“As the water shapes itself to the vessel that contains it, so a wise man adapts himself to circumstances.”
Confucius
In the five-plus months that have passed since the U.S. declared a country-wide state of emergency due to COVID-19, we have all had to adapt in some way or another, to change our shape to match our new vessel. These changes were made rapidly, even under duress, and they were shaped and enabled by technology in a way like we have never seen before, ever.
The fundamental difference between this moment in history and all others, between this pandemic and others, between this recession and others, is that we now have the ability to choose what the “new normal” will look like when we emerge. Technology has given us the tools to change the way that we work, live, and congregate in such a fundamental way that they will never go back.
Until now, we have always had to revert to our old ways after a major world event like this one. That meant working and living in dense urban cores, typically near ports, rivers, and rail lines. There are a lot of obvious benefits of this system. It provides a bevy of advantages from banking to dining to health care to emergency and public services. With almost everyone forced into the same city streets, it gave a sense of shared civic identity and commonality. But now we stand at the edge of the end of this type of human organization. What is happening now will force us to create a completely new normal, much as we did with another life-changing event that happened 29 years ago this month.
Happy Birthday to the Internet
On August 23, 1991 a British scientist at CERN, Tim Berners-Lee, launched the world wide web. Since then, the connectedness of our digital systems has only accelerated. Internet speeds have improved by roughly 50 percent annually, moving from dial-up to fiber, with speeds growing from 9.6 kilobytes per second in the early 1990s to commonly 400 megabytes per second today.
The capabilities enabled by today’s internet have influenced the way we organize ourselves in an unprecedented manner. Internet bandwidth is clay that provided our new vessel with shape and will continue to do so even after we find a vaccine for this deadly virus. The internet has globally unlocked the rapid transfer of information, collaboration, and multi-person video conferences that are powering work-from-home opportunities for many during the COVID-19 pandemic. For some, this model will continue after the virus abates.
Accelerated Adoption of Technology
Humans are quite predictable with our ability to manage change. This is an entire area of scientific research. A 2009 study(1) found that it takes between 18 and 254 days for a person to form a new habit and that, on average, it takes 66 days for a new behavior to become automatic. In case you are wondering, it has been more than 160 days since the declaration of the state of emergency.
That means that our collective new behaviors are now automatic, that we have survived accelerated change and that we are now in a new normal, even if it still feels odd. And, again, we have the internet to thank.
Recessions, Internet Speeds, and Judgment Day
The following table lists the most recent recessionary periods for the U.S. To illustrate the comparative internet capabilities, we have added both the prevailing internet speed of the time as well as the time it would take to download a 1080p HD version of Terminator 2: Judgment Day (T2), the box office winner the summer the Internet was born. The movie has a run time just over 2.5 hours and file size of 9.13 GB(2).
| Name (3) | Period Range | Duration | Peak Unemployment | Average US Internet Speed | Time to Download T2 (H:M:S) |
|---|---|---|---|---|---|
| Early 1990s recession | July 90-Mar 91 | 8 months | 7.8% | Before Internet | |
| Dot-Com Bubble & Post 9/11 attacks | Mar 01–Nov 01 | 8 months | 6.3% | 1 MBPS | 21:47:06 |
| Great Recession | Dec 07Jun 09 | 18 months | 10.0% | 24 MBPS | 00:54:27 |
| COVID-19 recession | Feb 20–present | ongoing | 14.7% | 400 MPBS | 00:03:16 |
If you downloaded T2 in 2008, you could get just under three seconds of the movie for every second of download time. Today, you can get nearly 46 seconds of movie for every second of download time. This capacity powers our streaming capabilities, our group video capabilities and our ability to leverage video to collaborate with our teams remotely.
In his landmark 2005 book, “The World is Flat,” Thomas L. Friedman noted that the combination of the personal computer with fiber optic microcable (the Internet) was driving global integration and the global distribution of work. Fifteen years later, those same phenomena are easily replicated domestically, even locally, flattening the enterprise, the educational structure, the shopping mall and, therefore, the city, putting new pressures on commercial real estate.
Everything is Flat
When we rapidly adopted work-from-home policies as part of the fight against COVID-19, we flattened our enterprises. We leveraged technology to continue our work independent of location.
When we sent students home in the spring, we flattened education. We leveraged technology to continue matriculation independent of location.
When we drew the line between essential and non-essential retail and mandated social distancing in essential places, we further flattened the shopping center and decimated the dine-in restaurant business model. We leveraged technology to continue to purchase goods and services, inspiring a drastic uptick in food take-out and delivery, independent of location.
In doing so, we changed the center of gravity on commercial real estate. “Location, location, location” has long been the fundamental differentiator for real estate and often, the city is the core of the location strategy. We have flattened the city with the sudden decentralization of the workforce. Leveraging technology, much of the workforce is now working independent of location.
In Search of Answers
Traditionally the gravitational center for commerce, culture, and community, our urban cores are draped in uncertainty. When will we return to our offices? More importantly, how will we return? Will the traditional office model be rethought? Will we shift to more collaboration space while keeping individual desk space at home? Will this change the demand pattern for locations and sizes of office space, for apartments and for homes?
How will retail space continue to adapt? Landlords are acquiring anchor tenants, staving off bankruptcy. Landlords are also seeking ways to repurpose large vacant space, even considering a conversion to warehouse space to fuel local e-commerce deliveries. Both developments are an interesting mix of bedfellows.
The impact on dining and food service is vast. Major cities typically have a vibrant culinary scene built around serving the community from their morning coffee to their nightcap. How will these adjacent businesses adjust to a fundamentally changed cityscape with less foot traffic and a declining population? Pressures are increased without sports, concerts, and musicals driving event traffic and with travel, conventions, and other tourist activities being greatly reduced.
These questions only represent a subset of what is driving uncertainty. We do not have control of the pandemic, a vaccine, nor any idea of when we can fully re-open. We do not have clarity on an economic recovery and a return to fuller employment. We have a coming presidential election that promises to be highly contentious.
Maybe the only thing that is certain is that commercial real estate will find a path forward.
Resilience, Reinvention, and Another New Shape
Through development and redevelopment, commercial real estate always finds a way forward, always finds a new shape. No matter how much technology is leveraged to shape the world around us, there is always a chain of goods and services that people require.
People always need somewhere to live, and many choose apartments (multifamily). They require goods and services, typically in close proximity to where they live and work. Goods are from grocery stores, pharmacies, clothiers, sporting goods, and home improvement warehouses (retail). Services include healthcare, personal care, finance, and dining (healthcare, retail). Warehousing convenience in storage for next-day ecommerce deliveries (industrial) continues to gain importance.
If the center of gravity has changed from the city, as part of decentralization, commercial real estate will rebalance as it has done before.
What once was a warehouse, power plant, or a brewery is now a set of unique lofts. Old shopping arcades are transformed into hotels. Old rail stations are transformed into shopping and dining destinations. Vacant malls and big box stores are turned into ecommerce distribution hubs. Some buildings are removed to make way for modern structures with renewed purpose and life. Buildings, like many things, need to be repurposed, reinvented or replaced over time.
Corporations, currently thriving on a culture that was built pre-pandemic, crave opportunities to reunite the workforce, for teams to collaborate in physical space, and to further the corporate culture beyond the two dimensions of the computer screen. Corporate America has shown its resilience, and when it reinvents, as mentioned above, it will turn to landlords for help in creating the next office of the future: space designed to power the digitally enabled workforce, to shape productivity and to find new ways to leverage places and technologies.
Large cities will always have a certain draw for cultural experiences. Professional sports, museums, theaters, and many other attractions are part of the fabric of many cities and they help shape the culture of their region (think Boston versus New York). Even in the most hyperconnected time we live in, seeing Hamilton on Disney+ pales in comparison to seeing the performance live.
Heraclitus, the Greek philosopher said, “Change is the only constant in life.” It is doubtful that he could have anticipated the pace of change that technology has enabled, nor the acceleration of change brought on by the pandemic.
As we are still in the midst of the pandemic, we do not have clarity as to what shape the recovery will take, what shape enterprises will take, and what shape that will require from commercial real estate.
The only thing certain is that commercial real estate will find a way forward, day by day, and that next year, on the Internet’s 30th birthday, it will be 50 percent faster, and we will continue to leverage technology to shape our new reality.
