The Future of Real Estate After the COVID-19 Pandemic

As a result of the COVID-19 pandemic, there have been unprecedented impacts on business, the economy, and society.

But what comes next?

In my latest book, The Future After COVID, I offer a futurist perspective. Because the real estate industry could be significantly impacted by the aftershocks of COVID-19, I dedicated a chapter of my book to this topic.

High-Potential Impacts for Real Estate

There are six different ways that I see a high potential for this to play out:

— Reduced commercial office demand.

— Reduced retail space demand.

— Risk of housing oversupply and price declines.  

— High risks to real estate in tourism-centric areas.

— Likely tradeoff preference for space vs. proximity.

— More demand for warehouse and distribution centers.

#1 - Reduced Commercial Office Demand

First, there’s a potential that people may increasingly telecommute and work remotely. I’ve discussed this in other chapters here in the book, so I won’t dive back into that in too much detail. But the main point is, if more people are working remotely, companies won’t need as much office space, and those companies will save money by not paying for office space.

Of course, if you happen to be the one who owns the office buildings, this is likely to be a source of financial pain.

It seems likely to me that some high-end commercial real estate could be converted into hotels, condos, or mixed-use real estate. This stems from a likely key influencing factor: If people continue to work remotely at levels anywhere near those seen during the COVID-19 pandemic, we will likely find that we have far too much commercial real estate for offices — especially expensive real estate in areas with high urban density.

#2 - Reduced Retail Space Demand

The second big impact that we could see as an aftershock of COVID-19 would be in the retail real estate space. We have been seeing a transition to e-commerce for some time. But that has become more pronounced — and more economically critical — during the COVID-19 pandemic.

 As a result, we may find that a lot of small mom-and-pop businesses, family restaurants, small service businesses, and small retail shops completely shut down and go out of business as in the economic aftermath of the COVID-19 pandemic.

The pandemic has had a particularly notorious impact on service businesses because these are high-touch businesses, and yet that is completely anathema to the notion of flattening the curve and trying to do your part to reduce transmission. High-touch businesses like massage therapy, nail salons, and hair salons require very close personal touch, and that’s not something that is consistent with flattening the curve and reducing transmission of COVID-19 during a pandemic. Furthermore, since some of these businesses are quite small, they may struggle to survive — even if they can access some of the funds in the $2.3 trillion CARES Act.

As such I expect a lot of small restaurants and small businesses will shut down, never to reopen. Additionally, the reliance on e-commerce is likely to be much stronger after the events of COVID-19, and given the increased reliance on e-commerce I expect that retail real estate is likely to lose even greater value moving forward, with entire chains likely to fail during the post-pandemic period.

#3 Risk of Housing Oversupply and Price Declines  

Another big change — the third big change — I expect is the potential for real estate residential markets to take a hit. If jobs do not come back and businesses fail, there will be evictions, there will be bankruptcies, there will be mortgage failures, and even though the government can help to bridge some of the lending and some of the gaps to prevent widespread national mortgage failures, there are going to be some areas where people owning houses will default on their mortgages.

People who will be upside down pretty quickly on their mortgages might try to sell them quickly. Therefore, it seems likely that we may see a lot of houses come on the market for sale at once. Since home prices are a function of supply and demand, you might find there’s a massive supply of people trying to get out of their homes, which could depress prices of homes that people are trying very hard to sell quickly. This is also something that could impact the financial health of the economy. I discussed this risk at length in the “The Future of Finance” chapter in this book.

#4 - High Risks to Real Estate in Tourism-Centric Areas

As a fourth expectation, I am very concerned about areas with high levels of tourism like Las Vegas, Orlando, and New Orleans.

Casinos and theme parks have been forcibly shut down, because high tourist areas present high risks of COVID-19 exposure. If there is a prolonged COVID-19 breakout, these cities will likely suffer disproportionately. Furthermore, even if the COVID-19 pandemic were to end quickly, tourism dollars would likely be very tight. Disposable incomes might be slow to recover and if that’s the case, we could likely see these major tourist hubs continue to suffer, even after people are legally allowed to return to them.

#5 - Likely Tradeoff Preference for Space vs. Proximity

The fifth important dynamic we expect is an increase in the preference for more residential real estate space over a closer proximity to work. By this, I mean that we may see home buyers begin to demonstrate a more pronounced preference for larger, suburban homes over condos close to urban centers.

Many people were predicting greater trends in U.S. urbanization for most of the past 15 years or so. But this pandemic may have a couple of significant impacts that reverse that trend. First, the remote work experience may change people’s perceptions about the value of space. If people are working remotely with their entire families in close quarters — rather than going to an office regularly — population-level preferences are likely to shift toward more space.

Furthermore, the risks of hoarding, food shortages, and public health contagion risks are likely to be heightened in more densely populated urban areas. This, too, seems likely to impact people’s preferences for the suburbs or more rural areas over cities — and major urban centers.

This seems especially likely for families that have adults working remotely as their kids are going to school online. If everybody’s going to school and work under the same roof, people are certainly going to show preferences for more space, rather than to be in a condo right near the office they never go to or the school their kids never go to.

#6 - More Demand for Warehouse and Distribution Centers

There’s a sixth and final dynamic for the future of real estate as a result of COVID-19: a likely increase in demand for warehouse and distribution center square footage. The critical nature of the supply chain and the importance of e-commerce are likely to drive this demand.

For real estate, these six big changes seem likely in the years ahead — and beyond. Some of these dynamics may not be new, but COVID-19 has revealed and accelerated some of these changes in perception and value.

The Future After COVID

This is an excerpt from Jason Schenker's recent book The Future After COVID, which was released on 1 April 2020.

The book can be ordered at www.FutureAfterCovid.com

Jason Schenker is one of the world's leading futurists. He is the Chairman of The Futurist Institute. Jason is also an instructor for LinkedIn Learning.

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