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The global COVID-19 pandemic has affected many aspects of our daily lives: how and where we work, where we live, and how we shop. Fundamental shifts in these behaviours will have major implications for the real estate market. So what could be the lasting effects on real estate assets as the pandemic recedes?

Our Research analysts have used traditional and alternative data sets, including geolocation data to analyse foot traffic, to gauge the likely long-term effects of the pandemic on supply-demand dynamics across the real estate market. Here we highlight their three main conclusions.

The office: Work from home is here to stay

The COVID-19 pandemic has revealed work from home (WFH) to be beneficial for both employers and employees. Half of S&P1500 companies mentioned WFH in their second quarter 2020 earnings calls – and of these, 80% talked about it positively.1 In surveys, nearly 75% of UK employees found WFH a positive experience2 and nearly 60% of US workers would work from home after COVID-19, given the choice.3

In the UK, 60% of employers are planning to encourage employees to WFH more often.4 The average employee expects to work from home 1.25 days a week after COVID-19, equating to 16% fewer workers in the office on a typical day than before the pandemic.5 Geolocation data of actual behaviour shows that US employees who need to be in the office are spending 13% less time there.6

Bar chart showing issuance in consumer and retail sectors between March 23 and April 17, 2020 compared to same period in 2019 and the prior four week period in 2020.

Source: Barclays Research, YouGov, Complementics

Our analysts calculate a long-term shift to WFH could lead to a 10-20% structural reduction in demand for office space. That said, offices will continue to play a critical role as central hubs. But as they become places employees ‘want’ to be rather than ‘need’ to be, landlords will need to invest in high-quality, fit-for-purpose space in order to attract good tenants from a smaller pool of demand.

Residential: The end of the city is an urban myth

Migration out of US urban zip codes during the pandemic has led to speculation about a collapse in city living. Our data suggests that while people may be leaving urban areas, this is at a more modest pace than media reports suggest.

The rise in working from home, COVID-19-related closures of urban amenities and a lingering aversion to high-density living could see cities underperform suburban real estate temporarily.  But most urban areas have benefited from the same pent-up demand and increased affordability that has lifted suburbs. Of the major US cities, only New York and San Francisco saw average prices decline between February and June 2020.7

Our analysts anticipate home prices will continue to trend upwards in both cities and suburbs even after the pandemic ends – driven by record low US mortgage rates and millennials entering their ‘peak’ house-buying years. Additionally, over the long term, preference for out-of-home amenities such as bars and restaurants will continue to support city property prices.

Nonetheless, even a minor movement out of cities could have a sizeable impact on housing demand. Our analysts estimate that up to 2% of people relocating permanently out of US urban areas could create demand for up to 500,000 additional new housing units elsewhere.

A reopened Midtown Manhattan should have modestly higher house prices even if density aversion continues

Zillow, US Census, Complementics, Barclays Research

Retail: Physical retail is finally facing its reckoning

In the US and UK, physical retailers have been losing foot traffic for years as e-commerce takes an increasing share of sales. COVID-19 has sharply accelerated this trend. In the US, a record 15% of mall stores have permanently closed in 2020 as of 6 October, with more likely to come.8

If vacancy rates continue to rise, our analysts suggest that 15-17% of US shopping malls would become unviable and may need to be redeveloped for other uses. Mixed-use redevelopment could help support pre-COVID-19 values, but that historically has been the outcome for just 15% of retired shopping centres.9 The more likely redevelopment options – conversion to residential or e-commerce warehousing – could see valuations fall 60-90%.10

Although street-front retail is also experiencing vacancies – especially as office workers and foot traffic reduce – it doesn’t face the same tipping-point risks as malls. The physical retail market is not as saturated in the UK as the US, but rents still need to be set at levels that allow tenants to profit. Europe is only now approaching the point where online shopping accounts for a critical proportion of sales. But as elsewhere, this will put pressure on rental levels and, in turn, physical retail asset values.

Warehousing to support e-commerce continues to be the bright spot in retail real estate and will likely accelerate in the aftermath of the pandemic.

As e-commercie surges, traffic to US malls is shrinking
Line graph showing increasing market share of private label products between 2005 - 2011

Source: Haver Analytics, Barclays Research

Real estate beyond the pandemic

The health crisis has accelerated existing real estate trends, such as the shift from physical to online retail, as well as introducing some of its own, including the dramatic increase in working from home. As the influence of the virus on everyday life recedes, we expect that long-term repercussions will remain for supply-demand dynamics across the real estate market.

1Refinitiv, Barclays Research, 2Hubble HQ, Barclays Research, 3Gallup, Barclays Research, 4YouGov, Barclays Research, 5YouGov, Barclays Research, 6Complementics, Barclays Research, 7Zillow, US Census, Barclays Research, 8Barclays Research, 9National Association of Realtors, Barclays Research, 10Barclays Research

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About the expert

Ryan Preclaw is the head of Investment Sciences, a group that creates investment insights by combining alternative data, data science, and traditional research. Previously, he was a Director in Credit Strategy, where he focused on special situations, event-driven strategies, and industries facing fundamental transitions. Ryan has also worked as a coverage banker in Barclays' Communications and Media group. Prior to joining Barclays, Ryan worked as an economist at NERA Economic Consulting and London Economics International. Ryan received his M.B.A. from the University of Chicago in 2008, his M.A. from Western University in 2001, and his B.A. from the University of Alberta in 2000.

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