THE IMPACTS OF COVID-19 ON COMMERCIAL REAL ESTATE IN BANKING – CAN ANALYTICS AND AI LIGHT THE WAY FORWARD?
For over a year, we have seen increased office vacancies created by new remote work policies, changes in store hours led by a decline in foot traffic at retail outlets, and record-low hotel occupancy rates prompted by severe travel restrictions. The pandemic continues to impact the demand for, and practicality of, commercial real estate (CRE), and this unanticipated turning point is causing significant uncertainty for lenders. Artificial intelligence (AI) and analytics hold considerable promise for helping banks navigate these uncharted waters.
Banks are the largest providers of debt funding to the CRE sector globally, and CRE loans constitute a large percentage of lending portfolios for banks in many economies. Social distancing, an increase in demand for e-commerce versus brick-and-mortar retail stores, and a decrease in demand for physical office space could mean CRE debt repayments are in question. And it is unclear what the post-pandemic future holds for CRE. You can pretty much visit any large, nearly empty office space in any city and conclude that the pandemic has fundamentally changed the demand for CRE, particularly in the office space segment, among others. The success of remote work has given rise to the relocation of employees out of major cities, which means ambiguity around future demand as well.
For banks, this is something of a double-edged sword. They are substantially exposed to CRE lending, while simultaneously needing to reduce expenditure on real estate as part of improving financial performance and transforming the workplace to meet changing operational needs. In August 2021, HSBC announced its intention to reduce office space by at least 3.6 million square feet by the end of 2021, which equates to around 20 percent of the bank’s existing global footprint. HSBC is by no means alone in this approach, and financial firms will continue to trim the size of their estates to prevent their balance sheets from shrinking. However, trading conditions make this challenging.
Oct-Dec 2021 Issue
SAS Institute