The hollowing out of city centres is here to stay

Remote working’s impact needs to be understood by investors, the hollowing out of the high street is not going to reverse, and the implications for investors are enormous. And will property prices crash?

Article updated: 5 October 2020 8:00am Author: Michael Baxter

Things are not going to go back to what they were like before. Sure, once Covid is finally banished, and joins the history books in the same chapter that talks about Spanish Flu, some things will return. But remote working has been tried at scale. Not everyone likes it, but many are finding it works rather well. Remote working has far-reaching implications for investors. The great hollowing out of the high street is not going to reverse.

I was a tad puzzled when I read that John Lewis is to convert almost half of its Oxford Street store into offices. Now, don’t get me wrong, I like John Lewis. In my nearest shopping centre, I find John Lewis by far the most appealing store — it feels good moseying along its length and breadth. But hello, can someone explain to me the logic of converting retail space into offices when the reason why they need less retail space is because less people are travelling to work in offices?

Covid the accelerator

The thing about Covid’s impact on working practices is that it has accelerated a trend that was already in place. Remote working, just like online shopping, was inexorably moving towards normality — a situation in which shopping in a physical store, or travelling to work in an office, would become an unusual practice. Covid has just made it happen more quickly.

Some slate it; they say interaction between staff is vital. There is the classic water fountain scenario — those serendipitous meetings between people who don’t usually talk, only to find synergy, leading to new ideas.

Such criticism lacks imagination. Post-Covid. Remote working won’t mean people will never meet in person. Companies will spend a small proportion of the money they save on office space, on weekly events, lunches and other network events.

Some companies encourage virtual coffee breaks; they even create a mechanism so that staff members enjoy a virtual break with a different staff member, every day.

And think of the money that is saved — less money on office rental, and for employees, less money on commuting, less time spent in traffic.

But new technologies will eventually take all this to a higher level. Augmented reality, in which we will see our co-workers, through the lenses of our augmented reality glasses, superimposed so that it looks like they are in sitting next to us, in a virtual office, will be transformative. We can have brainstorming meetings in virtual reality, communicating avatar to avatar. An anonymous avatar could represent us, so that we don’t know which ideas are promoted by whom — meaning that the shy introvert will have an opportunity to get their views noticed just as much as the CEO.

It’s a revolution. It won’t all be good. Loneliness and mental illnesses are risks, but by arranging regular gathering and via clever use of technology, the risks can be reduced.

The implications

All of this will transform city centres — commercial property values in city centres will be hit hard.

But retail and office space will be freed up; and what will we do with this freed up space? Answer; the cost of residential property in city centres will collapse.

Will there be a housing market crash post-Covid? I can’t say for sure, but I believe we will see a crash in residential property prices in cities.

More people may move to rural areas. House and apartment prices may fall in cities and increase in small towns and villages.

Maybe, we will see more local offices — co-working centres in every village. Maybe, but if more people work from home and if we buy more goods online, a huge amount of real estate will be freed up. For twenty years, I have heard that the reason why house prices are expected to carry on rising year in year out is because of a shortage of property. But if property is freed up, the implications will be enormous.

Some construction firms will benefit, more will lose out. Construction that focuses on converting old retail and office space into residential will benefit. But demand for skyscrapers, new roads and transport links will diminish.

The economic case for HS2 is diminishing.

Winners

Winners will be companies that embrace the change — those that cling to older ways of working will go bust.

Remote working will lead to a massive increase in demand for software tools such as Slack, Zoom or Snowflake which I covered here recently.

For more on technology stocks that could flourish, see TANDs versus Atlas versus FANGs, which tech group will win post-Covid? https://www.share.com/stock-markets-and-news/opinion-and-analysis/2020/september/tands-versus-atlas-versus-fangs-which-tech-group-will-win-post-covid

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.