How will our cities look and act after COVID-19?
Someone suggested recently that the COVID19 situation is the economic equivalent of a bushfire – it wipes out much of what was previously standing, especially what looked impregnable. In doing so, for the first time in decades, sunlight will now reach the ground. It will allow new types of life to rise from the ashes, although nobody expects it to happen quickly.
I have been trying to get a handle on how current trends will play out. In light of COVID-19, online shopping has boomed, and the number of bricks and mortar retailers has gone to the wall. Likewise, now that many employees can work from home, and may choose to stay there, has obvious implications for office space. There are industries for whom physical presence is necessary, but the workforce is going to be more spread out within those offices, with a higher cost per square metre. This, in turn, likely means that the best office space will go to the most productive firms and workers.
Office spaces with less amenity are going to lose value in both a relative and an absolute sense. They will need to be redeveloped, perhaps into much more flexible layouts for a variety of different businesses. One thing is for sure, landlords will not have the upper hand in rent negotiations for quite a while. If they don’t adapt to the new paradigm, their buildings will end up empty white elephants.
Many existing retailers will look at the percentage of online sales they have now, and realise that they would be better off being purely in the online space. Others will retain a physical location, but in light of social distancing, may choose to work from home – or at least somewhere with lower rent. You don’t need a large space if your shop only exists to give customers a chance to interact with what you have, and then buy online from a much larger selection.
Since the last economic crash in 2008, a “barbell effect” (https://www.livewiremarkets.com/wires/the-3-factors-that-keep-areits-performing) has been observed in many countries, where consumption patterns are mirroring the hollowing out of the middle class. And it’s occurring right across the economy, from food and clothing retailing (https://insideretail.com.au/news/property/retail-property-revolution-201207), finance (https://www.ft.com/content/0f06b47a-fbb3-11e7-9b32-d7d59aace167) and advertising (https://digiday.com/media/a-tale-of-two-cities-the-coronavirus-is-creating-a-barbell-effect-for-publishers-ad-sales/).
A recent report outlines where the online spend is highest in terms of volume (https://auspost.com.au/content/dam/auspost_corp/media/documents/inside-australian-online-shopping-ecommerce-report.pdf). I found it really interesting, because it shows a distinct pattern of being based in car-dependent, outer suburban areas. There’s no shortage of income here, but I’d argue it is the barbell effect writ large. There is lots of spending on status goods online, but the everyday goods may well be supplied locally.
However, the report pre-dates COVID19. If the workforce in these areas is hit hard by unemployment, will they continue to shop on-line? I’d argue that the answer is yes, for a number of reasons. First of all, it remains convenient. But paradoxically, I’d argue that it’s possible that the usual status effect of being seen will go into reverse now, to avoid seeing others. So having stuff delivered to the front door may now help people to save face in social settings. Whether isolating themselves in such a manner is a good idea is another question entirely….
The other thing that’s interesting about this report is what’s NOT showing up here. There’s a social class effect occurring. In the actual high-status areas of Australian cities, I’m sure online retailing is growing, but it’s likely in a much more deliberate manner by both consumers and retailers. The specialty bricks and mortar retailers here may do OK once things start to recover, but ONLY if they have a compelling retail offering.
Ruslan Kogan, founder and CEO of Kogan.com, also said something interesting recently; (partial quote) “in a world where people start to value their time a lot more, they start to value logistics and having something delivered to your door a lot more” (unquote)[1]. This could be because the spending patterns are different not only with money, but also relate to what people do with their leisure time.
So, looking at this situation broadly, we may now have a workforce split into those who can work from home, and those who cannot. This split broadly (not completely) happens along income and education lines, so it’s possible that in the future, the CBDs are mostly populated by an elite workforce, and a small base of service workers to cater to them. Suburbs of high amenity (good parks and gardens, pleasant architecture, and good public services) will see property values rise. The same effect may happen in regional areas with a lifestyle component; places like Byron Bay, Orange and Daylesford.
It’s possible that, rather than large shopping centres, these places have specialty stores and services predominating. Given that the days of department stores are clearly numbered, then, ironically, the future of CBD shopping may be “small is beautiful”, and focused upon delivery rather than much of a physical presence. By contrast, it’s possible that the large shopping centres will go down market, to cater to people for whom saving money counts for more than saving time.
As for the endless postwar suburbs built around the idea of commuting, I think the picture will be much more varied. Some places will end up as new hotspots, being redeveloped to meet new needs. Others, however, may well see a precipitous drop in value. After all, why would you live many kilometres away from any shopping centre with more than (very) basic services and from places with stronger, more varied job markets?
I can think of two reasons. Firstly, because you’re not aware of how things are changing. It’s just a recession, right? All of those empty shopfronts in my local shopping centre will eventually fill up again, surely? Ah, no…not necessarily. Second reason – this is the only place many people can afford to live. There’s nothing affordable for families near those hotspot areas, and they don’t have the skills to earn more now that many of the basic retail and hospitality roles they used to perform are gone.
More than that, though, I have concerns that these changes (if they occur in the way I have described) will cause our cities to stratify even more than they do already. Before the virus, people from different locations and backgrounds would commute together, and come into contact wherever there were large-scale buildings and locations (theatres, museums, galleries, and particularly sports stadiums and concert halls/arenas) . If it’s not really possible to do that much anymore , why would people bother to visit the CBD, especially if everything was expensive? Likewise, except for the aforementioned hot spots with something different to offer, why would CBD dwellers bother visiting the outer suburbs? And what happens if people have less and less idea of each other’s lifestyles over time?
What do you think?
[1] https://www.eurekareport.com.au/investment-news/e-commee-experiencing-years-of-growth-in-months/147442. Published and accessed 21 May 2020. Ruslan Kogan interview with Alan Kohler.
