Flexible infrastructure and the future of work
by Anne-Christine Champion, Global Head of Real Assets, Natixis
What is the future of the workplace? Much ink has been spilled on this topic since the onset of the Covid-19 pandemic, including recently by The Economist in an article that states that the longer the current situation lasts, the less likely it is that things will return to what was once considered “normal”. It is simply too late; the toothpaste is out of the tube.
It remains too early to know exactly how we will work in the future, but we can already discern some of the immediate consequences of the changes underway. In commercial real estate, for example, we expect the impact of remote working to result in a 10% drop in capital values for offices in the Paris region over the next 10 years, as explored in recent articles and podcasts published by Natixis.
The implications for other sectors and industries are equally starting to take form – some more easily discernible than others. Infrastructure for example – including telecoms, power and transport – will need to adapt to a new era of flexibility, shedding its historical stability and predictability to embrace the “new normal”.
The impact of the Covid-19 crisis is perhaps clearest for telecoms infrastructure. The existing trend of digitalisation has been accelerated by the crisis. Indeed, since the outbreak of the pandemic, our telecoms clients have reported a 30-40% increase in data traffic – further accelerating the need for new and additional data centre capacity. As a result, our telecoms teams have worked tirelessly to provide M&A and new financing support for companies worldwide – one example being the successful closing of a £320 million debt financing package to support Vantage Data Centres in the acquisition from Infravia and expansion of Next Generation Data (NGD), Europe’s largest data centre campus.
The fibre to the home (FTTH) market will also see a strong increase in demand from end users as work-from-home (WFH) policies are officially implemented as part of a post-pandemic workplace. Municipalities in medium- and low-density regions will be under strong pressure from their citizens to accelerate the deployment of FTTH in an effort to bridge the gap between urban and rural access levels. Indeed, high-speed fibre connections will prove a strong discriminating factor for real estate transactions at a time when many households are looking to relocate (or invest in secondary homes) in the countryside.
For the power sector, the crisis had the reverse effect, resulting in a sharp drop in demand due to lockdown measures, and has yet to fully recover in Europe (-7.6% in June compared to last year).The longer-term consequences are still unclear, notably whether production and demand from electro-intensive industries such as the automotive industry will pick up, and the extent to which demand will shift towards residential areas due to the remote working trend.
Mind the gap
The transport sector also saw sharp reductions in demand due to the crisis, including across metropolitan and regional transport companies. In France, traffic levels for Paris’ public transport operator, RATP, were around 62% of its usual level at the end of August.Traffic on the high speed TGV network has likewise been strongly impacted by the drop in business travel – with remote working and the cancellation of trade fairs estimated to account for a loss of 10-15% of business clients.
An unknown is the extent to which habits will prove to have been permanently changed by the pandemic. For commuters, this is not just a question of more remote working, but also of using other means of getting around to avoid public transport. Bicycle and electric scooter traffic volume has exploded in Paris, will people keep cycling even once a vaccine has been found? Similarly, will business executives keep pitching their clients on Zoom calls or will in-person meetings once again become the norm?
Urban transport systems were designed for the mass transit of passengers at peak hours during the working week. To regain their financial health, the operators of these systems will need to adjust capacity to align with new demand patterns. Yet these patterns are both difficult to forecast and difficult to adjust, due to the historical rigidity of the systems in place.
The aviation sector has perhaps been most negatively affected by the pandemic. At the peak of the crisis in April, amidst the height of national and regional governmental lockdowns, global air traffic was down almost 95% compared to the same time last year. Since then demand has started to increase as travel restrictions have eased, but the recovery has been slow and is expected to take year to fully recover. According to IATA, global traffic in August had improved to approximately 25%% of the August 2019 level, but significant differences exist between international (-88%) and domestic traffic (-51%).
The recovery of international traffic will largely be determined by 2 factors; governments’ responses to further outbreaks (travel restrictions, quarantine requirements), and the development, availability and acceptance of a vaccine and therapeutics. Domestic travel is recovering faster, led by the visiting friends and relatives (VFR) market, but varies widely by region e.g. Russian domestic travel is now up year-on-year compared to pre-covid levels and China domestic travel is back to over 80% compared to the same time last year, whilst in the US and Europe demand is still approximately -70% on 2019 levels.
Airports and airlines will need to adapt certain infrastructure to a) prevent the spread of the virus and b) provide passengers with the level of confidence necessary for them to get back on planes. Rapid testing and health screening before departure and/or upon arrival are likely to become the norm in the near term to help remove the requirement for quarantine restrictions and allow for the establishment of further “air bridges” between countries. The creation of standardized international airport and travel protocols, together with the development of universally agreed methods of contact tracing, should provide a stable framework to rebuild traveler confidence and enable the return of passengers to international air travel. This may also be accompanied by the advent of “health/immunity passports”, with travelers required to show they have been vaccinated in order to enable entry to countries and avoid quarantine restrictions. Air travel will no doubt return to pre-covid levels, but the questions are when and what will it look like.
The Covid-19 crisis has shone a light on the need for flexibility in the workplace – such as remote working and flexitime – but the consequences of such a move go far beyond the office. How can we forecast the impact of these decisions on transport network and energy grid capacity? How will these changes to the way we work affect urban planning and real estate market trends?
Part of the solution will be an increase in cross-industry collaboration to help align network capacity with expected consumer behaviour. However, while data-sharing exercises should facilitate forecasting, they will not exempt infrastructure companies from improving the flexibility of their systems and accelerating the digitalisation of their networks to provide real-time data – which can quickly and effectively influence strategies to adapt to the needs of the end user.
These challenges are not simple, and there is no straightforward or immediate way to resolve them. What they do provide is an opportunity for a fundamental change in the way industries are organised and the way society functions. If we integrate flexibility into our work, it must be successfully translated to the infrastructure that supports this. This will mean diverging from the current set-up, within which new adaptive practices and mid-term strategies are mostly kept within the framework of innovative companies and disruptive start-ups.
In turn, adaptation and innovation, fuelled by data and aligned with the way we work and live, will be key to a successful “new normal”. We must unlearn how these industries function, and rebuild them through gradual change, always keeping in mind the new, flexible, end user. If we fail to do so, we risk deepening the gap between our needs and our infrastructure’s ability to meet them.