INTRODUCTION
2. MICRO RESET (INDUSTRY AND BUSINESS)
2.2. Industry reset
2.2.2. Behavioural changes – permanent vs transient
Like for so many companies, COVID-19 proved to be the proverbial last straw.
sitting in an enclosed space with complete strangers, and many people may decide that staying home to watch the latest movie or opera is the wisest option. Such a decision will benefit local supermarkets to the detriment of bars and restaurants (although the option of online takeout meal delivery services could be a lifeline for the latter). There were numerous examples of this happening in an ad hoc fashion in cities across the world during
lockdowns. Could it perhaps become an important element of some
restaurants’ new post-COVID-19 business-survival plan? There are other first-round effects that are much easier to anticipate. Cleanliness is one of them. The pandemic will certainly heighten our focus on hygiene. A new obsession with cleanliness will particularly entail the creation of new forms of packaging. We will be encouraged not to touch the products we buy.
Simple pleasures like smelling a melon or squeezing a fruit will be frowned upon and may even become a thing of the past.
A single attitudinal change will have many different ramifications, each having a particular effect on one specific industry, but in the end impacting many different industries through ripple effects. The following figure
illustrates this point for just one change: spending more time at home:
Figure 2: Potential implications of spending more time at home
Source: Reeves, Martin, et al., “Sensing and Shaping the Post-COVID Era”, BCG Henderson Institute, 3 April 2020, https://www.bcg.com/publications/2020/8-ways-companies-can-shape-reality-post-covid-19.aspx
The heated debate over whether (or to what extent) we will work remotely in the future, and as a result spend more time at home, has been taking place since the pandemic started. Some analysts argue that the fundamental
appeal of cities (particularly the largest ones) as vibrant centres of economic activity, social life and creativity will endure. Others fear that the
coronavirus has triggered a fundamental shift in attitudes. They claim that COVID-19 has been an inflection point and predict that, all around the world, urbanites of all ages who are confronted with the shortcomings of city pollution and undersized, overpriced accommodation will decide to move to places with more greenery, more space, less pollution and lower prices. It is too early to tell which camp will be proven right, but it is certain that even a relatively small percentage of people moving away from the biggest hubs (like New York, Hong Kong SAR, London or Singapore) would exercise an outsized effect on many diverse industries (profits are always made at the margin). Nowhere is this reality more apparent than in the real estate industry and, in particular, in commercial real estate.
The commercial real estate industry is an essential driver of global growth.
Its total market value exceeds that of all stocks and bonds combined globally. Prior to the pandemic crisis, it was already suffering from an excess of supply. If the emergency practice of working remotely becomes an established and widespread habit, it is hard to imagine what companies (if any) will absorb this oversupply by rushing to lease excess office space.
Perhaps there will be few investments funds ready to do so, but they will be the exception, suggesting that commercial real estate still has much further to fall. The pandemic will do to commercial real estate what it has done to so many other issues (both macro and micro): it will accelerate and amplify the pre-existing trend. The combination of an increase in the number of
“zombie” companies (those that use debt to finance more debt and that have not generated enough cash over the past few years to cover their interest costs) going bankrupt and an increase in the number of people working remotely means that there will be far fewer tenants to rent empty office buildings. Property developers (for the most part highly leveraged
themselves) will then start experiencing a wave of bankruptcies, with the largest and systemically important ones having to be bailed out by their respective governments. In many prime cities around the world, property prices will therefore fall over a long period of time, puncturing the global
real estate bubble that had been years in the making. To some extent, the same logic applies to residential real estate in large cities. If the trend of working remotely takes off, the combination of commuting not being a consideration any longer and the absence of job growth means that the younger generation will no longer chose to afford residential renting or buying in expensive cities. Inevitably, prices will then fall. In addition, many will have realized that working from home is more climate-friendly and less stressful than having to commute to an office.
The possibility of working remotely means that the biggest hubs that have benefited from higher economic growth than other cities or regions in their vicinity may start losing workers to the next tier of rising cities. This
phenomenon could in turn create a wave of rising-star cities or regions attracting people looking for a better quality of life thanks to more space at more affordable prices.
Notwithstanding all the above, perhaps the notion of widespread remote working becoming the norm is too far-fetched to happen in any meaningful manner. Haven’t we so often heard that optimizing “knowledge work” (in reality the simplest sector to go remote) depends on carefully designed office environments? The technology industry that has resisted such a move for so long by massively investing in sophisticated campuses is now
changing its mind in light of the lockdown experience. Twitter was the first company to commit to remote work. In May, Jack Dorsey, its CEO,
informed employees that many of them would be allowed to work from home even after the COVID-19 pandemic subsides, in other words – permanently. Other tech companies like Google and Facebook have also committed to allowing their staff to continue working remotely at least through the end of 2020. Anecdotal evidence suggests that other global firms from various industries will make similar decisions, letting part of their staff work remotely part of the time. The pandemic has made possible something that seemed unimaginable on such a scale just a few months ago.
Could something similar, and equally disruptive, happen with higher education? Might it be possible to imagine a world in which far fewer students will receive their education on a campus? In May or June of 2020, in the midst of lockdowns, students were forced to study and graduate remotely, many wondering at the end of the term if they will physically
return to their campus in September. At the same time, universities started to slash their budgets, pondering what this unprecedented situation might entail for their business model. Should they go online or should they not? In the pre-pandemic era, most universities offered some courses online but always refrained from fully embracing online education. The most renowned universities refused to offer virtual degrees, fearful that this might dilute their exclusive offering, make some of their faculty redundant and even threaten the very existence of the physical campus. In the post- pandemic era, this will change. Most universities – particularly the
expensive ones in the Anglo-Saxon world – will have to alter their business model or go bankrupt because COVID-19 has made it obsolete. If online teaching were to continue in September (and possibly beyond), many students would not tolerate paying the same high tuition for virtual
education, demanding a reduction in fees or deferring their enrolment. In addition, many potential students would question the pertinence of
disbursing prohibitive costs for higher education in a world marred by high levels of unemployment. A potential solution could lie in a hybrid model.
Universities would then massively expand online education while
maintaining an on-campus presence for a different population of students.
In a few instances, this has already been done with success, notably at Georgia Tech for an online master’s degree in Computer Science. [140] By going down this hybrid route, universities would expand access while reducing costs. The question, though, is whether this hybrid model is scalable and reproducible for universities that do not have the resources to invest in technology and in an exclusive library of top-notch content. But the hybrid character of online education can also take a different form, by combining in-person and online study within one curriculum through online chats and the use of apps for tutoring and other forms of support and help.
This has the advantage of streamlining the learning experience, but the disadvantage of erasing a large aspect of social life and personal
interactions on a campus. In the summer of 2020, the direction of the trend seems clear: the world of education, like for so many other industries, will become partly virtual.