The crisis brought about by the coronavirus has utterly paralyzed the normal functioning of society on a global scale. It has intensified underlying social, economic, and political tensions and has accelerated preexisting trends. The fragility of the public health infrastructure in many countries around the world has become evident.
Going forward, we don’t know whether the coronavirus will be successfully contained by a new vaccine in 2021. For the US, the Federal Reserve’s unique position in providing liquidity—both domestically and beyond its borders—means that it will play a crucial role in managing the economic distress resulting from the crisis. The Fed’s leadership, together with the fact that US Treasuries are still considered a safe harbor for risk-averse investors, will likely safeguard the US economy, the largest in the world.
It is critical to leverage this crisis as an opportunity to pursue a development and investment model that is more equitable and just.
On the need for recovery planning that does not rely solely on modern techniques of finance in the name of “market efficiency.”
For China—the second largest economy—as life gradually returns to normal in many cities, the critical test will be its trajectory of economic recovery. Local governments’ and state-owned enterprises’ mounting debt is likely the most onerous burden for its stability. At the same time, China’s focus on the expansion of its public health infrastructure, domestic consumption, and the acceleration of development in less developed areas of the country holds promise for the economy.
Within these two macro environments, there are profound implications for the real estate sector. The most evident effect of COVID-19 is the abrupt halt of real estate transactions as investors move into a wait-and-see mode, with delayed investment decisions and pending financing possibilities.
In the longer term, as the pandemic forces us to recognize that our physical built environment is ill-prepared for emergencies, certain building typologies will undergo intense review and adjustments in design, construction, and operation. Relatively speaking, multifamily residential and logistical assets have been exposed to lower operational and financial risks during the pandemic, and have performed better in the capital markets; they will continue to be preferred asset classes.
Hospitality and retail real estate, where services drive growth, have faced unprecedented challenges, with many smaller retailers and hotels struggling to survive. Similarly, for the office asset class, we expect transitory downward pressure in the near term. Investors and users will scrutinize the pre-crisis emphasis on densified communal environments—including, for example, the co-working office typology that emerged from the 2007–2009 recession.
In addition, physical flexibility and adaptability of buildings and spaces will be highlighted in the long run as a necessity for investors; the market will assign increased value to resilience in times of crisis and as an insurance against operational risks. Digitalization (which refers to digital connectivity provided by broadband internet) and data analytics (associated with artificial intelligence provided by digital infrastructure), need to be considered at various physical scales. At the building scale, digitalization is essential to connect individual households and to enable working from home and long-distance collaboration. At the urban scale, digitalization is vital so governments can rely on data to assess, forecast, and manage the current coronavirus along with other potential emergencies in the future.
Public health infrastructure will become a critical component of master urban planning and will provide flexibility in the configuration, design, and function planning of public open spaces in cities. In that sense, public health–related services will likely rise in importance to investors, and perhaps become a fourth component of what is currently known as “ESG” considerations—for Environment, Social Responsibility, and Governance. As the crisis has laid bare the inequities and injustices that threaten people’s well-being, safety, and lives, especially in the US, the momentum that began to emerge before the pandemic is expected to continue.
It is critical to leverage this crisis as an opportunity—to pursue a development and investment model that is more equitable and just. Questions that need to be considered by both private and public sectors include: How to encourage investments that focus on the affordability of real estate and shared public benefits; how to establish policies and programs that bolster housing infrastructure and capacity to effectively deliver assistance to vulnerable renters; and how to incentivize funding to improve public health and well-being. We must address and seek solutions to these issues without relying solely on modern techniques of finance in the name of “market efficiency.”
Historical pandemics have structurally reshaped how we as a society conceived of and conceptualized cities, urban developments, and collective well-being. There is no reason to think that this pandemic will not do the same.
Bing Wang is associate professor at the GSD and a faculty area head for the Real Estate and the Built Environment concentration of the Master in Design Studies. She is the faculty co-chair for the Real Estate Management Program, a joint executive program between the GSD and Harvard Business School, and co-chair of the Advanced Real Estate Development Program at the GSD. She is on the steering committee of the Harvard China Fund and an elected board director of the American Real Estate Society.
Tobias Just is professor for real estate at the University of Regensburg and academic director of the IREBS Real Estate Academy. He is president of the German Society of Property Researchers, editor of the ZIÖ—the German Journal of Real Estate Research, and served on the management board of ULI Germany between 2012 and 2018. In 2017, Just became Fellow of the RICS by nomination.