Captain’s Blog – All Change

At the start of the latest pandemic – and remember there have been several over the years – many predicted that life wouldn’t return to normal for two years. The Hong Kong Flu pandemic lasted from 1968 to 1970 and killed around 4 million people worldwide. Before that the Asian Flu pandemic lasted from 1957 until early 1959 with a similar number of deaths. So far COVID 19 has been with us for around 18 months (we can’t be sure when it really started but it hit UK hard in March 2020) and has killed around 4.5 million. Taking into account that records kept today are more accurate than they were in the ‘50’s and ‘60’s and that more countries are reporting their numbers it seems that all three pandemics will have similar outcomes. That being the case we should hopefully see a return to normal in early 2022 when COVID 19 becomes a less serious threat. What lasting changes will we see and what implications have they for real estate?

One thing that’s immediately noticeable is that outdoor eating and drinking has become much more prevalent. Beer gardens have become semi-permanent spaces with pergolas, tee-pees and a host of other structures erected often enhancing the original venue’s appeal. Table service has become more noticeable as our habits change to reflect those of our European neighbours. Pavement cafés have sprung up on most high streets adding a degree of colour and activity which was missing before. So far so good.

Shopping habits have changed and there is now an Amazon or other e-tailer warehouse on many motorway junctions employing many thousands of people. Again, so far so good. However, elsewhere there is an acute shortage of workers particularly in the service and transport sectors many of whom are working at said warehouses which offer secure and seemingly future proof employment. Yesterday McDonalds announced that it has run out of milk shakes citing a shortage of lorry drivers. Some restaurants are closed because of a shortage of staff whilst many others are running at less than full capacity. The cause of this is partly COVID related as many workers are either still furloughed or are isolating having been ‘pinged’. Brexit has also played its part with a reported 20,000 European lorry drivers having departed these shores and a huge number of service workers also missing. We can only hope that the end of furlough and perhaps a re-set of wages in those sectors will help.

Logistics problems world-wide have created materials shortages because of the (COVID related) interrupted supply chain and this has led to huge spikes in prices particularly in the construction sector where steel and concrete prices have surged to previously unseen levels and some materials are simply unavailable. Developers face a tricky time in placing orders with contractors who in turn are unwilling or unable to commit to fixed prices. 

This COVID after-shock is almost as alarming as the initial hit brought about by lockdown. We are now faced with the dichotomy of an economy seemingly trying its hardest to bounce back from its slumber and consequent pent up demand whilst being simultaneously held down by shortages of labour and materials. This is bringing inflation into play which many have been warning about since the early days of Quantitative Easing. It seems a perfect storm may be brewing. 

The outlook for real estate is mixed. Housing and logistics are booming, retail and offices are stalling. Leisure and hotels don’t know which way to look whilst PBSA (purpose-built student accommodation) is debating whether to build in advance of increasing student numbers or retreat because many of those students will study from home. Major tenants are demanding more breaks from landlords as power shifts inexorably form the latter to the former. Meanwhile Planning is slower than ever – ‘because of COVID’ – whilst land prices are increasing and building costs are soaring. 

Financial modelling has never been such an inexact science as it is right now as inputs become mere guesswork and modellers rely more on art than science which isn’t always their forte. Those who are adept at seeing truth amongst chaos will thrive whilst those who can’t see the wood for the tress will fail.