Despite the very positive response to the easing of the lockdown, the fact remains that restoring the Swiss economy to its former momentum will take much longer than originally anticipated. For real estate, this means that the focus should be more on the medium- and long-term consequences of the pandemic rather than on the immediate loss of rental income. Falling employment figures and an increase in bankruptcies will impact demand for commercial real estate in the medium term. In addition, COVID-19 is accelerating the pace of structural change not only in retail property but also in the office space segment of the market. Working from home has become mainstream. According to Credit Suisse economists, this will have a negative effect on demand for office space in the long term.

Despite the surprisingly rapid containment of the COVID-19 pandemic in Switzerland and the phased lifting of preventive measures, the scale of the economic fallout of the lockdown is only gradually becoming apparent. An economy cannot simply be switched on and off like a light bulb. This is shown by data on mobility, which is only slowly nearing previous levels. For the economy, the return to pre-crisis levels is therefore likely to be a long and arduous process. Real estate investments did not emerge unscathed from the mid-March sell-off. However, a more nuanced picture has since emerged and the long-term consequences of the pandemic are taking center-stage.

Abandoned office space
The loss of rental income from office space has so far been limited. This could be interpreted as a sign that the pandemic has affected the office property market in only a peripheral way – were it not for the disturbing images of offices standing empty. In fact, there are some open-plan offices without a single employee working in them. Banks, insurance companies, law firms and many other service providers are nonetheless functioning smoothly, and they are being managed remotely by employees working from home. Many executive boards – including those of large global corporations – have identified the latent potential to make savings and are already looking to reduce the amount of space they use.

Rather than being a game-changer, COVID-19 is a massive accelerator of existing trends: While working from home was technically possible even before the onset of the pandemic, very few employees actually did so on a regular basis. It was only the lockdown that made home working an accepted practice and proved that it is a viable option. Various surveys show that a majority of employees, even after weeks confined to their home offices, would like to continue to have the option of working in this way in the future. Consequently, the question is not whether there will be a shift to home working but rather to what extent this will occur: With real estate expenses representing a major cost for many service-sector companies and generally accounting for a mid-single-digit proportion of revenues, the potential savings are too tempting to ignore.

Expected decline in employment is a greater problem for now
Only once the pandemic is under control will it be possible to determine the proportion of work employees can perform at home in the future. Companies regularly surveyed by Credit Suisse expect an average figure of 14%. Only a fraction of this will translate into savings of office space: 7%, according to the survey. Over a ten-year horizon, Credit Suisse economists expect an average figure of 15% as the most likely scenario. However, they also believe that demand for office space will ultimately fall by a small percentage due to other structural trends such as tertiarization and digitalization.

Nonetheless, changes in demand of the magnitude indicated above will have a negative impact on office rents. For now, the expected decline in employment is likely to pose a greater problem for office landlords. The 1.5% reduction in employment expected by Credit Suisse economists will reduce demand by 770,000 m2 by the end of 2020. This figure is equivalent to almost three quarters of the cumulative additional demand recorded in the market over the last two years.

Retail sector left reeling
COVID-19 is accelerating the pace of structural change in the retail sector. Until now, the reluctance of many consumers to make use of online shopping was the "best friend" of brick-and-mortar shops. However, the pandemic has now forced many people to shop online. A significant number of them will have come to appreciate the advantages of this channel and will therefore decide to shop with online retailers on a permanent basis in the future. Credit Suisse economists believe that the COVID-19 crisis has shortened the process of structural change by three years. This is likely to accelerate the shakeout of the retail property market, separating the strong players from weaker market participants, given that the crisis has affected a sector that was already in trouble. However, the pandemic shows that there will be winners too: While all retailers were confronted by the same storm, they were not all in the same boat.

Commercial real estate goes out of fashion
The gloomy outlook has not gone unnoticed by investors. They are therefore more skeptical about real estate investments with a focus on commercial property. Since the sharp sell-off in mid-March, which Swiss real estate investments also failed to escape, real estate shares (YTD -7.5%), as well as investment funds with a focus on commercial real estate (YTD -9.3%%), have lagged behind in terms of the recovery. In contrast, investors are much more positive in their views on residential real estate (YTD -0.8%). If we look at the premiums paid on the intrinsic value of property in the case of listed residential real estate investment funds, the pre-crisis level has already almost been reached: Although agios temporarily fell below 15%, they are currently back up to 28%. The figure at the start of this year was 32%.

Rental apartments: Stable values despite projected fall in demand
Although the COVID-19 pandemic is likely to put a severe dampener on the demand for rental apartments, longer-term rent reductions related to structural changes are less likely than in the case of commercial real estate. In addition, income losses and unemployment will be mitigated by the federal government's rapid and comprehensive support measures. This means it is very unlikely that there will be a loss of rental payments in residential real estate. In addition, the disinflationary impact of the crisis is likely to ensure interest rates stay low for a very long period; this will support real estate valuations to a significant extent.

Owner-occupied housing: Market paralysis was short-lived
Low interest rates are also providing solid foundations for the owner-occupied market. They ensure homeowners enjoy exceptionally low living costs, with the result that owner-occupied housing remains highly attractive. The number of owner-occupied properties being advertised had fallen sharply but there have been signs of a gradual return to normality since mid-April. Nevertheless, the number of newly advertised properties remains way below the pre-crisis level. Here too, the path to full recovery is likely to be a long way off.

Figure: Survey of companies on the impacts of home working

Survey of purchasing managers on expected number of hours of home working after lifting of COVID 19 restrictions and the resulting expected savings in office space  

The full version of the study Real Estate Monitor Switzerland Q2 2020 is available online in English, French, German and Italian: 
credit-suisse.com/realestatemonitor