We will emerge from the COVID-19 crisis, as we have from previous crises such as 9/11 and the Great Recession. As with each previous crisis, when we emerge, occupiers will re-evaluate their existing priorities and have new or additional priorities. Although it is too early to know the outcome of this process, we can anticipate some of the issues that will be considered to allow executives to make the most informed decisions for their organizations. This paper addresses some of the major decision-making criteria that will likely be in play and presents a series of questions and prompts that stakeholders may address in the post-COVID-19 environment.
Real Estate Strategy
In order to develop a real estate strategy for an organization, real estate professionals should apply a programmatic approach, including an evaluation of the organization’s demand side needs considering finance/accounting, labor, workplace design, wellness, technology and risk mitigation, and overlay supply side conditions globally or nationwide and in each local real estate market. Some business considerations will be critical to address:
a. Strategic Planning: The first step should be to understand how the organization has historically conducted its business and how peer organizations have conducted business, and to consider how that should change in order to reflect a changed post-COVID-19 world.
b. Portfolio Planning: The re-assessment of labor, technology and workplace design will result in or reveal a misalignment of real estate assets/leases for many organizations. These organizations will then need to evaluate the costs and benefits of migrating to an optimized real estate position. A transition plan may need to be developed as wholesale change will be difficult to produce in the short term, particularly in dislocated markets and with company balance sheets stressed due to the business slowdown.
c. Re-balancing Annual Cost, Total Cost and Flexibility: For many organizations, annual cost has been the over-riding decision making criteria. Taking a back seat to annual cost has been the overall financial obligation, capital investment (at times), and flexibility (and the cost to implement). As we emerge from this crisis, organizations may perform a forensic audit on how the structure of their real estate position or how their specific contractual obligations enabled or inhibited their organization’s ability to respond and perform.
d. Quality: Quality will become pervasive in all aspects of the real estate decision making criteria. Credit quality will play an even more important role than pre-COVID-19, as high credit quality organizations will be best positioned to use their financial wherewithal in traditional manners such as financial structuring and access to capital, and will also leverage their demands for changes in areas such as force majeure, casualty, and other formerly legal, now economic, terms that will be negotiated earlier in the process. On the building side, there will be a continued flight to quality as newer properties offer more advanced HVAC systems and other building attributes that support a healthier work environment. Lower quality buildings will need to consider significant capital investment to compete.