Is there still demand for office space? The impact of COVID-19.
The COVID-19 pandemic is accelerating the structural change on the Swiss real estate market. The trend of working from home will suppress demand for office space over the long term. Not only will office properties take a hit, but the market for brick-and-mortar retail space is also shrinking.
Home offices are replacing traditional office spaces
Thus far, the lockdown has had hardly any noticeable impact on landlords of office properties in Switzerland. Only a small fraction of office tenants were directly affected by the measures taken to fight the coronavirus pandemic. The amount of rental income lost this year is therefore likely to be only somewhere in the low single-digit percentage range.
Over the long term, however, the consequences could be more severe. COVID-19 is expected to accelerate the structural change on the market for office properties. That is because the crisis has allowed both employers and employees to discover the advantages of the home office. Working from home has become an accepted practice. As a result, many workers from now on may be putting in at least part of their weekly hours from their office at home.
Demand for office space will decline over the long term
Moreover, reducing the amount of office space being leased offers the potential for savings since property expenses are a substantial cost factor for many companies. Swiss service companies expect they will need roughly 7% less office space thanks to the expansion of home office arrangements. Manufacturing companies are also counting on savings of 3.6%. That will most likely occur at the expense of leasing new spaces since companies now ought to be taking a close look at whether their existing spaces are not already sufficient after all.
It remains unclear how severe the long-term effects will be. All other things being equal, Credit Suisse's main scenario predicts a slump of 15% in demand for office space over a period of ten years. Developments such as this will also take a toll on rents. On top of that, declining employment in Switzerland over the medium term will pose another problem for landlords of office properties. It is expected that employment will have fallen by 1.5% by the end of the year, causing demand for office space to drop by approximately 770,000 square meters. A decline of that size would be comparable to the slump in demand during the financial crisis.
Brick-and-mortar retail spaces shrinking faster
Even conventional retailers are not coming through the COVID-19 pandemic unscathed. The coronavirus is accelerating the structural changes already underway even more. Though the industry had already taken a beating due to growing competition from online retailers, the temporary closure of stores delivered another blow to many businesses.
While sales in the food service industry are continuing to rise, the non-food sector could experience a roughly 20% decline in revenue for the year as a whole. The clothing sector in particular suffered heavy losses over the first three months. The numbers will be even more gruesome in the second quarter. The results are likely to be bankruptcies and reductions in store sizes, causing the retail property market to shrink more rapidly than it has already.