When the pandemic subsides, some of the old ways will return, but a significant change in the organisation of work is likely to remain. Real estate faces important shifts. In this article, we speculate about how this might pan out. Interaction-intensive consumer-facing services will demand less real estate. The impact on office space is more complex, but a decline in demand is likely. There will be important general equilibrium effects, interlinking the labour market and the real estate market. As supply will adjust slowly, the adjustment will be largely by the price.
Consumer facing services
Interaction-intensive consumer-facing services will face challenges. In malls, the footfalls were supposed to have been brought in by restaurants, gyms and movie halls, but these industries have been hard hit, and a shift in favour of e-commerce is underway.
Important changes are in store for commercial real estate (CRE), in offices. Everyone is now doing a lot of work from home (WFH). When the pandemic is gone, will we revert to our old ways? In the past, many WFH experiments worked out poorly when it was one firm bucking mainstream business conventions. Now mainstream business conventions have changed; a sales pitch on a video call has been normalised. Sustained WFH has forced all firms into management practices which are able to obtain work from teams that are not within earshot. Reduced physical presence has its own positive benefits, in terms of reducing groupthink. Many firms are reporting productivity gains through WFH, through the reduction of cost of travel/commute, and better ability of senior people to pierce through layers and directly speak with the right person. A substantial scale of WFH is, then, likely in steady state.
Offices will be used for the all important in-person meetings. These are required for difficult conversations, creative thinking, and episodes of planning and review. Offices will become more like convention centres, with meeting rooms and catering, with a small full time facilities management crew. Offices, and off site activities, will be used to establish culture, shared values and goodwill, and then the actual work will be WFH.
Some over-crowded offices in Bombay will return to their old ways, once the threat of the disease has passed. But a significant subset of firms will not. There will be two conflicting phenomena at work: Some offices will upgrade to a higher area per employee (to traditional styles of work but with greater hygiene) and thus demand more CRE. Other offices will graduate to more WFH and thus demand less CRE.
Women working from home
Important shifts are in store for workers. A vast untapped resource in India is educated women who are not working. Once managers learn how to manage WFH staff that requires flexibility in working hours, educated women will be utilised more. This new labour supply will exert a negative impact upon wages in certain job profiles. The emergence of more women into the public sphere will induce social modernisation.
Residential real estate
If being in office, from 9 am to 5 pm, is important, then residential real estate (RRE) near the office has a premium. Given poor urban transportation in India, this created extremes of RRE demand for certain neighbourhoods. But if an office only requires a few visits a week, there is a reduced need to live near the office.
In the past, Indian labour was connected to the global corporation through organisational structures like Indian IT/ITES companies (e.g. TCS and Infosys) or through `captive' structures directly run by the global corporation. Once WFH works for global corporations, the logical next step for them will be placing the worker in India. This will become the third pathway through which labour supply takes place in India for global corporations. Demand for this kind of labour will go up, the price will rise, the invisibles earnings will support the rupee. Night life near residential neighbourhoods will develop, in response to more WFH in the Indian night time. These workers will buy international travel services a few times a year.
These three factors -- labour supply by women, reduced importance of commute time, and direct hiring by global companies -- will reshape RRE demand. This will decline near office areas and will increase further away. The nature of residential demand will shift from minimal functional flats in favour of flats which have greater space and can support WFH by multiple persons.
Once WFH works well, decisions about the residential location will be influenced less by the commute time and more by nature and culture. Locations with modern culture will be prized. There will be a premium for urban life (cafes, music, theatre), physical safety, respect for women, and cosmopolitan culture. There could be new possibilities for workers to relocate to places like Calcutta, Madras, Bangalore and the peri-urban edges of Bombay, or even further out to Goa, Pondicherry, and Kerala. There will be a two-way feedback loop between art, culture, broadband, and new residential arrangements. The cultural gap between the north and the south will be accentuated. It will be attractive to relocate to a place like Sri Lanka, which combines a high quality of life and low taxation. Through this, tax policy in India will face a greater constraint as high wage persons in India are less prone to accept high tax rates.
Inflexible supply means volatile prices
In every market, the price moves until the imbalance between supply and demand is removed. The altered price triggers off slow adjustments of supply and demand. A key feature of real estate is its inflexibility. It is hard to repurpose CRE into RRE, because of physical and government constraints. This inflexibility is greater in India than is the case elsewhere. When the supply is inflexible and demand changes, the brunt of adjustment is borne by the price. We are likely to see large price changes in the elements of Indian real estate, as this global general equilibrium plays out.
Ajay Shah, is Professor NIPFP.
The views expressed in the post are those of the author only. No responsibility for them should be attributed to NIPFP.
This article was published in Business Standard, dated July 27, 2020.