How does this Pandemic compare to past recessions. Part 2.
Just before Christmas we produced the first of this two-part blog, you can find it here → How Does this Pandemic Compare to Past Recessions. | by SHB Real Estate | SHB Real Estate blog | Medium
Now we want the second part to look at the short-, medium- and long-term effects of the pandemic and longer-term lock downs, as well as some analysis of government assistance and what might be coming our way as the interventions drift off and the next phase of the down turn develops.
Lockdown 2.0 & 3.0
The two most recent lockdowns have really rolled into each other, with the exception of xmas day where everyone was allowed to mix freely (madness) and one day of school, where the kids all got together for one germ infected day to cuddle their friends and then spread the virus to every possible part of home life (absolute maximum madness), and now we are in the relatively early stages of the dreaded national lockdown where the schools are closed, retail is largely shut, the borders are restricted and most people are working from home. So, in terms of all things commercial, why does the working element of this lockdown feel like a very different experience to the first one?
Leases Don’t Stop for Anyone
Regardless of the surrounding circumstances, leases carry on and generally need to be dealt with. What we found last year was the vast majority of occupiers spent a lot of their time getting emergency advice, analysing options and generally firefighting. In the end, some allowed their expiries to happen and they currently work from home, but most decided to renew their leases or they simply kicked the decision can down the road. As a result, we returned, albeit in a new lock down, to work in early January and BANG! It has been activity central both with new projects being confirmed from clients, or from historical projects starting to really move forward. This is good news for sure but really a result of compressed demand and at SHB we expect this level of activity to be short lived and it will settle into a low hum as companies continue to deal with the rising tide of economic trauma.
The Office is Dead: Good try office haters but you are very much mistaken…
There are actually many reasons to be excited about the future and we are in the midst of a commercial revolution. Let’s take a look at a few associated subjects:
Vaccine/s: YES! The light in the darkness but with a shimmer of warning in that it seems highly likely that coronavirus will be with us forever in one form or another and this could mean future restrictions and potentially even lockdowns. However, with vaccines being rolled out, we can start to plan for what comes next in a world where COVID is managed.
Novelty: The novelty of working from home is understandably diminishing very quickly and no doubt the perception and use of the office is changing. For sure working from home will be a more influential concept, but the office is simply having a well-earned rest and we are already seeing out of the gloom, that individuals and companies are beginning to realise the importance of the office, the collective and all things that funnel towards the brand of a business.
The Employee: By all means there should be employee understanding and in some cases influence, but it can be very dangerous to give the employee too much of a voice on some subject matters. When it comes to the requirements of any given commercial entity for their staff to be in the office or working from home, assuming there are no physical dangers, then it should be the choice of the company and the senior management. We are in danger of swinging way too much in one direction and dare I say it becoming a little too ‘woke’. In these difficult times there is nothing more powerful than experience and strong leadership, rather than treading the line of not wanting to rock the boat and appeasement. We really do need to be realistic here in that the focus of businesses is to both achieve survival (through the medium to long-term employment of staff) and make money through being effective as a business. When you take away some of the government support structures this will be made far more difficult.
Brand: In the short term there is no doubt that the defensive measures associated with working from home were required, but over time the internal cracks begin to show. Companies are defined by the staff they have and the collective drive, influence and creativity they magic up between them. The working from home concept is welcome and fine in measured amounts but if we rely on it too much, the damage and cracks in brands begin to show. Over a period of time, it is inevitably self-destructive and right now, as a country we are on dangerous ground and we need to be more self-aware.
The Marvel of Furlough and Financial Intervention
It is generally understood that there are many things about the UK government’s decision making and overall treatment of the pandemic that are highly questionable, but there are also some interventions that history will see as truly incredible. If we imagine what would have happened in another timeline if furlough and the various loans etc. were not granted, the damage is almost unthinkable. The other timeline could have sent unemployment soaring.
With furlough, we have been presented with a redundancy deterrent that is designed to buy people time whereby they might otherwise have been let go from employment. In reality the pandemic is like a period where we are all stuck in economic purgatory, and in a normal downturn we would be able to visualise the process and how bad that particular downturn is. With the pandemic and lockdowns in particular, things almost completely stand still, and as companies become defensive, cost cutting follows and this comes in the form of renegotiating supplier contracts, reducing office costs (potential relocations and/or offloading liabilities), and stripping back employee related costs. With furlough this reaction is avoided for a period of time and once the benefits of furlough are lifted, companies and their employees are fully exposed and the true ferocity of the downturn will begin to reveal itself. You see, one could argue that furlough just puts off the inevitable, but this time of assistance to the individual means they will have an income for x number of years, where otherwise they would not have any. This means those that would be affected have money for food, bills, rent/mortgages and hopefully live longer as the alternative would mean mass unemployment in a climate where there simply aren’t any jobs to replace the job losses. It is a very dark set of circumstances and this is why furlough is incredible. However furlough does have to end at some point and I fear that once it does we will see the stark reality of how our immediate future will be shaped.
Meanwhile we also have various forms of operational lending and with bounce back loans in particular it is easy to criticise the distinct lack of means testing, but there was a need to get financial assistance out into the working community as quickly as possible. If there was a form of means testing, then the working community might not have been there anymore by the time the regulatory approvals had been given. Instead what we have experienced was an extraordinary roll out of money that undoubtably protects small to medium sized companies. Incidentally another side effect has seen high end bikes and cars up to a certain value being sold out en masse. I am not even kidding! Some waiting times for these are around the 2-year mark would you believe?
What Next?
Although the interventions of furlough and the various loans offer great benefit, when combined with other forms of assistance including rates/rent relief (where applicable) or the deferrals of various payments including rent, rates, VAT, personal tax, and corporation tax, we have all been guided into a false sense of security that we have in some way dodged a bullet.
It may also be that the accounts of any given company might begin to look more secure. Combine this with the reality of taking the above into account and the real picture is very dark indeed, and in many cases, this will result in the failure of the wider commercial world, possibly on a scale never seen before. Even if the number of failing businesses is relatively light, the result will be surging unemployment, particularly through travel, retail, leisure and other industries. The net result could be as much as 3–5 million redundancies over the next 36 months and as direct consequence, the residential market will ultimately flounder as people cannot afford to pay their mortgages, in the end creating the great correction we have all been waiting for.
Although this all sounds highly depressing, this is one of the purest examples of the commercial world’s death and rebirth you could ever imagine. The inevitable failure or changing of these industries will see the birth of new ideas and concepts that will carry us through for generations to come. No better example than the suffering of the regions that has been going on for so very long and with employees likely to work close to or from home far more than ever, these areas will have real money and internal investment to make their futures brighter and better than for many a year.
The challenges will continue for some time but within the struggle the next generation of entrepreneurial minds are forming their ideas and as we climb out of the downturn, the good times will not be far away. For now we need to support our leaders as much as we can, grind it out and embrace the opportunities when they come.
For free advice. You can speak to our team today at www.shbre.co.uk
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