Guillermo Gonzalez
Hogan Lovells
Expert Contributor

Thoughts on the Pendular Nature of Life and Real Estate

By Guillermo Gonzalez | Thu, 10/08/2020 - 11:42

We have been living with the COVID-19 pandemic for more than six months now. I’ll venture to say that many of us have shifted, or are shifting, from a justified overreaction mode to a careful mode in which we re-learn our habits as we, hopefully (but with limits) re-activate our daily life. 

Personally, I have gone from doing only indoor exercise at home to adding some outdoor activities with due distancing and health protection habits; the same applies to getting only home-delivered groceries and full home-office to adding some quick stops at the grocery store and spending mornings at the office, as well as having a couple of dinners at restaurants. In general, fear and uncertainty have shifted into adaptation and moving forward, as safely as possible.

Such pendular movements apply not only to life, but to business as well, and real estate is no exception. From the many conversations I’ve had due to my real estate practice with colleges, executives, leaders, clients and friends, I’ve found a general consensus on the above. For example, some months ago it was common to hear people stating in definitive terms that the future of office space was doomed or, at least, that demand would be reduced by a significant degree. Now, I think we are in a state where we recognize that we can use less office space, but after contrasting the costs with the impact on stakeholders and real benefits, we are re-thinking that approach. A couple of months ago, people were highly engaged in home office and routines changed but now, many people have realized that having an office, school, living and leisure space under the same roof is not easy and that family dynamics can be affected significantly.

Having said that, I believe that the impact on real estate due to COVID-19 in Mexico will not be at severe as initially believed and, in some cases, we will see the consequent changes over the long term. This is true not only if we remain in this life-style for a while but also if we “return to normal.” The reason is simple: we have seen both sides of the story, the ups and downs of both extremes and the do’s and don’ts. 

It’s true that the office space market has been affected in the short run, even more so in cities with excessive offer, but those spaces may shift into mixed models with office and living space and well-designed amenities that allow school, office and leisure at home within the same property but not under the same roof. 

I think there are reasons for the WeWork model to grow (with modifications in the process and detailed health precautions) because we may no longer need all the office space we occupy now, but surely we’ll need additional office space from time to time and the flexibility to move in and out to control rent costs. We may need a more seasonal office space model as people may engage in home office during summer time and go to the office in other seasons, which could also create a niche for the Airbnb model.

Residential spaces will focus more on having much better and larger office/leisure amenities as people will continue to demand mixed home/office work structures and will require better spaces and technology. Not everyone likes to work at the dinner table. This may trigger a trend for larger homes on larger land parcels, residential developments in the suburbs and countryside and buildings designed with an approach that is suitable for this trend. 

Proptech (property technology) will most likely look into these trends and consider new needs. We saw the Zoom effect and we know these kinds of platforms are here to stay, as well as some health-related protocols. Offices and homes will require newer and better technologies as health and virtual needs grow.

From my practice, I see an extremely resilient local industrial market as T-MEC (USMCA) is now effective and the commerce in the region has proved to be deeply integrated, triggering surface expansion requirements and built-to-suit leases. The newest trending topic is “nearshoring” as the pandemic has demanded that company decision-makers look for a more controllable supply chain closer to their final markets. This change will happen in the mid to long term because moving a supply chain does not happen quickly but real estate business models are already shifting to it. This nearshoring trend has also been fed in part by the current commercial battle between the US and China, where our new treaty offers shelter and less commercial volatility to companies that decide to base their production in the region. Obviously, the big winner from the pandemic has been the e-commerce companies, which have experienced double-digit growth in Mexico and now require multiple distribution and warehouse spaces, with a notable demand for in-city spaces to be able to cover last-mile distribution.

The shopping, retail and tourism sectors seem more of a challenge. The first two may probably need to adapt to a showroom plus e-commerce model with well-planned logistics, especially in the last-mile service, which opens opportunities for distribution centers and smaller shopping surfaces. The tourism sector may need to re-think the whole business and look into fewer rooms but larger outdoor spaces and less crowed amenities, focusing more on the overall experience rather than the size of the premises.

In short, I believe that real estate market, at a different pace for each segment, will eventually be in good shape because, in addition to its “safe heaven” investment status, new market trends and demand will adapt and allow growth. We will certainly need to adapt, be flexible and able to understand the new trends and market conditions or risk losing the opportunity. Resilience will also be a necessary skill, mainly for the shopping, retail and tourism sectors.

Photo by:   Guillermo Gonzalez