Changes to business models after Covid 19

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  • #608
    Brian Burnett
    Participant

    Changes to business models after Covid 19

    What do you think will be some of the major changes to various business models after the experience of Covid 19 spread and lockdowns?

    #618
    John Hawkey
    Keymaster

    Hi Brian,
    The consensus following business crashes (such as the Wall Street Crash of the ’30s or the Global Financial Crisis of 2008) is that “things will never be the same again”. Of course, this is true in the sense that things are never the same as consumer habits and technology constantly evolve. These evolutions are usually gradual, but financial crises speed them up. For example, the demise of the high street and the growth of online shopping will be accelerated by Covid 19; so will working from home. However, it is arguable that the fundamentals of business and the business models necessary for businesses to be successful will not change in anything but the very short term – but this is only my view!

    #663
    CWB
    Participant

    You may well be right, John, that nothing much will change other than in the short term. A number of companies are saying that people are more productive working from home. I think we are going to see businesses in the services sector adopting a more flexible approach to employment with less time spent in the office. This has a downside in that working from home or on holiday may be normalised. Jobs may become 24/7/365. I also think there will be continued use of zoom/teams etc for meetings, which will be good news for productivity and bad news for airlines.

    #701
    John Hawkey
    Keymaster

    Hi CWB,

    Thanks for your contribution.
    Your observations regarding working from home and virtual business meetings raise an interesting question about how the virus will effect the use and value of commercial property. Similarly, how will the increase in online shopping effect the use and value of retail property?
    I can foresee big changes in the demand for office space – down?; the demand for factory and distribution space – up?; the demand for retail space, especially high street space – down? Replacement or alternate use (like the conversion of high street retail space into domestic use, and factories being converted into distribution centres) could ease the crisis, although changing use is not always straightforward. I anticipate considerable adjustment of values across the various sectors and huge worries for developers!

    #715
    Marcus
    Participant

    I would expect a lot of companies to increase their online presence. Clearly anyone who can reach their customers online is in a better position to survive the current crisis. I’d also think there will be increased daily rental of office space, so that a company whose staff can all work from home could organize monthly meetings or whatever was necessary without the expense of full rental.

    #719
    CWB
    Participant

    I don’t know the corporate legal responsibility for workplace accidents in the UK but there has been an interesting (landmark?) case here in Australia whereby the courts have ruled that corporations have responsibility for workplace accidents occurring in the home. They award damages to the children of a woman killed (by her husband!) while working at home. As bizarre as that may be, it should raise some concerns for businesses. Check with your insurer.

    #729
    Jeheon
    Participant

    The impact of COVID-19 on commercial real estate values is going to be interesting. While the long term acceptance of working from home is obvious, the impact in the short-term of hygiene issues and the long-term impact of accommodating new working habits will be interesting to watch play out, particularly in relation to the occupancy densities which directly impacts the amount of commercial office space large institutional companies require and therefore commercial real estate values.

    In recent history there’s been a trend towards higher density occupancy in modern offices (1 person per 8m2 and even higher densities for Co-Working Offices). This has resulted the reduction of office space footprint for most large organisations, which has pleased CFOs, by basically fitting more people into less space. However economic growth over the last decade has resulted in more companies requiring commercial real estate, albeit on a smaller footprint, but net demand has increased.

    This reduction in office space footprint has been driven down further by Activity Based Working (ABW) aka hot-desking – there was a presumption that not all people were anchored to their desks during a working day (meetings or offsite meetings with clients etc) so the concept of ‘Dynamic Density’ was created which allowed organisations to ‘over-allocate’ staff to an ABW office by factoring a percentage of staff that would not require a desk at the same time. However….social distancing and hygiene vigilance off the back of COVID-19 may buck the trend of higher occupancy densities resulting in each staff member requiring more space m2. If ABW is a victim of COVID-19 then this will also kill ‘Dynamic Densities’ should staff demand having the same workspace everyday. This on its own would mean large organisations would require more office space but I suspect one driver for the long-term adoption of working from home will be opportunity for large organisations to offset the need for more office space but adopting working from home permanently if efficiency gains aren’t compromised. Then there’s the issue of how future workplaces will need to be modified to accommodate the privacy and noise issues of constant Zoom or Teams style meetings if some people are working in an office and some people are working from home – this too could have an impact on occupancy densities for the need to incorporate a larger quantum of break out spaces or the creation of a greater number of smaller meetings rooms further lowering occupancy densities.

    Who knows were all this will land but it’s a fascinating time for commercial real estate that has until recently enjoyed an exceptional run of cap rate compression and valuation increases as global capital has been on the hunt for yield and commercial real estate has offered a reasonable spread to the risk free rate. However the underlying value of commercial real estate has been the security of covenant from institutional occupants and the attractiveness of reliable recurring rental income. But with so much uncertainty in the market and so many industries paralysed by COVID-19 the commercial real estate market may be undergoing a significant structural shift. Or it might be just a bump in the road and in an environment of historically low rates global capital might come flooding back.

    More broadly for large ‘global cities’ like NYC, SF and London, the advent of ‘agglomeration’ where the largest technology companies have clustered in areas with the highest concentration of specialised educated people and specialist business services, the increase in commercial real estate values has also driven up residential real estate values and created significant affordability issues and further exacerbated the wealth gap. Recently a large number of the world’s most valuable tech companies like Facebook and Twitter have signalled a long-term move towards working from home which may allow their staff to reconsider living in these ‘global cities’ just to have access to employment opportunities. If this trend results in net migration out of these ‘global cities’ with a premium placed on space and proximity to nature (without a loss in employment opportunities) this may also significant impact how some of these global cities will be developed moving forward and may compel governments to accelerate a shifting of investment focus from old-world hard infrastructure to new-world digital infrastructure. I personally think that most young educated people will find the clustering of broader economic activity, amenity and cultural institutions in large too attractive to ignore and the urbanisation of world will continue, albeit with a greater focus on social, heatlh and environmental consequences. Hopefully….

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