Acts of terrorism have caused corporations to delay realty decisions while some have adopted a multipremises and decentralisation strategy.
Terrorist attacks on cities gained worldwide attention after the 9/11 tragedy due to the drama, huge loss of human lives and the wide on-the-spot coverage given by the media. Over the years since, similar attacks on a smaller scale have taken place in large cities, tourism resorts, and political institutions all over the world. No place is safe – attacks have happened in Bali, Madrid, Bangkok and most recently in Paris. The loss of human life is without doubt the single most tragic result of any terrorist attack
The collateral damage however may sometimes go far beyond the immediate loss of lives. Livelihoods and homes are lost. In other words, the impact on the economy and real estate may be more far-reaching than initially thought.
With worries looming large over similar attacks in other cities, it is time to reflect on some of the short-term global real estate trends arising from acts of terrorism.
There are two ways through which terrorism impacts economies. Firstly, terrorist attacks have a direct impact on our economy because they destroy productive physical and human capital. Secondly, terrorism increases the level of fear and uncertainty which could have a larger impact on the overall economy.
After 9/11 attacks, office properties in landmark buildings within close proximity of the World Trade Centre had experienced increases in vacancy rates compared to office properties not located nearby. The attacks have also drastically increased the perceived risk of large-scale terrorist attacks in Central Business Districts (CBD) and in turn, placed particularly large pressures on major financial centres the world over.
Decentralisation
In the post-9/11 era, vacancy rates had increased more for buildings with a high perceived vulnerability to large scale terrorist attacks than for buildings that are not perceived as preferred targets. After the WTC attacks, it was anticipated that there would be a flight of occupiers and capital from the CBD areas. Even though this did not happen, new demand was stronger in suburban markets than in CBDs in many cities around the world.
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From a short-term perspective, in the face of uncertainty, corporations have delayed their realty decisions. Many companies preferred renewing their leases than moving into new business premises. Global corporate real estate expansion was slow during the Gulf War. Premiums paid for prestigious buildings and the highest floors have also marginally declined.
Many major firms adopted a multipremises strategy facilitated by technology and favoured decentralisation. Global firms even considered a greater regional and international dispersal of headquarters activities to avoid business damage. Demand has accelerated for teleconferencing facilities and broadband connections as a substitute for frequent business travel.
Building management costs also increased due to enhanced security measures and higher insurance premiums. Many new projects at that time which were under development were reviewed in terms of building specification and configuration.
The security aspect has also become a differentiating factor for Grade A versus Grade B space. Buildings across the world started following the extensive security practices which were previously in place only in a few developed countries.
In the wake of increased uncertainty, invariably the other sectors in the residential and industrial markets will be impacted due to the shift in demographics and economic capacity driving the commercial sector.
Since it is the aim of terrorists to create fear, the places with a huge congregation of population, such as the CBDs or popular tourist resorts would naturally be targets to create maximum shock and impact. It is therefore not unimaginable that “reverse migration” to less urban areas might follow, with pressure on prices of properties in commuter towns outside the CBDs.
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Matthew Yeoh is a partner of Yeoh Mazlina & Partners, a member of ASEAN Legal Alliance, a group of legal firms across ASEAN