CRE investments down by 29%. Facility costs only by 2%. How is that possible?

Corporate real estate (CRE) investments were down by 29% in the first half of 2020, while the same decrease in facility costs was only by 2%. The impact of the pandemic on CRE is already considered much more severe than the effect of the financial crisis of 2008. Companies have come to learn the hard way what it means to be underprepared. Many have realized that their real estate portfolios are requiring even greater attention than anticipated pre-covid. In this article, we discuss how real estate investments and facility costs have developed during the pandemic and how they might change going forward.

Real estate investment and facility costs during Covid-19

In an interview by NAIOP, industry experts Spencer Levy and John Chang, who are CBRE’s Senior Economic Advisor and Senior Vice President of Marcus & Millichap Research respectively, suggested that the pandemic has massively slowed the transaction and investment volumes in the CRE industry. While the amount of contract renewals and renegotiations has largely remained the same, relocation and expansion plans have mostly been put on hold or canceled all together. The 2020 Global Occupier Sentiment Survey by CBRE has shown that 75% of respondents have put their relocation and expansion plans on hold or even canceled them. Furthermore, roughly 39% of respondents indicated that they are aggressively pursuing portfolio exit plans in an attempt to decrease their real estate portfolio. Drastic declines in investments can also be seen in the enormous fall of 61% of cross-border investments in Q2 of 2020. 

Real estate assets have performed vastly different during the pandemic, which is predominantly due to the largely localized nature of the pandemic that is heavily influenced by local and national decision-making in terms of regulations, rent prices and renewal probabilities. Across the globe we have seen governments temporarily prohibit evictions, suspend mortgage payments and halt construction. Even mortgage reliefs, rent holidays, and tax breaks could be observed. A surprising factor however has been the small decrease of facility costs per square meter, which is largely caused by the inelasticity of facility cost contracts. In the Netherlands for example, the facility cost index (NFC) decrease was only 2% compared to 2019, which saw a decrease of only seven euros from 490 to 483 euros per square meter. 

Whilst during the first months of the pandemic the main discussion was employee safety and employee sentiment, in the current phase many companies are increasingly looking to decrease their real estate footprints. A challenge for many is however balancing cutting back on square footage, whilst maintaining a stellar employee experience. Through the use of utilization and behavioral data, companies are able to make specifically targeted decisions to their real estate portfolio rather than apply a one-action-fits-all approach. It is therefore suggested that companies decommission space based on future projection of needed square meters in combination with sharing ratios. Additionally, companies can try to renew and renegotiate leases to lower rents, this is however often the more difficult out of the two options.

Future Outlook 

Changed behavior during the corona pandemic is likely to alter the way consumers and businesses use and interact with real estate in the future. Large consensus exists that companies will use less square meters for their future office spaces, due to mostly positive employee experiences of working remotely. Whether these alterations will affect real estate investments and facility costs in 2021 remains to be seen. Obtaining insights into space utilization that help you understand how people consume and interact with space, is essential in times of drastic behavioral change. Moreover, it is something you should get started with today, to ensure that you have the right instruments in place when employees start returning to office.