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The New Normal in Commercial Real Estate: Decisions in a Time of Challenges and Uncertainty

Colliers International Philippines is one with the nation and the world in Doing What is Right for the people, clients and communities in combating the spread of COVID-19.

When this is over, it will not be business as usual. This pandemic will change the way of life across the board. In commercial real estate, we see significant changes in how this sector will rebound and evolve when this pandemic is over. While we are all busy coping and surviving this challenge, we intend to share our knowledge to accelerate the success of our partners by writing a series of papers about The New Normal in Commercial Real Estate. We need to be ready and preparation starts now.

 

DECISIONS IN A TIME OF CHALLENGES AND UNCERTAINTY

Metro Manila is currently on its 8th week under the Enhanced Community Quarantine (ECQ) which was implemented by the government across Luzon and other high-risk areas to suppress the spread of the COVID-19 virus. Because of this pandemic, the International Monetary Fund (IMF) declared the world in recession, the Philippine GDP which was initial forecasted to be between 6-7% might already contract by 0.4%. The OFW remittances which are a major economic contributor might decline because of layoffs.

The creation of a vaccine will be the ultimate solution and path towards recovery. Health experts estimate that it will take 12-18 months to develop a vaccine safe for public consumption. Still, there is no definitive timeline on the availability of the vaccine and COVID-19 continues to pose many challenges and limitations to businesses. To compound things, the uncertainty brought by this crisis makes it more difficult for business owners to take action and make the right decisions.

Navigating Through the “VUCA” World

Nonetheless, in a world that’s increasingly volatile, uncertain, complex, and ambiguous, it’s important to “keep swimming”.

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Source:  What VUCA Really Means for You. Harvard Business Review. Jan-Feb 2014 Issue.

A controlled stimulation of the economy will allow businesses to start recuperating from their losses and hit the ground running especially once the enhanced community quarantine is lifted. The VUCA world, because of its challenges, also presents a lot of opportunities. It is during these times that entrepreneurs think of ways how to solve new problems and give themselves an advantage. To this end, Colliers suggests for companies to navigate the VUCA world by applying the Effectuation Principles in their decision-making.

The Principles of Effectuation

The Effectuation Principles is an entrepreneurial process where one identifies the next, best step by assessing the available resources in order to achieve one’s goals, while continuously balancing these goals with one’s resources and actions. These principles are used by expert entrepreneurs to help them wrest control in an unpredictable environment. Below are the five principles of effectuation:

  • Bird-in-hand – start with what resources and means you have

    In unpredictable situations, rather than focusing on a goal, it is best to first assess the resources that you have available and create a solution from there. These resources can be determined by asking, “who I am”, “what I know”, and “whom I know”. Once you’re able to determine what resources you have, you may start to create ideas and solutions.

  • Affordable loss – the future is unpredictable, so know what you are comfortable losing

    In any new endeavor, there will always be risks. Instead of focusing on an expected return and working back to minimize the risks, it is best to understand how much you are willing to lose on each step. This will let you determine which endeavors you’re willing to take knowing both what you’re risking and what there is to gain even if the result is unfavorable. This will limit your risks as you’re already aware of what you may lose.

    Everyone is struggling right now because of the restrictions caused by the pandemic. The reality for some companies is they may not be able to survive the length of this pandemic and may not open again. By understanding what there is to lose and gain, this can be an opportunity for bigger companies to “invest” in these smaller companies.

  • Lemonade – “When life throws you lemons, make lemonade.”

    The year 2020 has been full of surprises and continues to be unpredictable. Despite the challenges and uncertainties, there are still plenty of opportunities around to find. Instead of trying to control outcomes, it is best to take in these surprises and find a way to make these valuable. The current times also present “opportunities” for companies to find new ways of innovating (e.g. delivery and logistics services, telemedicine, teleconference platforms, etc.) These innovations will hopefully inspire more companies to be creative in order to sustain the economy.

  • Crazy quilt – work together with partners who are willing to cooperate and commit to the goal

    Having partners to work with you not only helps you achieve your goal, but also increases your means and resources. Of course, the goal may further evolve as more ideas and resources are shared. It is still important to remember points 1 and 2, by knowing what you have and the risks you carry as partners. In our current situation, it is more important to work together, communicate, create partnerships and leverage on key strengths with our suppliers and clients.

  • Pilot in the plane – the future depends on the choices the pilot makes

In an unpredictable environment, it’s best to focus on the things that are within your control. It may be true that larger market forces determine how the future will play out, but it is also true that the future is shaped by the actions we take today. In the same sense, inaction may also affect future outcome or worse, result in further losses. Instead of allowing yourself to be thrown around by the unpredictability of the market, it’s best to make sense of the current situation and figure out what can be done within your means.

In summary, what sets companies apart is the ability to find the right opportunities available now. By virtuously practicing the Effectual Principles of making incremental decisions based on available information, understanding both potential good and bad results, and deciding on what to do next, companies will be surprised at the value they can create with what they already have.

Market Trends During COVID

Based on the latest data from Colliers International Philippines Office Services, office transactions in Metro Manila stood only at 8,000 sqm for the month of April 2020, a reduction of 84% compared to the recorded office transactions during the same month in 2019. Despite the notable reduction in transactions for the said month, April YTD transactions stood at 383,000 sqm, which is nearly the same with the recorded 382,000 sqm for 2019 during the same period. This is attributed to the increasing trend of outsourcing transactions during the 1st quarter prior to the decline due to the COVID pandemic. Moreover, majority of the transactions for the month were driven by traditional companies. While outsourcing and traditional companies are seen to drive the office market amid the COVID-19 pandemic, current office transactions data show that companies are still taking a wait-and-see stance while some have held back on their growth plans for the mean time.

While there is no definite timeline when the market rebound will happen, companies need to take incremental actions and decisions during this period and be prepared for all possible scenarios. As businesses thrive on cost-saving solutions during this time, future business decisions should not be compromised.       

Colliers Views and Insights

This pandemic has substantially changed the global economic landscape and businesses will have to operate under a new normal moving forward. Without the vaccine, we will have to operate under worse conditions, yet business actions and decisions must be taken soon in preparation for the market rebound. Colliers International Philippines encourages occupiers to explore the following post-COVID recommendations in preparation for the new normal:

  • Evaluate the feasibility of remote work
  • Revisit density ratio and workplace design
  • Explore opportunities to negotiate with longer lease terms
  • Look into fringe locations when considering cheaper rents but revisit CBD options with revised rental rates

Moreover, as property and facilities management will become more vital for occupiers, we also urge landlords to start implementing new measures to remain attractive to tenants such as the following:

  • Consider lease extensions in exchange for rent-free concessions to prevent defaults
  • Work with existing occupiers to provide flexible lease terms
  • Revisit wellness and building design features (e.g. air circulation, glass ratio, and LEED/WELL certifications)
  • Target epidemic-resilient occupiers that cater to essential goods and services (e.g. data centers, pharmaceutical companies, and other healthcare-related industries)

According to Alaine Yap, Associate Director for Tenant Representation, the drastic implications of the pandemic may have become too overwhelming, but we should not let it paralyze our business decisions. Many are at stake and waiting for “accurate” and complete information may take us some time and not get us anywhere. Thus, companies can at least make incremental decisions, see the results, and decide again – the virtuous cycle. We should keep going and restart sooner than later. While it may be a challenge for companies to make vital business choices during this difficult period, we should no longer wait for the time when all our backs are against the wall.