The COVID-19 pandemic is having a huge impact on the way people live and work and uncertainty is now becoming part of the ‘new normal’. The flow-through effects to the real estate market are undeniable and the full impact is yet to be reflected in quarterly performance data.
The retail and hospitality sectors were the most immediately hit with lockdowns and travel restrictions curtailing demand. Global office leasing activity was 23% down on Q1 2019, while demand for logistics space was also lower despite a spike in short-term requirements linked to the immediate impact of the pandemic. Businesses are now starting to prepare for market re-entry, and the safety and wellbeing of employees is a key focus.
Volatility and uncertainty are impacting real estate investment. REITs were among the first to experience declines, and direct investment in global commercial real estate decreased by 5% year-on-year in the first quarter. Capital flows varied by region, broadly tracking the evolution of the pandemic, and favoured defensive sectors. Despite ample liquidity on the sidelines, the effects of the COVID-19 pandemic will be realized in the short term and will result in a drop-off in capital flows into the sector. However, the overall trend has been for higher allocations to real estate, and we see no reason for this trend to reverse given the portfolio diversification benefits of the sector.