The first quarter of the 21st century may be remembered as the time when technology finally allowed people to stop doing specific activities in specific places and enabled us to do most anything from basically anywhere. The COVID-19 pandemic will be seen as the accelerator of a “Great Disassociation”: a time when the relationship between an activity and where it took place was changed forever.
Separating activity from place
The earliest forms of technology started us on the path of separating activity from place. The telegraph and its successor, the telephone, allowed communication between two people regardless of their vicinity. The radio and then the television brought news, sports and entertainment directly into our homes.
The launch of the Internet and the persistent progress into the digital superhighway of today has allowed the disassociation of activity from place to grow and accelerate.
The disassociations impacting Commercial Real Estate
As we leverage technology to separate activity from place, we continually reshape commercial real estate with rapidly changing conditions and short-term uncertainty.
Work vs. the office
In a study from June 2020, Stanford economist Nicholas Bloom found that 42% of the US workforce was working from home full time, accounting for more than two thirds of all US economic activity.
The last time the US workforce worked from home in such high volumes was in 1900, when work was literally at home because home was a farm. Around 40% of the US population lived on a farm, and 11.7 million people of the 29 million in the workforce worked in agriculture.
It took more than a century for the work and home paradigm to blur again. Corporate leaders are learning from their current experiences, and they are starting to question what the post-pandemic office needs to look like. Should density be relaxed? Should collaborative spaces be added, and should individual work-from-home practices increase?
Banking vs. the bank
The automated teller machine became mainstream in the late ’80s, creating a convenient way to withdraw and deposit funds at any hour of the day. This would later be seen as the first step in a digitally powered movement toward self-service banking. With direct deposit, online bill payment, mobile check deposits, and the use of electronic signatures, we are making fewer visits to our local bank branch to do the same banking we used to do in person. A recent report by Keefe Bruyette & Woods, a New York investment bank, found that teller transactions are down 30-40% this year, and they conservatively estimate up to 30% further branch consolidation.
Shopping vs. the store
For the past 25 years, ecommerce has grown by creating frictionless buying experiences, next day deliveries and hassle-free returns. This continued growth forced retail center and mall landlords to rethink their strategies and offer more comprehensive experiences. More dining and entertainment venues have been added to the shopping experience, as well as more special events and attractions.
COVID-19 caused many malls, shopping centers and non-essential retailers to close, driving even more business online and accelerating an industry-wide correction. Further, the experience-driven components of shopping centers, including restaurants, have been greatly impacted by social distancing needs, thwarting the most common strategies used to combat ecommerce.
Announcements of permanent store closures continue to pile up and have well surpassed any historical peaks…and the year isn’t over yet.
Essential shopping still takes place in the store (grocery, pharmacy, home goods, home improvement, etc.), and technology is being introduced to allow for the use of a mobile device to scan products and check out in an independent manner. Additionally, the activity of grocery shopping can be outsourced through apps like Instacart and other grocery pick-up and delivery services.
Dining vs. the restaurant
A 2019 study commissioned by the National Restaurant Association found that off-premise dining (drive thru, takeout and delivery) had claimed a majority and was growing. Then the pandemic struck, increasing the importance of off-premise dining for restaurateurs seeking ways to recover revenues in the face of social distancing measures. Expanded services also allowed customers to continue to support their favorite establishments throughout the pandemic. The off-premise model, however, does not facilitate alcohol sales like the in-store model does, placing an upside damper on off-premise revenue streams.
Growing services like Grubhub and DoorDash have contributed to this trend, allowing delivery from more than the traditional delivery sources like the local pizza shop or Chinese restaurant.
While the maintenance of food quality from kitchen to table remains a challenge, more and more people are trying to enjoy restaurant-prepared meals at home. As the colder months approach and the demand for outdoor dining decreases, more reliance will be placed on off-premise dining.
Recent reports estimate that up to one third of America’s 660,000 restaurants face permanent closure this year as a result of the COVID-19 fallout. Embracing a mixed model (on and off-premise) is likely the best go-forward path for survival as revenue is not solely a factor of dining room size and table turns.
Entertainment vs. the venue
Once the pandemic hit, the lights went down on Broadway and on every other theater across the country. Movie premiers have been rescheduled and stage productions halted. Some content, however, found its way onto streaming services instead of waiting for a return to traditional theaters. A recording of the hit musical Hamilton, as well as movies like Frozen II, The Invisible Man and Bill and Ted Face the Music all landed on streaming services and Video-On-Demand (VOD) formats well before their original home release dates.
Traditionally, it would take 90 days for a hit movie to reach VOD platforms, a window that is surely shrinking on the heels of Universal’s optional 17-day release agreement with AMC, the largest theater chain in the country.
While you might expect sports to be in this category, most professional leagues have already been reaching audiences in their homes with live broadcasts for years via radio and television. Bundesliga, Premier League, NBA, WNBA, NHL, and MLB have all proven that they can separate the game from the fans, playing in “bubbles” and empty stadiums. Other professional sports such as cricket and rugby have already resumed play in Australia, while the UK is taking a measured approach and South Africa rugby is currently restarting in September. The NFL season in the US has begun with vastly limited attendance in most cases. The NCAA is currently fragmented on its approach. Unlike movie production companies who can postpone the release of a movie for better times, sports leagues have heavy fiscal incentives to play on, even without the fans in the stands.
Among all of the disassociations we’ve seen over the past few months, there are a few scenarios that are in a unique position. For example, home fitness has been around since Jack LaLanne in the 50s, but companies such as Peloton, and competitors like Mirror, FightCamp, NordicTrack, and Tonal have become more popular as they create live and on-demand classes that participants join from home, avoiding the gym altogether.
In an entirely different situation, however, are teachers and students, who have been forced to resume education separately from a classroom. With the onset of the pandemic, all students were sent home to finish the 2019-2020 academic year. As the 2020-2021 school year launched, a variety of in-person and remote options were made available to students and parents. In many cases, the teachers are in their classrooms doing their job for a decentralized class. The higher education situation is more fluid with a variety of colleges and universities all trying their hand at continuing to deliver content across an array of in-person, on campus and fully remote options. Given the individual costs associated with higher education, the entire system could be destabilized by prolonged distance learning.
Renew, rethink, redevelop
Work, banking, retail, dining, entertainment, fitness and education cover a broad array of commercial real estate assets, many utilizing large or purpose-built locations. Unfortunately, the pandemic has greatly impacted the current use and state of many real estate assets. As the disassociation between “activity” and “the room where it happens” accelerates in light of the COVID-19 pandemic, owners, operators and investors need to undertake analysis to figure out what a technology-driven path forward will look like.