“It's tangible, it's solid, it's beautiful. It's artistic, from my standpoint, and I just love real estate.”

Donald Trump

For the past two hundred years, cities have been magnets for people across the world, concentrating wealth and economic activity. As office development boomed to accommodate new workers, the countryside was emptied, first with the mechanisation of agriculture and more recently the export of manufacturing. China is the most recent to be transformed by huge urban developments.

But now the virus has shown business how it can de-centralise. Nearly all of central New York is thought to be home-working; meanwhile Land Securities, which owns office blocks worth £6 billion, said last week that less than 10% of its portfolio was being used. Supported by cloud computing and secure communications, many will never return to shimmering glass and concrete towers of financial intermediation such as Canary Wharf.

So, in this commentary we look at the changing shape of business, and why, notwithstanding the 15.3 million sq. ft. of office space being developed across 112 schemes in London, commercial real estate could become the dinosaur of the 21st century.

Within days of easing the brakes on the UK lockdown, scared commuters were bundling onto the London Underground. Those who could afford to travel by car were confronted by a re-imposed and increased congestion charge. Cities are not a good place to be at present, and everyone knows it.

In contrast, office-based businesses are getting to grips with home-working technology and, with the exception of lumbering utility giants, are understanding how to ensure that productivity and service levels are kept up to scratch. Most employees, having savoured the benefits of home-working, do not want to return to the commuting grind.

The impact is already being felt in the sector: Michael Cracknell, director at Deloitte Real Estate, has said that sentiment had “dramatically shifted” since work stopped at a number of sites, and that London offices have been left largely vacant during the lockdown. In his foreword to Deloitte’s Summer 2020 London Office Crane Survey he says: “The current mass remote working is the largest workplace experiment the world has ever seen.” 

There are immense savings to be made. Rent, rates and office support activities typically consume about a quarter of office-based company expenditure. Meanwhile the commercial real estate sector has become one of the most inflexible and most unpleasant to deal with, requiring long inflexible leases and demanding unreasonable deposits from small businesses. There is no love lost for a sector which has shown so little appreciation of the stress it can cause, and some might say that the US President’s love affair with real estate has brought many of these characteristics into the White House.

Most businesses are in a state of economic shock at present. It’s only bio-science and technology, plus those businesses wholly geared for online delivery, which are thriving. In the United States, they have lost as many jobs in five weeks as it took to create over eleven years, and their virus fatality rate is climbing ever higher towards the awful milestone of 100,000.

It’s not surprising, therefore, that during the two-month period to the end of April, 351 public-quoted companies across all UK indices have announced a cut in their dividend: see The Share Centre’s report on ‘Dividend Cuts: The Story So Far’.

But people are very creative, perhaps more so when locked down in isolation and forced to look for new ways of doing business. You can be sure that few of the new models will be based on urban concentration. We will emerge from the impending recession, but the world could look a very different place as people head out of town.

In some cases, that could be just as well, with many coastal conglomerations such as New York threatened with unavoidable sea level rise over the next century. Meanwhile the major world trading blocs are also re-evaluating their relationships: over the past 10-20 years, we have become accustomed to see China providing the supply chain and India the back-office for many industries - but their reactions to the virus has shown developed Western countries that they cannot rely on these external dependencies when the chips are down.

Cutting back on urban concentration will bring many knock-on effects across the economy, reducing the demand for travel and transport, and energy usage. However, as usual the early beneficiaries will be those who can afford to move, and the swathes of urban poverty will become even more of a major challenge when they have departed.

It’s for all these reasons that we have to re-think the way capitalism must work for the benefit of all, as we commented last week. Customer and employee share ownership must be a central feature to avoid a new ‘us and them’ division, and I was pleased to see Philip Aldrick’s article in the Times on Saturday 16th May, arguing for an employee share ownership revolution. He points out that just 13,000 out of 1.4 million UK companies offer worker ownership schemes, with just 1.9 million employees out of the 33 million UK workforce participating.

It all underpins the need for individual investor participation, which was the subject of a London Stock Exchange hosted webinar ten days ago - here’s a video recording of the event, which included Angela Knight, former Economic Secretary to the Treasury, Malcolm Stuttard of the London Stock Exchange, Richard Wilson, chief executive of Interactive Investor, and myself among its participants.

‘The times they are a-changing’ as Bob Dylan sang fifty years ago. They certainly are, and the virus emergency will be the catalyst for that change.

Gavin Oldham OBE

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