Snapshot: urban living - the hospitality and real estate winners and losers

Piers Brown Piers Brown Uploaded 27 April 2020

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The COVID-19 humanitarian challenge will have lasting effects on how people stay, live and work in the future.

These three themes will be explored by hospitality and real estate leaders at the URBAN LIVING FESTIVAL 2020: stay-live-work, November 25-26, London, and how their businesses can remain relevant in what is being termed the ‘future normal’.

Here’s my brief snapshot on how the current pandemic is playing out within many of the UK’s urban hospitality and real estate sectors.

Winner: Co-living

Thus far, there’s no easy way for the majority of co-living residents to stop using their accommodation barring moving in with other family members.

People require somewhere to live irrespective of the COVID-19 crisis, and whether co-living is counter-cyclical, performing well during economic downturns it’s this irreplaceability that fundamentally separates co-living from co-working.

For a co-living market that has reacted proactively on the whole, one of the crisis impacts is placing the spotlight on what really defines the property type. Despite all the perks and a strong amenity package that plays to the strengths of such a living arrangement, the long-term occupancy of a bedroom is the fundamental component that makes co-living what it is – a residents’ home and not a private members club.

For companies like STAY, that offer a living and co-working arrangement with higher-quality finishes than traditional apartments, this urban real estate asset class could have been the shining star in the impending recession. However, co-living and shared space is not quite so attractive during a virus outbreak, but when the infection risk has mostly passed, it could become more desirable.

Co-living is already benefitting from owners and operators working more closely together to get through the crisis. This includes deferring landlord rental payments, and offering shortened guest tenancy lease structures for those new residents requiring more flexibility due to a change of circumstance and heightened uncertainty based around their employment for instance. Some savvy co-living branded operators like The Collective, Canary Wharf were already offering 1 -365 night stays, whilst adhering to planning regulations (there's currently a 5 night minimum for health and safety reasons during the crisis). Many have shut off non-essential communal areas, and updated their operational procedures to place more emphasis on more frequent cleaning within their buildings, and to make it easier for residents not to leave their apartments and connect ‘digitally’ more. Bespoke resident building apps have seen usage increase, together with more virtual event programming like comedy nights and self-improvement sessions. We are yet to hear of co-living operators providing in-room catering solutions to help keep residents out of the common areas or taking on the grocery store runs themselves, but I’m sure that’s happening.

Between shorter lease terms, upgraded service packages and a tech-enabler, co-living starts looking less and less like “real estate with services” and more and more like the ‘services with real estate’ Space-as-a-Service trend itself. For co-living, which has long been tied by a relatively traditional, long-term lease for a bedroom, perhaps even this most essential component will become unrecognizable with time.

Winner: Proptech

Back in 2019, UK proptech investment had nosedived as global volumes leaped. Investment slumped almost two thirds from nearly £1 billion in 2018 to £375 million last year, according to CRETech, whilst global proptech investment more than tripled to £23.9 billion. Before the crisis the real estate industry had been moving towards tech-enabled processes and creating digital services for operators, tenants and users. The current social distancing and lockdown of the majority of physical spaces have magnified their importance, to drive tenant experience and community. Those companies within hospitality and real estate that have invested in digital sales and leasing processes —using virtual tours, augmented and virtual reality, digital contract signatures and more will quickly allow their customers to find the right space for themselves, whilst shortening the sales process

With operators likely to have to keep amenity spaces closed for months, many are well on the way to creating a differentiated digital-first experience: contactless access for residents, guests, and maintenance staff, on-demand delivery and concierge services, telehealth, virtual communities, and much more. As more users adopt these digital-first products and services, users’ expectations will be raised, and players that provide a differentiated post-crisis experience will stay ahead of the curve. These digital offerings will pay dividends in the form of superior loyalty and the ability to create brand value and drive new revenue streams while better meeting the needs of customers and end-users.

Winner: Serviced Apartments, Aparthotels and Extended Stay

There’s lots of positives for serviced apartments, aparthotels and extended stay during this crisis based around a flexible, and in many cases contactless length of stay, self-containment with more space offering. Whilst hotels and the majority of short term rentals are closed, I’ve heard of occupancy levels reaching 80%+ with serviced apartments housing those requiring self-isolation, key workers and essential corporate travellers. The flexibility and collective ‘goodwill’ that Lamington Group and other serviced apartment providers have shown will very much be remembered too.

Airbnb has noticed the uptick in demand and now offers ‘multi-month’ stays as a booking option, and it's likely this length of stay will feature more prominently across the OTA distribution landscape when travel resumes. There’s already been some casualties within the low margin serviced apartment booking agency business which is unfortunate. Perhaps no surprise there’s heightened interest within the investment community with Blackstone Group and Starwood Capital’s recent investment in Extended Stay America – a budget accommodation portfolio, offering a more resilient and stable cash flow with much healthier occupancies than hotels during these times. Don't be surprised to see more opportunistic investments and fund-raising activity over the next few months.

To be determined: Student Housing

With most universities sending students home in a hurry long before the school year was finished, managers of student housing accommodation have been grappling with who is responsible for the rent over the remaining 'empty' period. One exception is UNITE which is taking a £125 million hit by allowing students to forgo their rent for the rest of the academic year if they return home. In the short term, the disruption is likely to leave a dent on the sector, which was already struggling with over development in some markets. When you add a slower leasing cycle and a robust annual pipeline of circa 25,000 beds in the UK, demand could struggle.

Travel is very limited and campuses are currently shut. Students will sooner or later return, but likely in reduced numbers in the short term. The big question is whether students will be back on campus this Autumn. Without an end in sight, universities are being forced to educate remotely for entire terms which could convince students and other stakeholders that existing tools are sufficient to provide a high-quality education at a lower cost, and a new type of hybrid online and offline education could become even more widely embraced.

Europe entering a prolonged downturn with high unemployment provides a compelling case for more people to take up studying again. How they do that is an interesting question with the recent huge growth in home schooling and digital learning – why pay all those fees, when the same qualification can be achieved studying from home.

While the short term outlook for student housing is negative, as a sector, it should be able to bounce back.

To be determined: Co-working

Tarnished with what most real estate professionals would say were exuberant valuations, and some high profile casualties pre Co-Vid 19 co-working spaces are scrambling to negotiate leases with landlords in an attempt to make up for the loss of revenue.

With 90% of co-working deals reportedly falling through before lockdown and occupancy levels at zero in a lot of cases, many tenants are giving force majeure notices, and asking for rent holidays. Pricing pressures are already being witnessed in the market. Whilst there is no denying the short term pains the co-working sector is grappling with, there is a growing view that it will most likely benefit from the overflow of office workers caused by the heightened group gathering and distancing rules at work places after the lockdown lifts and beyond.

Loser: Hotels and hostels

Hotel and hostel operators were the first to suffer when people stopped travelling. Leisure, business, meetings and events business disappeared with conferences and conventions cancelled. Hostels lost student group bookings and backpackers – a key demand driver, almost overnight. The majority of properties are closed and many leaseholders and operators are scrambling to negotiate their payment obligations to landlords. Those that do remain open, are looking to adapt their building to a more self-service serviced apartment style property with operational efficiencies that limit the downside with minimum staff, and temporarily closing communal and meeting space, restaurants and cafes. A number of empty hotels are housing keyworkers, and may be able to restore at least a portion of their revenue that way while the lockdowns continue. Post pandemic, hotel and hostel owners may find themselves facing the same dismal REVPAR and ADR statistics for months, as demand is not expected to rebound immediately and if hotels open together when restrictions are lifted they will likely be trading losses for some time. It doesn’t however stop there, as there will be numerous operational, social distancing and hygiene measures to implement throughout these ‘people heavy’ and transient guest buildings. The more physical amenities the property has, the more it will cost leading to reducing revenue and profitability in many cases. Lots of communal space will also need repurposing – 24 bed dormitory anyone?. Every hotel has it's unique operational layout challenges. The 'hotelisation of real estate' is very much a distant memory for now.

But if distressed real estate funds’ interest in hotel and hostel properties is any indication, the sector will eventually rebound. Once the virus is under control, conferences and events could be rescheduled and those who can still afford it will gradually visit places outside their immediate neighbourhoods once again. Hotels and hostels that move to a more tech-enabled operation and experience have a better chance to recover sooner.

Loser: Short Term Rentals

Short term rentals have really suffered during the pandemic. A highly fragmented market with varying quality standards doesn’t generally perform well in a downturn, let alone a pandemic. The coronavirus crisis has already taken its toll with many accommodation hosts and property managers having no business and delisting their rooms, apartments and holiday rentals which prompts the question will they relist in better times?, and high profile casualties like Hostmaker pre-pandemic. The rent to rent master lease operators have been particularly badly hit. The majority having come to market in the last 3 years with hugely successful fund raises based on punchy valuations, are now over-exposed with crippling single digit occupancy and scrambling to get out of the leases they were able to outbid everybody on in better times. Stay Alfred has already ceased trading and there will be more to come within the property and revenue management space.

Some of the large short term rental OTA’s and distribution companies have enforced cancellations and dealt with refunds for travellers trips better than others. Airbnb retracted on its refund policy for hosts, and substituted this with a $250 million USD relief fund and other initiatives introduced to improve relations - many hosts and property managers remain unhappy about how they were treated and talk of listing on alternative distribution platforms when travel resumes. It’s this market turmoil which places the spotlight on whether Airbnb’s proposed IPO will go ahead in the future. If it does, the proposed terms will change having received an additional $2 billion USD over the last fortnight from the likes of Silverlake and Sixth Street to help see it through the crisis.

When people start travelling again, cleanliness will have a heightened importance. I’m not convinced short term rentals will be able to sit alongside the reassuring standards of what an alternative branded hotel or serviced apartment accommodation provides. Accor hotels have been quick to launch a new cleaning standards certification with Bureau Veritas. We will have to wait a little longer to discover short term rentals' cleanliness protocols.

Others

Winner: Real Estate Lawyers

When a leaseholder is unable to pay the rent because its hospitality business has been forcibly shut down by the government to prevent the spread of an infectious disease that’s completely out of its control, who takes the financial hit? Is the operating tenant still responsible for missed rent even though they have seen no or very little business during the involuntary shutdown? Will the landlord just have to accept lower revenue for the period? These are going to be complicated issues facing an untold number of commercial tenants and landlords across the country and all of them are going to be hiring lawyers to sort out the mess.

To be determined: Planners

Couple innovation with ease of use in real estate and you usually have a winning combination, and in recent years the planning authorities have struggled to keep up. An example is the boom in co-living developments which have already exposed shortcomings in the planning system. Susanna Caulfield, senior associate at Rosling King LLP says "the UK Town and Country (Use Classes) Order of 1987 no longer appears fit for purpose. The key challenge is determining where co-living fits in the use class framework – it is a semi-dwelling, semi-hotel, semi-office and semi-community centre rolled into one. The length of stay, extent to which units are self-contained and level of privacy or exclusive possession enjoyed are factors to be considered in any development."

With the current turmoil in real estate, planners need to be ready for the new property models that will inevitably take hold.

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