The Covid comet strikes – the world of property investors is turned upside down

We are seeing ten years change in ten months in some real estate sectors.

One of the most fascinating aspects of this crisis, is the way that existing social and economic trends are being accelerated at break-neck speed. We are seeing ten years change in ten months. Nowhere is this clearer than property markets. For investors in certain sectors of commercial property – hotels, retail, high-rise offices – it feels as if a comet has fallen from the sky causing an existential event. Other sectors are flourishing – activity in residential property is booming – and in all sectors there is talk of a return of the ‘Doughnut Effect,’ a flight from city centres to the suburbs. Politicians are inadvertently helping – creating ‘Fifteen Minute Cities.’ The cities of our future will look very different to those of our past.

If you ever wondered what a “black swan event” in investment looked like – well here it is. Wells Fargo data for the CMBS (commercial mortgage-backed securities) market shows commercial property valuations are on average being marked down by some 27%. In certain areas it is even worse. Take hotels – the value of a Holiday Inn in Tennessee has been cut by 37%, while a Crowne Plaza in Houston was recently valued at nearly half its 2014 valuation.

High rise offices have particular issues. Social distancing in elevators means there are not enough hours in the day to get workers up to their desks in larger skyscrapers. Julian Olley, ‘director of vertical transportation’ at consultancy group Arup, noted that in one building, even at half capacity, it takes two and a half hours to get people in. Imagine if they then go out for lunch? HSBC, with a skyscraper in Canary Wharf, London, thinks it can operate the building at only 20 percent capacity.

Cushman & Wakefield has just predicted that nearly 215 million square feet of office space will disappear globally. They are the optimists, predicting a return to pre-Covid levels by 2025 based on a belief that remote working will ‘only’ rise to 10-11% of the total workforce. What if they’re wrong?

The retail sector has its own earthquake. UK real estate investment trust (REIT) Shaftesbury (which owns 660 central London shops) scrapped its dividend recently, with less than half of rent collected, and vacancies doubling. CVA’s (company voluntary arrangements) are the only way some retailers are surviving – often involving a 50% reduction in rents for landlords.

Elsewhere, the news is better. Rent collection in the residential sector is running above 95 percent. Contrast the stock performance of Invitation Homes with, say, British Land. Indeed, residential property is seeing a pick-up in activity and prices globally. Standard & Poor’s Case-Shiller US home price index recently reported a 4.8 % rise. All but three US cities reported price acceleration. UK house prices reached a new record high in September (up five percent according to Nationwide). In Germany the market is particularly strong – house prices rose 10.85 % during the year to Q2 2020.

One phenomenon of Covid noted by psychologists is a vivid dream life, and reports that many of these ‘quarandreams’ are about moving home. After months cooped up in small apartments, we’re all dreaming of space, inside and out, and city-centre dwellers are realizing you can get more of both in the suburbs.

According to analysis by Les Grands Notaires de Paris, prices in the outer Paris suburbs (la Grande Couronne) are rising by nearly 8%. In the US, suburban listing prices are rising at more than twice the rate for inner cities, while in Japan Recruit Group’s Suumo real estate portal reports that the top page views are for the Tokyo suburb of Kisarazu.

In Japan, there’s also evidence of companies decamping to the suburbs. Fujitsu has announced a halving of office space, while Overflow Inc. has got rid of its central Tokyo offices altogether. Similarly, Ad-promote Co. has closed its HQ in Dogenzaka and moved out to Tochigi. There are some signs of this in New York, if only exploratory discussions at present. AIG has, however, made a significant move taking 230,000 square feet in Jersey City.

We may be witnessing a repeat of the “Doughnut Effect” of the 1960’s and ‘70’s, when city centres declined and suburbs flourished. Then, it was driven by reduced commuting times. Now, with remote working, there may be no need to commute at all. Politicians are helping this flight with high city taxes and inadequate crime prevention. Do they risk sacrificing city centres with further initiatives?

The Global Mayors Covid-19 recovery task force has issued the Mayors’ Agenda for a Green and Just Recovery, which dedicates to ensuring that “all residents will live in ’15-minute cities.’” The “ville du quart d’heure” was invented by Sorbonne Professor Carlos Moreno, who argues cities must move away from oil-era priorities of roads and car ownership to ‘a post-vehicle era.’ The idea is to turn cities into a collection of villages, where everything citizens need is within fifteen minutes’ walk – their place of work, the food they buy, schools, clinics, parks.

As Bloomberg notes “as infection fears have limited transit and travel, this vision of close-knit districts….may be coming of age.” The concept is very familiar to Parisians. Indeed, pre-Covid, it was a major plank of Mayor Anne Hidalgo’s re-election campaign. She’s made walking and cycling a priority, and repealed zoning prohibitions, to allow all neighbourhoods to be ‘mixed use.’

Terrified that commuters are deserting public transport, across Europe cities are accelerating bike lane plans. Paris’s Rue de Rivoli is now a bike lane superhighway, Milan has added 35km of bike lanes and similar transformations are underway in London, Lisbon and Barcelona. Indeed, Barcelona has gone further with its “superblocks system” modifying road networks within 400×400 metre blocks to create local communities which take back the streets. Madrid is following suit.

These efforts in urban planning are laudable, but they do have their limitations. To many Americans, European cities have always been remarkably “walkable,” and are already a collection of villages anyway. The Mayor of London boasts that the city has 600 high streets and 90 percent of Londoners already live within ten minutes’ walk of their high street, let alone fifteen. Twentieth century cities have geographical limitations – try walking in Los Angeles. As Dario Hidalgo of the Ross Center for Sustainable Cities notes, the danger is islands of walkability in a sea of cars – “drive, park and enjoy (walking)…that’s what you do at Walt Disney resorts… (not) cities.”

Urban planners also need to consider the impending reality of emission-free electric vehicles. Should we really be virtually eliminating cars from our city infrastructures just at the moment when they cease to be an environmental problem? And EV’s are a much more inclusive transport solution. There is sometimes a tinge of youth fascism in the embracing of cycling lanes. Not every 80 year old wants to get on a bike. Nor mothers with small children, the handicapped, or the infirm.

We must debate what city life in the future should be. We cannot ignore the importance of maintaining vibrant city centres with their rich cultural lives. Otherwise, in a world of remote working and internet shopping, is there any point in cities at all?


Christopher Walker is a writer on business and politics. He sat for several years on the asset allocation committee of a major asset manager.