COVID-19 Revolutionizes Real Estate Markets
The advancements of the internet and mobile phones have enabled many new possibilities of replacing physical presence at a real estate property by online engagement. For example, the ideas of home offices, e-shopping, etc. are developing for decades. Yet, their progress had been very slow and there was a lot of resistance.
However, the global lockdown in the wake of the COVID-19 forces us to adopt and adapt online engagements in almost every aspect of life. Work from home and schooling at home are mandatory by law. e-shopping and Amazon-delivery become the new normal. If all these changes are to be continued, the real estate markets would no longer be the same, the discipline of urban economics would have to be revamped!
Let’s start by discussing the potential impacts on the real estate markets first. If most of the office workers work from home and students study at home, then office buildings, schools, universities, libraries, carparks, etc. are redundant. If most of us shop online, retail shops and malls can be closed. If we are not allowed to travel or choose to rent Airbnb (normal housing units), then hotels would not be required. If we do not commute, then there is no incentive to live in a city center or to pay a premium for accessibility. All these changes would revolutionize the real estate markets.
Before the COVID-19, these changes were very slow. For example, co-working space and wifi-cafes are growing and competing with traditional office space (Figure 1). Shopping malls are repurposing for mixed uses or alternative uses such as co-working, residential or cultural facilities (Figure 2). Airbnbs (housing units) are also competing with traditional hotels. [watch my Youtube on Yiu (2020a) Urban Economics 2.0 — the Future of Property Markets at https://www.youtube.com/watch?v=zQ_mWdHmOn8]
On the contrary, hospitals and clinics are expected to be increasing. Parks and gardens are in stronger demand. Space for logistics, storage and quarantine are also likely to be indispensable (Figure 4). The most important of all, transportation infrastructure for mass-transit would not be necessary. It helps save billions of dollars on the construction of high-speed rails and metro rails.
Even though housing would still be a necessity, but its price gradient would be changed. In fact, there has been a report in the Washington Post that “The pandemic is making people reconsider city living, trading traffic for chickens” (Kelly and Lerman, 2020). It is a story about “people are making big moves to less-populated areas. … As work becomes less tied to the office or disappears completely, the pandemic is fundamentally changing the appeal, necessity and feasibility of living in a big city. … Some real estate data suggests many are already considering or making a move to a smaller town or suburb.”
The whole premise of residential location choice is based on commuting costs, for example, Dewita et al. (2018) are arguing that low-income households choose to live in the city center for saving transportation costs. Similarly, Glaeser et al. (2008) contend that access to public transportation explains why the poor choose to live in urban centers. In fact, the whole premise of urban economics is based mainly on transportation costs.
Since von Thunen’s (1826) isolated state model, and then Alonso’s (1960) bid-rent curve, the reason for a declining unit land rent against distance from the CBD is explained by the competition of accessibility. Or put in Alonso-Muth-Mills model, high house prices close to the city center are offset by short commutes. Fujita’s (1989) standard urban economic (SUE) framework also posits that a house price gradient surface should reflect commuting costs, income and demographics.
Now, if people do not have to commute, then the accessibility premium for a housing unit does not exist anymore. People would be incentivized to live in a suburb with lower housing prices and a better environment. When the considerations of where to live are no longer commuting-related, then the housing price gradient from the city center would be flattened, and people would consider a Spatial Portfolio of the Attributes they treasure of where to live (Yiu, 2011).
It does not only help solve the housing affordability problem in the city centers, but it also improves air quality, reduces density and congestions, saves lives by cutting traffic accidents (Sethi, 2018), and reduces stress (Schultz, 2019).
Similarly, when shops do not need to agglomerate to compete for customers, then the Hotelling Theory does not hold. The retail rental gradient would then be flattened. Christaller’s (1933) hierarchies of centers for high-order goods and low-order goods will vanish. Shops would be more likely to stay close to the manufacturing or storage center and serve as a factory outlet if shops are still necessary.
Further discussions on the adaptive reuse of real estate can be found in my previous article (Yiu, 2020b)
#COVID-19 #FuturePropertyMarkets #HousePriceGradient #BidRentCurve
Alonso, William (1960) A Theory of the Urban Land Market. Papers in Regional Science 6 (1): 149–157.
Christaller, Walter (1933 ) Fundamental Meanings, Central Places in Southern Germany. (translated by C.W.Baskin) Prentice-Hall, 1966, pages 14–23.
Dewita, Y., Yen, B. T., & Burke, M. (2018) The effect of transport cost on housing affordability: Experiences from the Bandung Metropolitan Area, Indonesia. Retrieved from https://www.sciencedirect.com/science/article/abs/pii/S0264837717313042
Fujita, M. (1989) Urban Economic Theory: Land Use and City Size, Cambridge: Cambridge University Press.
Glaeser, E., Kahn, M.E. and Rappaport, J. (2008) Why Do the Poor Live in Cities? The Role of Public Transportation, Journal of Urban Economics 63, 1–24. https://dash.harvard.edu/handle/1/2958224
Kelly, H. and Lerman, R. (2020) The pandemic is making people reconsider city living, trading traffic for chickens, The Washington Post, June 2. https://www.washingtonpost.com/technology/2020/06/01/city-relocate-pandemic/
Schultz, J. (2019). Cost, crowding, or commuting? Housing stress on the middle class. Retrieved from Brookings: https://www.brookings.edu/research/cost-crowding-or-18commuting-housing-stress-on-the-middle-class/
Sethi, A. (2018). How urban traffic affects the property market. Retrieved from Housing: https://housing.com/news/urban-traffic-affects-property-market/
von Thünen, Johann H. (1826 ) The Isolated State with Respect to Agriculture and Political Economy. (Der isolierte Staat), 3rd edition, Berlin, Wiegardt, Hempel and Parey.
WIRED (2019) Architecture Professor Explains Why Malls Are Dying, June 28. https://www.youtube.com/watch?v=sBEajQWy-LU&feature=youtu.be&list=WL&fbclid=IwAR0nZOpZjZc461CqCmmLMd_Nf87jMoqMxoidOrOTIBlAXYT7lkhPg1CZCKg
Yiu, C.Y. (2011) A Spatial Portfolio Theory of Household Location Choice, Journal of Transport Geography 19(4), 584–590. https://www.sciencedirect.com/science/article/abs/pii/S0966692310000931
Yiu, C.Y. (2020a) the Future of Property Markets, Youtube, May 23. https://www.youtube.com/watch?v=GeHKRNvRA3E
Yiu, C.Y. (2020b) Asset Management of Real Estate and Adaptive Reuse of Space after the COVID-19, Medium, May 25. https://medium.com/discourse/asset-management-of-real-estate-and-adaptive-reuse-of-space-after-the-covid-19-5f39ed19c421