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The Bat that Turned into a Black Swan

Are the consequences of the coronavirus outbreak a passing phenomenon? And how long will it take for the commercial and investment property market to normalise? In any event, the pandemic may be labelled a so-called Black Swan: An entirely unforeseen and unforeseeable event that has fundamentally changed the market, at least in the short term – but with possible long-term consequences facing the market.

A month ago, we at Colliers introduced our annual market report, in our review of the economy and the market for commercial and investment property drawing parallels to the fairy tale of “Goldilocks and the Three Bears”: “Not too hot, not too cold, but just right”. In a matter of weeks, the fight to prevent the global spread of coronavirus has fundamentally changed this analogy, also in the market for commercial and investment property.

In the short term, the outbreak of coronavirus and (in particular) the severe restrictions imposed to delay its further spread have enormous consequences for several industries, including the travel industry, hotels and conference centres, restaurants, the culture and entertainment sector as well as specialty retailers. We do not travel, we do not stay at hotels, we meet less frequently, we do not dine out, and we almost exclusively shop for daily groceries.

These sectors have already experienced a slump in turnover and earnings, and it will not be long before the first businesses fold. This is going to inflict losses, also on the property industry.

In the long term, the consequences of the coronavirus outbreak will hopefully turn out to be much less severe than the consequences of e.g. the financial crisis. It is therefore not unlikely that we will return to more normal conditions already within a few months. However, the question is which short- and long-term effects we will see in the property market.

Short-term developments in the property market – Colliers’ basic scenario

 We base our basic scenario on the following (fairly favourable) presumptions:

  • Within a period of four to six weeks, it will be possible to see the effect of the myriad measures introduced in the course of the past week. That means that it will again be possible to travel between European countries, and it means a gradual normalisation process in the office and transport sectors as well as the retail trade. For the travel industry as well as for hotels and conference centres, the effects will be much more long-term, with the market hardly returning to normal until Q4 2020 at the earliest.
  • It is fair to expect a slowdown in economic activity in Q1 and possibly also Q2 2020, in technical terms spelling recession.
  • Monetary policy will remain exceptionally lenient, with central banks pumping liquidity into the market to such an extent as to eliminate last week’s budding signs of an imminent credit squeeze. 
  • At some point, we will presumably see the introduction of massive fiscal easing to mitigate the effects of the economic downturn.
  • We will gradually see financial markets returning to normal, with a fair share of the losses incurred in recent months being recovered before year-end.
  • In H2 2020, growth momentum will be relatively strong, and backlog growth will be partly recovered.
    In the commercial property market, we are facing very weak activity in the months ahead, with the letting market hardly returning to normal until this autumn at the earliest.

However, it is quite feasible that the investment market will regain momentum relatively quickly, implying mainly that transactions are carried out a few months later than originally planned.

Our basic scenario is therefore quite bright, although invariably entailing palpable consequences for a number of industries for a prolonged period of time.

We must emphasise that there is a real risk of more negative developments.

Key elements of risk are believed to relate to the following scenarios:

  • If ongoing global measures to contain the spread of coronavirus turn out to be insufficient, a scenario hopefully quite unlikely given the massive scale of the restrictions.
  • If central banks fail to prevent an escalation of the credit squeeze so that the market for high-yield bonds dries up. This may potentially trigger more severe and prolonged recession. However, the risk is considered fairly small – central banks demonstrated their ability to act during the financial crisis and will no doubt do so again.

Potential long-term effects on the commercial property market

Even if the market recovers quite quickly, both property users and property investors will for many years to come try to learn a lesson from such a global crisis, which may happen again.

Some of the possible effects are:

  • Investors will again focus more on the residential market, which all other things being equal is less cyclical and less susceptible to such crises than the commercial market.
  • Office occupational demand is quite likely to pick up – although we have become more accustomed to working from home. Firstly, many have experienced that the exchange of ideas that takes place in a workplace, in particular in the knowledge-intensive sector, is much more effective when you are physically in one place – and the continued trend towards lower workspace requirements per employee may well be turned around: There are cost benefits but also disadvantages, including the higher risk of infectious diseases spreading, associated with high-intensity use of open-space offices. 
  • Logistics will remain popular – and the demand for both logistics and storage facilities may well grow due to the demand for building major buffer stocks to mitigate the disruptive effects on global supply chains. The same applies to stronger demand for last-mile logistics facilities for the distribution of groceries, purchased online, with online sales quite understandably already seeing a sharp increase.
  • However, physical grocery shops may again become in vogue among investors as a secure and non-cyclical segment – as opposed to specialty shops.

The outbreak and rapid global spread of coronavirus – and not least the comprehensive restrictions imposed to prevent it from spreading further – have in the short-term fundamentally changed the economic basis for the financial markets – and for the market for commercial and investment property. Nevertheless, it is clearly must probable that the brunt of the effects will be relatively short-lived, no matter how dramatic they may seem right here and now.

Colliers predicts weak transaction activity in the next couple of months

“We have experienced a marked slowdown in activity already as we face restrictions in terms of property viewings, either because investors are not inclined or allowed to meet up, or because the properties have closed down. For instance, several investors have announced that their employees are momentarily banned from property viewings. Needless to say, sales prospects deteriorate further when foreign investors are prohibited from entering Denmark to inspect properties”, says Peter Winther, CEO of Colliers Denmark. He expands,

“Ongoing sales processes and transactions will suffer delays, and we may expect fairly weak transaction activity starting today and the next couple of months ahead, if not longer, far below 50% of the normal level. But we hope that we will soon see the effect of the many measures to contain coronavirus. In this event, transaction activity may bounce back very strongly in the second half of the year. However, the risk of a prolonged slowdown is most certainly real”.


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Peter Winther

Executive Director | Partner | MRICS

Copenhagen

Peter is Executive Director and heads Colliers’ Danish Investment & Capital Markets teams. Peter provides strategic property consultancy services and facilitates the sale of commercial and investment properties, including hotels and shopping centres, as well as property portfolios and companies.

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