What’s Next?

Is this a good time to invest in real estate? Is the property market coming crashing down or is this the buying opportunity of a lifetime? Is retail – and for that matter are offices – dead as we know it?

Those looking for yes / no answers should hit the back button, as the truth is so much more nuanced. And in our view, more interesting.

Social scientist Jack Mezirow wrote about the need for a “disorienting dilemma” to hasten change. We have that now in spades. As difficult as it may be, we need to look beyond the sensationalised tittle tattle of hand sanitiser, face masks, and perspex barriers to what lies on the other side. And as stewards of long-term, generational capital, to think through how the COVID crisis will drive secular shifts, permanently transforming the built environment for better or worse.

We need to have this clear framework in mind before jumping the gun and making grand proclamations about the prospects of specific property opportunities, or sweeping generalisations about the market as a whole.

We offer three observations.

First, technology is not a get-out-of-jail-free card. While it has been absolutely essential these last months, to those that herald Zoom, Slack and the rest as the great facilitators of social cohesion across the miles, we ask you, have the digital tools we have used for the last decade like Facebook, Instagram, and Twitter engendered more inclusion, fostered a greater sense of belonging, improved our sense of self-worth? Are they the solution or rather contributing factors to the problems facing the modern workplace? The idea that we will all work remotely and somehow beam into a digital workplace for our daily dose of corporate culture, values, and collaboration is a fiction for now at least. These tools have their place and will be part of a transformed work experience, but are blunt instruments that cannot be deployed without consequence, most of all for our own mental health.

Second, beware of the data. There is so much noise out there during this acute phase of the crisis. It’s almost possible to formulate a coherent case for any side of the argument. It is distracting. We could convince you that vacancy rates will stabilise since there is no new supply coming as projects have been shelved, and that the downward pressure on space will be met with at least an equal upward pressure as we see square foot per person densities reverse their downward statistical trend. And equally, we could impress you with data around rising grey space, falling take up, and sideways investment volumes. For almost every leasing deal that fell out of bed, we could cite one that has completed. While normally we absolutely love data and consume it voraciously, at times like these, not sure any of the backwards looking statistical nerding gets us very far.

And finally, ESG is here to stay. It is hard to ignore the drum beat of the build back better movement, the chorus of business leaders from firms big and small, from far and wide, committing their vast resources to a more moral form of capitalism. Investors are demanding it. Staff are demanding it. Customers are demanding it. And if you have any lingering doubts, rest assured that soon you will be regulated into submission as things like TCFD and the EU Climate Law start to bite.

So, taking this all in, where are we putting our own capital?

Offices. Yes, offices. It is contrarian, but we think the economic distress in the market will create buying opportunities over the next months and years. To the extent never before seen, there is now a bifurcation between rents and valuations on buildings that are forward-thinking and those that are not. The successful buildings are creating detailed property-level business plans that clearly advocate for the office, why we come to the office, what magic happens there that cannot happen anywhere else, and how the office makes our tenants and their staff better, happier, healthier. Rather than simply promising that we will try to reduce the risk that coming to the office will kill you. Imagine a restaurant’s slogan being, “eat here, we’ll try not to give you food poisoning (or worse)”. Marketing 101. These offices are worth owning. Still.

Living. Especially sub-sectors that are anti-cyclical, like assisted living. There is a greater focus on health of course, physical and mental. Creating communities and connecting people to people rather than people to places certainly is an enduring investment theme. And demographics are on our side. We also like co-living for similar reasons.

We believe in cities. They are where culture is born, scholars are educated, the sick are healed, and the youth are inspired. For over 150,000 years, humans have been flocking together for complex, powerful reasons driven by evolution; a transient health crisis will not unwind this, it is literally hard wired in our DNA. The urban fabric will undoubtedly change, but for the better. Cities are not going anywhere.

And last but certainly not least, we are all-in on investments where we can unfurl our ESG vision. As much as we see economic distress looming, so too do we see sustainability distress. For our part, we have used the time during lockdown to publicly formalise our commitment to reach Net Zero Carbon across our portfolio by 2025, an industry leading pledge. We have also promised to retrofit first before rebuilding, recognising that 80% of the buildings that will exist in 2050 – the UK’s zero carbon deadline – already exist. And we are more committed than ever to act in service of people and planet, as well as profit.