Covid-19 Occupational market news update

Written By:

Lee Elliott, Knight Frank

24 Apr 2020

9 minutes to read

Categories: Covid-19

• Lock-downs persist in most markets, slowing the wheels of the global economy, which the IMF is forecasting will contract by 3.3% during 2020.
• Continued efforts to build operational and financial resilience but business confidence indicators are turning downwards.
• An important future occupational market dynamic will be the financial strength available to occupiers to drive necessary business (and portfolio) restructuring.
• Health & safety and de-densification will become central to the post-Covid-19 workplace environment and experience.

This is the third note we have issued on occupational impacts of Covid-19 since the global pandemic began. Its overarching tone remains consistent with previous notes. This is unsurprising, given that government and public health interventions seeking to ‘flatten the curve’ of both infection and death rates, whilst creating some grounds for greater optimism, remain very much a work in progress. Accordingly, governments around the world are, in the main, continuing to enforce ‘lock-downs’ and ‘social distancing’ for an extended period.

Lock-downs persist

In the UK, the government announced yesterday that the lock-down of all but essential key workers would remain in place for a minimum of a further three weeks. The same announcement introduced five key tests that must be passed before current restrictions can be lifted. In France, a date for gradually lifting restrictions has been set by President Macron, the 11th May, while in Germany, social distancing will remain in place until the 3rd May although some relaxation of measures will be evident prior to this. Meanwhile, Singapore is currently ten days into a month long lock-down, after a recent spike in new infection rates. Finally, in the US, President Trump has been promoting America’s imminent return to work, although the practicalities and wisdom of doing so is the subject of much debate with more than 675,000 American’s infected and a death toll, tragically, in excess of 35,000.

Economic forecasts turn downwards

Against this backdrop of constrained movement, the wheels of the global economy are slowing. This week the International Monetary Fund (IMF) released their updated World Economic Outlook, which points to a global contraction of 3% in 2020 followed by a rebound of 5.8% growth in 2021. This would represent the worst downturn since the Great Depression. It is in stark contrast to the IMFs prediction of 3% growth at the start of this year. As a portent for national economies, according to officials the Chinese economy shrank by almost 7% in the first quarter of the year, ending nearly half a century of growth. Such declines mirror the IMF forecasts for Europe, which suggest an average contraction of 6% across the continent during 2020. The IMF also forecast the US economy to decline by almost 6% this year.

Operational and financial resilience is the short-term business focus

t the business level, the short-term focus remains on bolstering operational and financial resilience. The rapid, enforced shift towards remote working technologies has been well navigated. The magnitude of this shift is apparent within Microsoft’s first Work Trend Index report, launched this week. The report highlighted a new daily record of some 2.7 billion digital meeting minutes had been achieved – a 200% increase from mid-March. The report also noted a 1000% growth in the total number of video calls during March, with the number of people turning on the video function in Microsoft Teams doubling. In similar vein, the number of daily downloads of the Zoom remote working app sustained at over three million per day for the closing weeks of March and into early April. Technology is no longer a constraint to the adoption of remote or home working.

Business is also turning attention to achieving resilience through supply-chain reconfiguration. Although this will take longer to implement, more occupiers will seek to shift the location of manufacturing and back-office functions in order to avoid business disruption in the event of further pandemics or shocks. One such example of this change is in Japan, where the government is launching a huge financial programme to support Japanese manufacturers in shifting manufacturing activity away from China amid fears of too great a dependency.

Attempts at building financial resilience to ride out the crisis also continue. Link Group reported this week than more than 40% of British companies have axed dividends in response to the Covid-19 outbreak, representing cuts of £28.2bn with suggestions that a further £24bn may be at risk. Over the longer-term owned real estate may be mobilised to raise capital, with increased sale and leaseback activity likely. Indeed, there is growing consideration of this strategy in Asian markets presently.

Corporate confidence is weakening

Concerns about the macro-economic picture are serving to dent corporate confidence with every passing day of the crisis. C-suite sentiment surveys provide useful insights into corporate health and strategic intent and are something that we monitor regularly. Two such surveys, published this week, made for sobering reading.

First, Deloitte’s European CFO Survey showed a clear erosion of optimism, with the outlook for both hiring and business investment darkening. 63% of surveyed CFOs are less optimistic about the financial prospects of their business than they were six months ago, which is the worst outlook since the survey began in 2015. Around 40% of those surveyed are planning to reduce their capital expenditure, double the number who are still intending to increase capex, and just over a third foresee reducing headcount over the next 12 months. The over-arching expectations of the majority of respondents is for a gradual business recovery. Indeed, 80% expect the pandemic to have a negative impact on company revenues into the autumn months, while more than half anticipate the negative effects of the pandemic to stretch into 2021.

EY’s Global Capital Confidence Barometer, also published this week, struck a slightly more positive tone. The survey of almost 3,000 global c-suite executives, found corporates in survival mode but pro-actively adapting supply chains and seeking to accelerate digital transformation and automation. Encouragingly, more than half of those surveyed also signalled their intent to purse business acquisitions over the next year. We expect to see more of this transformational behaviour as the crisis dissolves. Consequently, the disruption = demand thesis that we promoted almost five years ago may well be the market tone going forward. Business transformation rather than expansion will be the basis for the bulk of business activity in global real estate markets post-crisis.

Global occupational market sentiment continues to point towards a pause

Suppressed business confidence has obvious immediate consequences for global occupational markets. The pause noted in our last briefing note persists. Our second Global Gateway Market Sentiment Tracker – which provides a fortnightly view of sentiment across 16 key global office markets – supports this, with little movement during the last two weeks. Active occupier requirements are trending downwards in 12 of the surveyed markets – the exceptions being Manila, Hong Kong, Dublin and London that have seen stabilisation over the last fortnight (albeit at reduced overall levels). Asking rents and total occupancy costs have thus far held steady in all but a handful of markets – a function of underlying supply shortages – but more telling perhaps is that only 1 of the 16 markets (Paris) is regarded as being landlord favourable with 7 markets now deemed tenant favourable (Hong Kong, Singapore, Sydney, Dublin, Shanghai, New York and Nairobi). The expectations must be, therefore that rents will be under increasing downwards pressure if wider business confidence and finances are depressed for any significant period. Even in the case of Paris, it should be noted that the landlord favourable tone is restricted to the tight CBD sub-market. Conditions in areas outside of the CBD, which were beneficiaries of increasing occupier and developer activity prior to the crisis, will be more in keeping with the majority of the global markets in our analysis.

Longer-term workplace considerations – health, safety and density

Finally, as outlined in previous notes, the potential long-term impacts of this pandemic on the global workplace are as uncertain as they are fascinating. We will shortly be sharing our perspectives on the future with you. One thing that is undeniable however is that there is going to be a much stronger focus upon health and safety in the workplace as a direct consequence of this crisis. Employees will demand such, and employers will have a moral and regulatory obligation to deliver. Consequently, we believe health and safety considerations will sit firmly alongside wider wellbeing initiatives and become central to the future workplace experience.

Signals of the future are already in evidence. In Wuhan, the original source of this now global crisis, workers at Kone Elevators are being tested for Covid-19 by a private medical organisation on a daily basis. Amazon, much in the news throughout the crisis, is building its own testing capabilities in order to monitor the health of its employees. While in the banking sector, Goldman Sachs, is reported to be in talks to purchase infrared body scanners in order to screen staff and visitors entering their buildings – something which has rapidly become commonplace in many office buildings within Singapore.

These health considerations, and the prospect of sustained social-distancing in the workplace even after lock-downs are lifted, pose real challenges for the co-working and flexible office sector as noted by Knight Frank’s APAC Head of Occupier Services and Commercial Agency, Tim Armstrong in a recent Bloomberg article. Global market evidence points to the ongoing reconfiguration of coworking spaces by operators, with greater emphasis upon private offices and secure spaces that enable organisations to contain staff and reduce risks inherent in sharing office space with others. It is telling in this respect, that Amol Sarva, CEO of flexible office provider, Knotel, this week outlined plans to add new features to the company’s app that will give customers the option to track some employee movements and trace their contacts in order to control the spread of illness.

We fully expect a global reconsideration of the density of office occupancy within both coworking and conventional office space as a direct consequence of the Covid-19 crisis. The long-term psychological impression made by current social distancing measures, coupled with a heightened consideration of personal health and wellbeing, will mean that occupiers will have to think carefully about the amount and quality of space they provide for staff within the formal workplace. The strategy used by so many businesses as we emerged from the last major crisis, the GFC, whereby more people were shoe-horned into less space, does not look like a viable option as we emerge out of this current crisis.