercial properties who have no idea how to repurpose their office space. A Moneyweb article, which cites a recent report by McKinsey, points out that this disruption is causing a $800 billion loss in valuations and represents a 26% decline compared to levels in 2019. The research shows that this may increase to as much as 42%
Permanent shift
The article points out that McKinsey’s model is offering a window on how property owners and lenders are grappling with the changes in where people work in the wake of the pandemic. The shift is also affecting the value of retail and residential real estate as people’s new habits influence where they shop and live.
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In a moderate scenario, demand for office space will be 13% lower by the end of the decade, McKinsey said. Attendance still is 30% lower than what it was before the pandemic and only 37% of people are back at the office every day.
Foot traffic near stores in metropolitan areas remains 10% to 20% below pre-pandemic levels, McKinsey said.
The article adds that lower office attendance has driven down asking rents in real terms. US cities have generally seen sharper drops, with San Francisco and New York City showing declines of 28% and 18% respectively, while European centres such as Paris, London and Munich have been more resilient.
The trend is set to continue with more employers downsizing space to reduce costs as soon as long-term leases come to an end.
Immediate action
“Some tenants have chosen not to wait for their renewal dates and instead have bought their way out of long-term contracts,” McKinsey said.
The article points out that developers can adapt to the declining demand for office and retail space through the creation of hybrid buildings whose design and infrastructure could be modified to serve different uses, McKinsey says.
Such designs “would protect owners from shifts in preferences that are impossible to predict now,” the report said. Also, “because tenants will now be moving in and out more frequently, buildings might become more valuable if they grow more adaptable.”
A stubborn problem
The Covid Pandemic, and the mass adoption towards digitalisation, has brought about this change and has caused a significant inflexion point in the business operating environment.
Access to the internet has not only become more widespread and more stable, it is priced at a point that is more comfortable for businesses than spending money on massive office space. Digital tools like Zoom and Microsoft Teams allow for the seamless management of remote teams akin to office meetings.
Image by Juan Diego from Pixabay
This is a stubborn problem that will not go away. How do offices and retail-based companies address this? Is the answer for retail businesses to migrate towards an inline model and transform physical stores into collection and distribution points? Will this be feasible in a country where a large portion of the population still depends on physical stores over the online option? If the answer is that this is not an option, how do retail stores adjust their operating models to take a hybrid approach that will not impact profitability?
The McKinsey research points out that the impact on value could be even greater if rising interest rates compound it. While rising interest rates are a global problem, what is the outlook for distressed economies such as South Africa where the recovery from economic disruption may take longer than in developed economies?
All of the indicators point to a challenging environment for the South African corporate and retail property space.
