CRE Missed The Real Danger During The Pandemic. 5 Years Later, The Painful Fallout Is All Too Clear
Cast your mind back to April 2020.
You were highly likely to be locked down, working from home, and worried about your job, your health and the health of your family. There was no end in sight to the coronavirus.
Real estate was in turmoil, vast swaths of it forced to close by governments across the world. The way people used offices, shops and cities changed more in a month than it had in a century.
What did you think the real estate world would look like in 2025? What does it actually look like?
On the whole, real estate got it wrong.
Bisnow went back and analyzed the predictions the industry made during the lockdowns to find out what came to pass — and what didn’t.
At times of immense upheaval, making predictions is hard. It's easy to overestimate how much things will change in the short term and underestimate how much they will change over the long haul.
Real estate failed to spot that inflation was looming and that this second-order effect of Covid-19 would have a huge effect on values. The detrimental impact on retail and hospitality was, understandably, overstated. And the real impact on offices is still not fully known.
Here are some of the key predictions the industry made about the impact of the virus that changed the world and how the reality played out.
Jump to: Investment | Distress | Urban Exodus | Hub-And-Spoke | Workplace Health | Retail | Business Travel | Ghost Kitchens
Investment Values And Volumes: The Hidden Danger
In spring 2020, it seemed a safe bet that global investment volumes and values would fall off a cliff.
That did indeed come to pass, but not in the way that anyone predicted at the time.
Things went as expected in 2020, with global volumes down 26% at $833B, according to data from CBRE, a still staggering total given the state in which the world found itself.
But in 2021, something no one predicted happened: Real estate investment had its best year ever. Even as much of the planet remained locked down, $1.3T of real estate was transacted across the globe, 21% more than the previous record in 2019, according to CBRE.
Prior to the pandemic, central banks around the world were slowly unwinding the quantitative easing and interest rate cuts put in place after the Global Financial Crisis, which flooded the world with cheap money, brought interest rates to zero and made real estate an attractive investment for a decade.
But the response to the Covid-19 crisis was to slash rates back to zero and reinstitute QE. That did the job of helping consumers and economies bear the economic pain of the pandemic. It also made real estate an incredibly attractive buy again despite lockdowns and lingering worries about the coronavirus' long-term impact.
That helped stoke inflation in a way unprecedented since the 1970s, in tandem with Russia’s invasion of Ukraine — more fallout no one foresaw in 2020.
The word inflation didn’t appear in a Bisnow headline between June 2018 and January 2021. Until May of 2021, commentators were predicting that inflation would be a positive thing for CRE.
The truth was quite the opposite.
Inflation rather than the pandemic itself was what brought about the destruction in values and volumes in commercial real estate. It meant central banks in countries like the U.S. and the UK were forced to raise interest rates at historically high speeds, moving from 0% to 5.5% in the 18 months between mid-2021 and 2023.
That meant acquiring real estate was far less attractive than buying other types of assets like government or corporate bonds, which offered similar returns for far less risk. And the cost of borrowing was much higher than real estate cap rates, meaning the type of investor that normally borrowed to buy was paying more in interest than they were getting in rent.
In the blink of an eye, profitable deals turned into loss-making trades. Global volumes collapsed, falling by 37% in 2023, CBRE said. In 2024, that figure increased globally by 14%, according to JLL. Yet cities like London had a worse year in 2024 than even the lowest points of the GFC.
Data on value declines is patchier because of the heterogeneous nature of real estate as an asset class. But they didn’t come close to matching the fall in values precipitated by the 2008 financial crash. In the UK, average real estate capital values fell by around a quarter between mid-2022 and the end of 2023 before stagnating in 2024, CBRE said.
Distress: Lots Of It, But Not Much You’d Want To Buy
The distress will come, but it will take a while to come through.
That was the mantra in spring and summer 2020, when many theorized that with real estate and banks under pressure from the effect of lockdowns, there would be a significant opportunity to buy good assets at distressed prices for those with cash in hand.
It sort of happened, but not in the way anyone expected. Distressed assets did increase sharply as a direct result of the pandemic, in the hospitality sector in particular. But the bigger issue for real estate was the decline in investment volumes and values precipitated by rising inflation and the resultant spike in interest rates.
The total volume of distressed assets in the U.S. jumped from about $25B at the end of 2019 to about $55B at the end of 2020 before declining back below $50B at the end of 2021, data from MSCI showed. That figure doubled to $102B at the end of 2024, with the pace of growth slowing.
To put that in context, that is only half the $200B of distressed assets that came about as a result of the 2008 financial crisis.
In terms of distressed deals, the flood that many predicted never came because of where the distress is concentrated. In the years following the Lehman collapse, investors could buy good real estate at low prices as it was too highly leveraged.
This time around, $50B of that overall distress, or almost exactly half, is in the office sector, MSCI said. That's an asset class investors are wary of due to wider structural trends and uncertainty about how people will use offices in the future. The distress is there, but it is not necessarily in the places where investors want to buy.
The Great Urban Exodus Never Really Happened
The flight from dense, crowded, virus-ridden cities — a flood of urban dwellers moving to the suburbs or countryside — is one of the most enduring motifs of the Covid-19 pandemic.
But looking at the data, it quickly becomes clear that the trend was more anecdote than reality.
U.S. home sales data from the National Association of Realtors shows that a change in home-buying habits happened in 2022. But it was short, sharp and followed largely by a reversion to the mean.
Far from an instant exodus from cities, the split between cities, suburbs and small town/rural areas was remarkably consistent from 2017 to the end of 2021 when it came to home sales.
Over that four-year span, the suburbs accounted for about 50% of all home sales, urban areas about 13%, and small towns and rural areas made up the other 37%.
In 2022, that shifted: The share of suburban sales dropped to 38%, urban sales fell to 10% and small towns rose to 52%.
Yet as the virus receded, tamped down by vaccines, those trends almost immediately reversed. In the last two years, urban areas increased market share at the expense of the suburbs, accounting for 14% of sales in 2023 and 16% of sales in 2024.
The median distance between a home purchased and a previous residence tells a similar story.
Between 2018 and 2021, the figure was static. On average, people moved 15 miles away from their previous residence. That figure leapt to 50 miles in 2022 before dropping back to 20 miles in 2023 and 2024. People moved slightly further following the worst years of the lockdown, but not enough to indicate any permanent urban exodus.
Hub-And-Spoke Offices: The Wheel Turned A Little
While the pandemic was raging, the idea of everyone congregating in a single central office and traveling there on busy public transportation seemed like something that could easily become obsolete. But working from home seemed unsatisfactory, too.
Thus the idea of the “hub-and-spoke” office model was born. The thought was that companies would still have some sort of city center presence, but staff would also work closer to home at flexible satellite office locations in suburbs and smaller towns.
Was this just an attempt to stoke demand from a flex-office sector facing annihilation as clients cancelled short-term leases in big urban locations?
Data suggests the concept may have quietly taken a foothold even though references to hub-and-spoke offices are not quite as common today and workers are mostly traveling to central offices, albeit less frequently.
“This growth in demand for flex workspace in locations on the boundary of major cities is indicative of the rise of more localised work,” Instant Group Executive Director John Duckworth told Bisnow in an emailed statement.
In the UK, Instant data showed a significant increase in demand for flexible workspaces in tertiary UK cities and towns.
Cities like Oxford, Leicester and Southampton have experienced a 36%, 25% and 15% increase in demand, respectively. Locations such as Uxbridge, Slough, Romford and Solihull, in the suburbs of London and Birmingham have seen respective 88%, 73%, 42% and 37% uplifts.
In the U.S., New York City's suburbs also benefited from flexible workspace demand. Between 2019 and 2024, Manhasset, Long Island, saw a 300% rise in demand, while demand in Morristown, New Jersey, jumped 195%, according to Instant data. Westport, Connecticut, was not far behind with a 150% uptick in demand.
Other U.S. cities, including Miami, Seattle and Raleigh, North Carolina, benefited from migration to “lifestyle” cities, Instant said. Demand in these cities rose 153%, 144% and 57%, respectively.
No Six-Foot Offices: But Workplace Health Is Here To Stay
An examination of how often people are using offices and the resulting impact on demand is worth a 20,000-word essay all of its own.
But during the very depths of lockdowns in 2020 and 2021, there was understandable speculation about how working in an office might function in a world suddenly more aware of the health risks that come from gathering together.
As the coronavirus has receded, so too have the solutions proposed for a world where greater illness was more of a constant. Those include Cushman & Wakefield’s 6 Feet Office and workers sitting in glass cubes inside office buildings.
But the trend toward denser offices over the last two decades has reversed, data indicates. Between 2001 and 2018, the average space per desk in a UK office dropped from 159 SF in 2001 to 105 SF in 2018, according to the British Council for Offices, with UK offices being slightly less packed than their U.S. equivalents.
By the end of 2023, that number had risen to about 125 SF per desk, the BCO said. That is partly the result of fewer people coming in to offices and more space being set aside for communal work areas and less for desks. Spacing us out to avoid disease is not the main issue.
At the same time, sales of furniture with antimicrobial materials and finishes have been slowly rising, increasing from $3.6B in 2023 to an anticipated $4.1B in 2024, according to data from Next Move Strategy Consulting. It cites an increased focus on workplace wellness as a factor in this growth.
Proptech: The Great Leap Forward Didn’t Happen
With tenants and investors unable to view properties in person during the lockdowns of 2020 and 2021, virtual reality proptech companies experienced a sudden surge in demand — the “Dawn Of the VR Era,” as a Bisnow headline in April 2020 declared.
The pandemic was seen as having the potential to accelerate the adoption of proptech by real estate owners hungry for the certainty of data in a new, highly uncertain world.
The reality was more nuanced.
“Has the experience of making a decision by physically visiting a place changed meaningfully since the pandemic? Probably not,” Concrete VC General Partner Taylor Westcoatt said.
There are some areas where virtual viewings have caught on, he said, like international students viewing accommodation. It has also allowed tenants to whittle down their options before going to see an office or an apartment. But physical viewings are still paramount.
Numbers at Matterport give a good insight into the state of play, even though virtual 3D renderings of properties are not its only service. Revenue at the company has grown since it listed in 2021, but it has yet to turn a profit. CoStar agreed to buy the company last year for $1.6B, almost half the $2.9B valuation at which it floated.
Proptech adoption has clearly increased in the last five years, but it is hard to make a case that the pandemic accelerated the process. Global proptech investment was $32B in 2019, according to the Center for Real Estate Technology & Innovation. It dropped to $24B in 2020 before rebounding to $32B again in 2021. By 2024, that figure plummeted to $15B as higher interest rates hit investment levels.
Compared to five years ago, the sector is in less of a bubble, and the real estate companies that ultimately buy proptech services have a better idea of what is really useful, Westcoatt said.
“All the real estate players are vastly better informed about what their options are,” he said. “We've now had, let's call it a cycle, of exposure to where an actual difference can be made. It's not so much smoke and mirrors anymore.”
Retail: The Death Of The Store Is Greatly Exaggerated
There was a legitimate worry that pandemic lockdowns could be a death knell for a retail real estate sector that had already seen huge value and income declines over the previous decade.
Across the world, all but essential retail stores like groceries and pharmacies were closed, and access to even those locations was heavily limited.
Between mid-February and mid-March 2020, Simon Property Group’s share price dropped by two-thirds compared to a drop of about a third for the average REIT over the same period. And shares in Prologis rose sharply after a shallow dip on the expectation that e-commerce would take an even greater share of the retail pie.
In reality, e-commerce sales have risen, and that rise has been maintained. Yet the jump was not as big as might have been expected.
U.S. online sales accounted for 11.2% of all retail sales in the last quarter of 2019, a proportion that rose to 16.4% in the second quarter of 2020. Since then, the figure has bobbed around 14.2%, climbing back to 16.4% at the end of 2024. But predictions from Boston Consulting Group that global e-commerce sales could reach 41% of all retail by 2027 seem wide of the mark.
Similarly, online U.S. grocery sales shot up from 4% in 2019 to 11% in 2024, but this percentage is only creeping higher now.
That's why grocery-anchored retail is now appearing on the shopping list of major investors again, with Blackstone having agreed to take private Retail Opportunity Investments in a $4B deal.
Business Travel: Zoom Calls Don’t Cut It
Why fly across the world when you can speak to a client on Zoom or Teams?
While going into the office was always going to be up for debate, it seemed a no-brainer that the rapid adoption of video calling would have a long-term impact on business travel and the hotel sector, particularly in city centers.
Citigroup predicted business travel could drop by 25% long term. It fell 90% in 2020 from 2019, according to data from Deloitte. In 2022, it was still down 50%.
But business travel has bounced back far quicker than anyone expected.
“The business segment is stronger again,” Hyatt Hotels Senior Vice President of Development for Europe, Africa and the Middle East Felicity Black-Roberts said. “The return-to-office trend has started, and we’re benefiting from people wanting to meet face-to-face again.”
As of last year, business travel was on track to exceed 2019 figures for the first time since the pandemic, netting a record $1.5T, according to a report from the World Travel & Tourism Council last October. That would be a 6% increase from 2019.
In the U.S., the amount spent will be 13% above 2019 figures, the report said.
But while the trend will be great for hotels, it does have its downside. Airline emissions dropped 50% between 2019 and 2022, analysis from the European Federation for Transport and Environment showed. That little breather for the atmosphere is now very much over.
Ghost Kitchens: Funding Boom Outpaces Reality
In November 2021, Uber founder Travis Kalanick raised an $850M funding round from investors like Microsoft for CloudKitchens, his ghost kitchen startup. It valued the company at $15B, one of the world’s priciest unlisted companies.
That came on the back of expectations that after getting into food delivery in a big way during the pandemic, demand in the U.S. and around the world would only grow.
Cut to 2022 and 2023, and the noise around the company was very different.
While there is no news on an updated valuation, The Financial Times reported sites were closing down, operators were leaving the platform and a moratorium was put in place on new location acquisitions.
The level of investment into the sector during and immediately after lockdowns has not been met with demand.
And while some companies have expanded at a steady pace, like the UK’s Karma Kitchen, other big names like SoftBank-backed Reef have pivoted to providing software rather than brick-and-mortar kitchens.
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