Charles Justin is an Architect and co-founded SJB in 1976 (the J in SJB). He is past President Australian Institute of Architects Victorian Chapter, Life Fellow AIA, past President Jewish Museum of Australia and current Chairman Melbourne Art Foundation. In 2012 he retired from SJB and co-founded with his wife Leah the Justin Art House Museum (JAHM) in 2016.

There are 2 reasons that Covid-19 has made me feel old. Firstly, my children are paranoid that because of my age group I’m in the high-risk category from the virus, and secondly, I was around last time we had a major recession, which was the ‘recession we had to have’ in the 1990s. At that time, I wasn’t a retired babyboomer shielded from the devastating effects of Covid-19, but an architect in his 40’s saddled with debt and a business whose turnover had more than halved overnight. Having survived by the skin of my teeth, I had to virtually start again from scratch with my partners and was fortunate to enjoy an unbroken period of economic growth, with a few hiccups on the way, for the next 25 years.

Of course, then and now were different periods with different circumstances, but both had something in common, they posed an existential threat about survival and what the future will hold. Klaus Schwab, the founder of the World Economic Forum, now known as Davos, has co-authored a recently published book titled The Great Reset. He bluntly quoted “Many of us are pondering when things will return to normal. The short response is: never.” Being an optimist, he goes on “Deep existential crises also favour introspection and can harbour the potential for transformation. The fault lines of the world- most notably social divides, lack of fairness, absence of co-operation, failure of global governance and leadership- now lie exposed as never before and people feel a time of reinvention has come”.

This newsletter is about property and in the context of the above, I propose to give some predictions which is a foolhardy enterprise at the best of times. In my defence, following “the recession we had to have” I predicted that all the empty B and C grade office buildings resulting from the glut of new A-grade offices would be converted to residential apartments. This was to be driven by the children of babyboomers leaving home wanting to live closer to the city followed by their parents who also wanted to live close to the city to enjoy its facilities. Consequently, one of SJB’s early projects was the conversion of BP House in StKilda Rd into luxury apartments and subsequently we rode the crest of the wave of the apartment boom.

So here goes

• We have had more bushfires and pandemics in the last 20 years than in the last 200 years and they are going to keep coming due to the lack of action in dealing with the human impact on the environment. Risk considerations by investors, banks and insurance companies will increasingly have dramatic impacts on the property industry.

• Online activity for work, schooling, shopping, and entertainment increased dramatically during Covid-19 and became normalised for large segments of the population. Much of this activity will continue after Covid and will negatively affect the office, retail, hospitality and entertainment sectors. 

• Working from home, in whole or part will allow people the opportunity to move out of the city to country and regional centres where housing is more affordable.

• Immigration and overseas students will reduce dramatically in the short to medium turn. This with the above decentralization will impact the demand for residential property both for purchase and rental, impacting values.

• Young families are moving away from apartment living to the suburbs so that in lockdown mode there is space to get away from each other, kids can play in the garden and there’s room for the veggie patch.

• People are looking for houses and apartments that have private spaces where they can set up offices, away from interference from children and other adults, resulting in an increasing demand for larger residences.

• The increase in activity in warehousing and logistics will have a consequent impact on demand in the industrial sector. The change in focus in restaurants and cafes from dine-in to take away has seen the development of dark kitchens (kitchens in industrial areas to only service take away) resulting in a shift from the retail to the industrial sector. 

• During lockdowns there has been a refocus on the ‘local’, be it the shopping strip, the parks, schools and other facilities where you can walk for all your needs. This has significant advantage when localized lockdowns take place as part of a strategy of containment.

• CBD’s now look like ghost towns and there is a risk that the hollowing out of residents, students, office workers coupled with the retail, hospitality, service and entertainment businesses that service them, could dramatically impact property values in the CBD.

• Hotel sector will be hit by both the halt in international travel and the reduction in interstate travel. The effectiveness of online meetings will reduce the need for interstate business travel which accounts for a significant proportion of hotel occupancy. The one bright spot will be the switch by Australians from international travel to travel within Australia.

• Airports as an investment category will be hit hard by the severe reduction inactivity.

• All businesses that involve the gathering of large numbers of people- shopping centres, pubs, music venues, entertainment facilities have a higher risk profile not only from this pandemic but also the potential next one.

• The division of businesses into the ‘essential’ and ‘non-essential’ introduces a differentiation between secure tenants and unsecure tenants which could have differing impacts on property values. Equally the type of tenant eg Government or corporate with their security and strong balance sheet could have greater impact on yields in the future than it did in the past.

• Due to the issues associated with the lack of housing affordability, ‘Build to Rent’ and social housing have real impetus in the current climate.

• If the Government looks to tackle our dependency on overseas manufacturing, particularly for critical items and our supply chain vulnerabilities, there could be a boost in the manufacturing sector. If our recent experience with the car industry is anything to go by, this expectation would be challenging, albeit not impossible.

• The costs to business of continuous cleaning for Covid will increase overheads for both tenants and landlords, which could put added pressures on rentals and/or business viability. This is not dissimilar to the added costs of security required in protection from terrorism following 9/11.

• Many are predicting that when Jobkeeper stops many businesses will go broke causing many vacancies. There is a potential, depending on the extent, that there could be knock-on effects, leading to forced sales and a downward spiral in property prices.

And lastly,

One of the criticisms of the Australian economy is that too much of our wealth is tied up in property which is a static investment rather than an investment in the creation of new businesses that generate jobs and wealth for the nation. With the Government’s focus on job and wealth creation, there is a possibility that it may re-engineer the economy to achieve this end, which I imagine would impact the property industry.

I acknowledge that it all sounds quite pessimistic, but I heard that a pessimist is an optimist who’s a realist. We need to recognize that we live in a world of accelerating change. Just consider the internet, the smartphone, AI, 9/11, the GFC, bushfires and pandemics- all which happened within the last 20 years. Our mechanisms for managing this changing world are not keeping up. Therefore, to expect that Covid-19 will have little impact on the property industry is naively optimistic.

On the positive side, after the 1990’s ‘recession we had to have’, I was surprised how quickly we bounced back to enjoy one of the longest sustained economic periods in our history. Much of it was driven by digging up Australia and selling it to the Chinese and in turn buying their stuff to fuel our easy lifestyle. I don’t think at this point in time this is a sustainable model for the future. For a salutatory lesson in complacency we only need to look at Venezuela, once the richest country in South America, that through the process of mismanagement, populism and misplaced political ideology has become in a relatively short time an economic and social basket case.

The predictions above present possible future scenarios, they may not happen, but they could happen. What will happen is up to us, as the late Peter Drucker, one of the world’s top management gurus said, ‘we don’t predict the future, we create it.’ I have a feeling that out of Covid-19 there is a broad-based appetite for change, a desire by all stakeholders to work together for our mutual benefit and a preparedness to set aside entrenched ideologies for the common good. Let’s hope, it’s an opportunity we don’t take at our peril.