VIRTUAL AND PHYSICAL SPACE IN THE CONTEXT OF COVID- 19
Department of Estate Management
University of Lagos
The reliability of the real estate fundamental of “location! Location! Location!” appears to have come under threat in the wake of COVID-19. The relevance of virtual space has been brought to fore with the ad hoc option of “work from home”. While this practice is not novel, it enjoyed negligible patronage pre-COVID period.
At the moment, it is pertinent that the real estate sector discerns the impending rivalry between physical and virtual space. The cyber world has in recent decades proven to be an inevitable reality redefining norm. As the world struggles to get back to work amidst the ravaging pandemic, it is likely that business will not be as usual even in the days ahead.
Some stakeholders anticipate the aftermath of the global pandemic on the real estate industry to create adverse macro and micro impact in the short and long run. Reportedly real estate contribution to GDP, foreign direct investments (FDI) and large-scale construction projects across the United States, Canada, China and Nigeria within the first quarter of 2020 were already showing weak signals. Also, real estate investors are set to experience the immediate challenge of dwindling revenue, reduced operating income, rent defaults while end-users particularly tenants may be faced with liquidity pressures that results in making demands for concessions and abatements’ or even deferring and ceasing contractual lease payments.
However, the virtual/remote working option adopted during the recent lockdown will specifically affect the commercial real estate industry. Remote working options is gradually initiating voids in retail and office spaces subsequently causing job, revenue and investment loses. As observed during the lockdown in Lagos, many retailers adopted online trading options particularly through social media platforms. Besides the ability to monitor one’s business remotely, online trading opened up opportunities for synergy amongst retailers across geographic borders without the need for physical space. Presently, restrictions placed on every sector of the Lagos economy have been significantly eased. Still, a significant number of corporate organizations in Lagos have either adopted flexible work patterns to ensure social distancing or maintained work from home option. The cyberspace is awash with daily suggestions of how to improve home environments for working purposes. Remote work options rather than complement real estate products gives impetus for logistics management as observed in the recent proliferation of dispatch riders shuttling Lagos residential locations. Thus, if established, this new trend implies setbacks for commercial real estate business.
In the event that work from home option becomes a trend then virtual space becomes a substitute option for physical space. Hence, within the shortest possible time, most commercial real estate outlets particularly office and retail spaces would be become vacant with associated loss of income realizable from sales and lettings. The diminished relevance of retail and office spaces in Lagos will subsequently cause a shift in demand for this category of properties with likely effect on income and operating expenses. Recent observations of vacant office and retail space adverts across prime locations of Lagos (Ikeja, Lagos Island, Surulere etc.) indicates the uncertainty of demand in commercial real estate market. The convenience of video conferencing and associated cost savings have significantly reduced bookings of event/conference halls for workplace meetings exposing the vulnerabilities of such investments particularly in Lagos where so many of these developments exist. It is thus essential that the commercial real estate sector set out to assess the impact of impending risks and figure out how to remain in business.
Forecasting looming void rates can indicate magnitude of likely revenue loss; the burden of recurrent expenditure like tax, loans; potentials for leverage; how to review ongoing commercial real estate development projects and the onset of redundancy. Thus, such incisive analysis would assist in making profitable informed decisions. For instance, envisaging the effect of the economic loss caused by the pandemic on tenants makes it pertinent to review the feasibility of annual rental payment typical of Lagos real estate market. Based on this premise, real estate managers analyze trade-off options that guarantees income flow within the context of mutual interest and then negotiate flexible rental payment plans with tenants.
Incentives to support physical distancing; provision of health and safety facilities and efficient but cost-effective internet services through top-notch facilities management expertise can preserve capital value of office and retail spaces.
Voids in office / retail spaces due to remote workspace options would indirectly shift demand towards the housing market requiring housing adaptations and renovations or perhaps stimulating new housing design options that complements work activities in the long run. Also, real estate practitioners can initiate viable conversion developments like warehousing, self-storage facilities, industrial facilities, and data centers that support online markets in the direction of market demand to offset void losses. Thus, ability to identify real estate sphere of influence that cannot be substituted like housing or are complementary to e-commerce e.g. warehousing and data centers will provide strong signals for investment.
Commercial real estate stakeholders can also analyze how diversification and synergy of multi asset investment portfolio consisting of equities, bonds and other asset classes can cushion the effect of Coronavirus on markets.
Although land remains the basis for all human activities and cyberspace will always require physical space to function. Also, physical workspace offers the ease of coordinating work activities over the distraction associated with work from home. However, the emerging relevance of virtual space implies that fixity of real estate services is relative. Astute employers and entrepreneurs whose businesses despite lockdown thrived on remote working options with significant outcomes may be poised to analyze the costs and benefit between work from home and office space options. So rather than focusing on how to increase the supply of commercial land, the concern now should be how to efficiently maximize existing space for mixed uses in the post-COVID period
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