Real Fantasy. How Commercial Real Estate Will Change in 2021

I must say right away that no one can build a model that accurately predicts the future. Moreover, the more distant future we try to look at, the higher the probability of error. But there is one very important positive moment in such futuristic studies. Within our work, we interview market participants like top managers of large development companies, investors, financial experts). They are true market experts and we already had a chance to see how their forecasts came true. They know how the market has changed over the past 10 years and many remember the story even much deeper. By making their predictions, they can indirectly communicate their intentions. From now on, these are no longer just predictions, but plans, which are much more specific. Thus, our research is not so much a forecast as an assumption of how the market can change and what events can affect it.

Not just Europe

In advance, we want to note that the following trends are primarily related to the European market. Nevertheless, they will inevitably become characteristic of other countries as well. In general, relatively objective and substantiated forecasts (we call them trends) are obtained only for the year ahead. In this case, some “black swan” can greatly change everything. First, let’s have a look at what we think about the commercial real estate trend of 2021.

Retail will not die, but will change

One of the trends, most likely, will be the digital switch to the digital economy. It has had (and will continue to have) the greatest impact on retail real estate. The share of online retail has already grown significantly. Last year, Ozon had a very successful IPO, and this was also clear evidence of the growth of online commerce.

In turn, shopping centers are gradually transforming into sort of leisure facilities. This does not mean that shops will leave them, but they will fall into the field of interest of visitors on a par with once secondary objects like restaurants, entertainment areas, cinemas. Shopping for food and electronics in shopping centers will gradually become less and less popular. This, by the way, is already happening. Trade, on the other hand, will gradually move to the online format. The final transition will though not happen. Shopping trips for many have been and will remain an entertainment process, and online shopping will not become a full-fledged replacement.

Warehouses will catch up with retail

Warehouse real estate has always been a significant part of commercial real estate but the last year was booming. This is due to the development of the same online trade. Regardless of how the product is sold, it still needs to be stored somewhere! As a result, it was the warehouse real estate that became the beneficiary during the pandemic.

In general, in 2020 the number of vacant lots in the warehouse real estate market began to decline rapidly. We believe this segment will continue to develop. Moreover, we see that investors are actively drawn to the warehouse sector, despite the fact that not long ago office real estate aroused much greater interest in them.

The office market: a careful transformation

Office real estate is another significant segment of commercial real estate. And its spirit also has to change all over the world in connection with the great influence of remote work. The transition of companies to remote work was a necessity during the pandemic and even when it’s over the part of its effect will still remain in place. However, every business has its own habits. Many companies tend to require more control over their employees, and only strong government restrictions can force them to change their approach.

Even relatively democratic companies that agreed to transfer their employees to telecommuting during the pandemic, after the final lifting of restrictive measures are most likely to return to the proven office format of office work. Basically, they are guided by the opinion that people need to communicate with each other offline to be more efficient. In addition, not all employees are satisfied with remote work. Some find it hard to work from home (easily distracted by children in a small living space, for example).

Second step towards coworking

The pandemic accelerated the pace of development, but at the same time did not become the founder of this trend. Many have thought about a smooth transition to remote working before. Moreover, not everyone needs a permanent office, or at least not all the time. For example, these same auditors are auditors who are constantly on the move and often work in their clients’ offices.

Even before the self-isolation mode, the coworking format began to gain popularity. It assumes that the office does not provide its employees with assigned jobs, but provides them with a workspace depending on their needs (for example, it provides meeting rooms, office equipment, or a temporary workplace). It is a flexible model that allows you to use the same space in different ways.

Headache for developers

The office real estate market entered the pandemic year 2020 in a non-standard form. There has been no full-fledged development since 2015. The previous crisis forced developers to stop building new business centers. At the same time, when the economy began to revive by 2019, and the demand grew, the vacant spaces became scarcer. As a result, the rental rates began to grow. A year later, analysts were confident that rates would continue to rise, but the pandemic made its own adjustments. Demand fell sharply, and there were practically no major transactions.

Now rates behave differently depending on the class of the office. So, more budget options mostly filled by small companies, which were hit quite hard by the pandemic, are losing demand. Tenants are moving out. As a result, rates had to be reduced. In the case of Class A offices, the situation is different. It is not easy to move out there as contracts are usually signed for a longer period (5-10 years). So the pandemic could not and is unlikely to affect the level of occupancy for this level of office spaces.

Housing: preparing for stagnation

This segment of real estate received active support from the state, and the effect was not long in coming: sales increased, followed by a rise in prices. Along the way, developers began to go public with an IPO. Most likely, in the near future, demand will decrease slightly, sales will fall. As a result, developers will fulfill their sales plans, but at the same time they will receive a decrease in marginality. The market and sales will start to stagnate.

Within 5 years: innovation and technology

Let’s try to carefully look into the future within a few years. What do we see there?

Even before the pandemic, a number of analysts said that the real estate sector will transform depending on the functionality. For example, there will be fewer purely office or purely residential properties. They will be replaced by multifunctional complexes. We increasingly see buildings where you can live on the upper floors and work, shop and play on the lower ones.

One of the very “far-reaching” forecasts is a decrease in the polycentricity of cities. What it means? Before pandemic, you could easily live at one end of the city and travel to work at the other. People will try to change this tendency and limit their movement around the city trying to stay within their living area as much as possible. At the same time, while searching for a job near home or a home near work, people will not be afraid to live far from the center. The infrastructure will become approximately the same everywhere. We are already seeing an increase in requests for housing in ecologically clean areas. This trend will strengthen over time.

Investments in real estate related to medicine are becoming promising: clinics, drug factories, and other options, which in the distant future will become independent segments.

The real estate market is changing quite quickly. It is a very sensitive segment. Not surprisingly, 73% of the experts we surveyed are confident that investment in the PropTech market (technologies and companies that provide innovative solutions in all sectors of real estate for all work on a project, from design and construction to management and operation) will grow in the next 5 years.

10 years plus: possible fantasy

Another trend that has already emerged and will gradually increase in 2021 and later is the sharing economy. This economic model based on the idea of joint consumption and collective use of goods and services. People will start to unite in a community and form groups of interests, joint work, and place of residence. At the same time, they will not be the full owners of something, but they will be able to spend less due to temporary use. It is evident, for example, what a great impact had a car-sharing on our daily life.

If you look into the very distant future, then we can already firmly say that digital will be in trend. For example, already now, cell towers have begun to be considered as real estate: they can be bought, sold, leased.

And then forecasts are difficult to distinguish from fantastic (and nevertheless quite realizable) scenarios. Entrances to buildings of no matter commercial or residential real estate will be located on rooftops, and people will move through the air. All logistics will be tied to the work of drones because it is cheaper and more reliable. The square meter system will give way to the cubic meter system because it is more convenient in terms of logistics. Agglomerations will grow, but decentralization will occur, and megacities will be divided into self-sufficient areas. As a result, metropolitan cities will become the prototype of countries with city-districts inside, and coliving – as a way of life. Does any of the above sound like a science fiction movie? Perhaps, but some of the current realities were once hard to believe in!

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