Finance & Real Estate

2020-05-07 Andrea Beltratti, Alessia Bezzecchi

The World to Come

The transformations of numerous sectors of the economy and business, and thus of the real estate market as well, will lead to the definition of new paradigms and new rules of functioning that will be based on three pillars: sustainability, the creation of value for localized and integrated adjacencies, and the transformation of the industrial district into an "experiential district" for consumers

In 1963, Charles Eric Maine published The Darkest of Nights, translated into Italian and published in 1973 with the title Il grande contagio. The novel explores the social aspects that emerged due to the spread of a new, highly contagious virus, with a mortality rate of 50 percent, that emerged in Japan and spread throughout China and Russia. Nobody knows how we will manage co-existence with COVID-19 and when a vaccine will be available. What is certain from the start, is that our life will be different, because "health risk" will be a central element in the risk management activities of companies and people. Perhaps it is not a coincidence that Asia, that was more heavily affected by SARS at the beginning of the 2000s, has been less affected than Europe and the United States now, that until two months ago thought health spending was a necessary, but limitable cost, and in which citizens thought that washing their hands was useful to freshen up in the summer but not necessary for their health (according to a study by Michigan State University, only 5 percent of the population washes their hands correctly, meaning using soap for at least 15 seconds). But the global consequences will be much more important than a small change in lifestyle.

Social distancing

Social distancing aims to reduce the density of people in a certain area. In the short term, it will not be possible to restore previous habits, with very differentiated implications. Sports events like soccer games, moments of relaxation (discos, theaters, movies, restaurants), air travel, and school lessons are some situations where it will be necessary to reduce density. The private or public companies that organize those events will at times be able to modify the formats to adjust them to the new needs, but in other cases this won't be possible, either due to resistance by demand (will fans go to the stadium standing six feet apart from each other, and waiting in long lines to enter in groups? Will young people accept dancing six feet away from each other?), or the difficulty of supply (can a restaurant with 100 seats and normal revenues survive with only 50 seats? How much will a ticket cost for La Scala or other international shows and events?). The considerations extend to tourism as well: for example, not only will it be necessary to limit entry into the city of Venice, but it will even be necessary to ensure that gatherings don't form in certain areas. How many people can enter the city while ensuring adequate social distancing in Piazza San Marco? Once the city and its commercial establishments adjust to the new economic model, will they want to return to the past? Tourism is a sector that in the short term will suffer a strong negative impact. In this case, there are two types of problems, linked to both the difficulty of moving people from one country to another, or from one area to another in the same country, and also the accommodation capacity of hospitality facilities in many tourist zones. How will the Italian tourism sector react to the need for "tourism distancing," considering the presence of many small, independent facilities? Will hotels and tourist locales offer a service able to combine health safety, sustainable costs for families, and profitable management?

Work in businesses

Social distancing will affect businesses, not only as regards the internal organization of work. Some will choose to reduce their work force in order to maintain the "density goal" of utilization of space, while others will decide to expand their premises or considerably increase the contribution of home working. All of these scenarios directly involve real estate, both due to the construction of new buildings, and the renovation of existing ones to adapt to new needs. Buildings will have to be increasingly smart, helping with the automatic management of spaces and perhaps providing real-time indicators on the health status of individuals. The greater use of home working could have important consequences for residential construction as well: more than in the past, new buildings will have to contemplate the presence of a room dedicated to professional activities, or at least common areas that can be partially shared by those who often work from home. There will also be important consequences for the way people enter and exit buildings (with a particular need to manage traffic flows in towers), as well as the management of goods. The latter will also suffer from the impact of changes in international trade, that could significantly influence shipping costs and thus the business model of companies that in the past have become part of integrated global value chains.

The location of production

A period of difficulty in movement and shipping can be better faced by local production systems, those which create value with the joint actions of businesses that are located in a limited area of territory. Italian industrial districts are one of the best-known examples in the world of how a production system can share available resources. Nobody knows exactly what the essential factors of the district model are (which includes economies of knowledge linked to the possibility to constantly speak with other technical personnel and researchers who work on similar problems, the cost savings associated with reducing shipping, and the possibility to create a sustainable life for the community as a whole). But it is plausible to think that Italian districts are the best candidates to work safely, maintaining social distancing and "creative proximity," that makes them competitive internationally, especially when a large company is located in the same area that acts as an "antenna" able to direct to local producers requests that come in from around the world in terms of variety of the products and services necessary and price benchmarks.

What future?

The transformations of numerous sectors of the economy and business, and consequently of the real estate market, will lead to the definition of new paradigms and new rules of functioning, that in our view, will be based on three pillars:


  • The must-have of sustainability. We have no certainty regarding the future, but we know the only, new paradigm we must pursue to build it: the model of sustainability. Social and green, dimensions that have historically been considered 'nice-to-have', have now become 'must-have' for everyone. The priority of businesses is to focus on the safety of employees and clients, rethinking their organizational structure, from production systems to distribution, with an evident need for innovation in regard to space planning of all the assets involved and an evident impact also on profitability per square meter. For sustainability purposes, the economy of a business must take into account social and green constraints, rethinking the business model, organizational structure, and taking appropriate actions to manage discontinuity. The strategy to reach those goals must no longer be based on a "business idea" but on a "sustainability idea," that sees the integration of the three dimensions to create value.
  • The creation of value for localized, integrated adjacencies. The creation of value takes place through a "sustainability idea" of local centrality. The rethinking of the strategy of each company must take place starting with an analysis of the new competitive scenario, whose perimeter must take into account new post-COVID-19 constraints, going from the classical territorial view of zones to an analysis of the ecosystems in which the company operates. Starting with the opportunities offered by the local ecosystem, given its specific features and dimensions, each company will have to understand its role in the context of the system and the related synergies that can be exploited for the further enhancement of collaboration for localized and integrated adjacencies. For example, in certain sectors, a competitor could become a strategic partner by integrating some production processes and/or some phases of the value chain to respond to new needs for "productivity in safety." Those transformations represent the true challenge for real estate players and for all public and private stake holders in general, who must act tactically to support the new needs of businesses and families in the most flexible way possible.
  • The cross-sector effects of change and the "experiential district." The transformation will have a multi-sectoral, multi-functional, and multi-segment impact. This means it will likely be necessary to expand and rethink the perimeter of the industrial district to become an "experiential district," as the new framework in which sectors are substituted by the lifestyles of end-users. We must imagine safe scheduling of the work and consumption experience, fostering systematic interaction between the various stakeholders and the new ecosystems to create integrated solutions. The "experiential district" could offer consumers and businesses ways and methods of making use of assets and production facilities that are compatible with the needs of sustainability and safety also for systems of mobility that support the movements of end-users and logistics for product distribution. To carry out its functions, the "experiential district" will be enabled by factors such as technology for the construction of platforms able to create "bespoke client solutions," integrating all of the services offered by the public administration and private institutions in an integrated framework.


Andrea Beltratti is a Professor in the Department of Finance of the Bocconi University, where he teaches Economics of the Securities Market and Equity Portfolio Management, and Academic Director of the Executive Master in Finance (EMF) of the SDA Bocconi School of Management

Alessia Bezzecchi is Associate Professor of Practice in Corporate Finance & Real Estate at the SDA Bocconi School of Management, where she is Program Director of the Executive Master in Finance (EMF) and the Executive Program in Real Estate Finance and Real Estate (EPFIRE)

Real estate_covid