Principle of substitution in the face of COVID-19 pandemic: An application to tenants' choice in commercial real estate markets

ABSTRACT

The principle of substitution is an important concept in economics and valuation of real estate. The principle postulates that the upper limit of the market value will be set by the cost of acquiring a similar substitute property. This means that no investor will be willing to pay more for an investment property than the amount it would cost to build or buy a similar one. However, most studies on the application of this principle are focused on assessment of value and less on tenants' choice. The recent COVID-19 pandemic, which has resulted in a barrage of scholarly articles on its impact to various sectors of the economy, provides an opportunity for the investigation of the principle of substitution from the tenant's perspective. While most studies have focused on the investors' side, as it relates to vacancies and loss of business, little attention is being paid to the behavioural changes amongst tenants as clients of these services. As explained within the concept of the principle of substitution, tenants are trading-down (especially in the residential market) or being forced to work from home, in essence abandoning commercial space. Thus the question that emerges is what is the future of real estate in a post COVID-19 environment? The paper undertakes a detailed analytical review of emerging literature on measures to combat COVID-19 (such as social distancing, working from home, etc) in relation to levels of rentals and vacancies in residential and commercial real estate rental markets. The paper then goes further to investigate these dynamics within the Zambian context. © 2021 Nova Science Publishers, Inc.