Covid-19 has greatly changed the way in which real estate is used or accelerated changes that are already taking place. Like any change, it creates winners and losers.
Commercial real estate has had it better before.
An example of the changes that were accelerated by the Corona crisis is online trading and its effects on retail and industrial real estate, as the following DWS chart shows. Although the two sectors have historically been strongly correlated, industrial buildings (especially warehouses) in the US had a total return of 11.8 percent in 2020, while retail centers had a negative return of 7.5 percent.
Logistics top, retail flop
Extra growth spurt through Corona for online tradingOnline trading existed long before Covid, but the lockdowns brought an incredible growth spurt. In the third quarter of 2020, online trading grew 37 percent year-on-year and accounted for 16 percent of retail sales practically overnight.2]It therefore does not seem like a coincidence that 45 bankruptcies of larger retail chains were reported in 2020, almost twice as many as in all of 2019.
Shopping centers in troubleThis was also a severe blow to shopping malls, which are typically home to a large number of struggling department stores and clothing stores. At the same time, it was a boon for industrial real estate, which is crucial for the fast processing of online orders (as well as the processing of their returns, which are twice as high as in stationary retail).
The Covid-related shift in consumer spending from services to goods has intensified these effects.
The end of the trend is still a long way off, but light at the end of the tunnelDWS experts believe that this trend is far from over. Some high-end shopping centers are likely to survive Covid and will likely thrive as expanded entertainment centers afterwards. But they will continue to have an uphill battle with online trading. DWS Group prefers inner-city retail concepts with a strong focus on food. Since the fitness studios and restaurants that house these concepts had to close or partially shut down their shops due to the pandemic, challenging times are still ahead in the short term. In the long term, however, their mix of everyday goods and services should be more resistant to online trading. Accordingly, the demand for this type of property is likely to increase, especially in those regions of the United States that are experiencing high population growth. As is so often the case with real estate, the location is also decisive here.
Oversupply in logistics real estate seems possibleWhen it comes to industrial real estate, DWS experts fear overpriced prices at some point, which could ultimately lead to oversupply. But there are currently no signs of this, which is why the outlook for this sector is still positive at the moment. It is believed that the considerations that have been made here for the US real estate sector also apply to other regions. (kb)
1]NCREIF; December 2020
2]Census Bureau; September 2020