What are the key trends impacting on real estate as we, hopefully, emerge into a post covid world?
The most striking thing we have learnt over the last 15 months or so is that across the planet, individuals want the same things. Of course there are variations in local conditions but essentially, because of this commonality of end user demand, there are certain trends that apply everywhere.
Many of these were underway BC, before Covid, but many are a result of the new zeitgeist that is developing as a consequence of the virus.
In evolutionary biology there is a theory called ‘punctuated equilibrium’. This holds that instead of slowly evolving over time, when evolutionary changes occur, they happen rapidly and suddenly. Species split into two distinct species, rather than one species gradually transforming into another.
In an equally transformational way, this is where we are in the world of real estate. The way things were in February 2019 must now be considered history. Everything has changed. However long it takes to get through the current pandemic, we are not going to return to the world as it was.
Three zeitgeist changing things have occurred. First, we have been forced to realise that being inside, in confined, badly ventilated spaces, with many other people, potentially exposes each and every one of us to illness, or worse. Our buildings can harm us.
We have to take environmental conditions more seriously.
Secondly, across the globe, we have been part of the largest behavioural experiment in history. In a matter of days the knowledge economy went from being 95% office based, to being 95% home based.
And the results of this experiment? With caveats, working from home, works.
And thirdly, e-commerce works better than most people thought. Online grocery in the UK, for example, doubled within weeks of our first lockdown. For non grocery retail, 40% of revenue is now generated online.
Put these three together and you have a forcing function of unparalleled power.
You must think of what is about to occur as being a revolution, not an acceleration. The equilibrium has been punctured. Our direction of travel has been changed.
The following 20 trends mix up those that were underway before coronavirus with those that have been catalysed by coronavirus.
Critically each trend, which may be specific to one asset class, has a knock on effect to other asset classes. Much commentary is on the office market today, but be in no doubt that the pandemic is upending all of real estate. Residential, retail and industrial markets are all in flux.
There is no safe harbour. Across real estate, the risk profile is rising.
1. We start with the relentless speeding up of technology. Just think of your phone – todays versions are mighty impressive, but in 10 years they will be 100 times more powerful. What will we be doing with all that power?
2. We are moving to an AI everywhere world, supported by huge increases in computing power, data and the sophistication of advanced algorithms, particularly in the sphere of deep learning. Increasingly we will be utilising AI to help us design, build and operate our real estate.
Understanding how AI can both augment our own capabilities and provide smarter, better real estate for our customers is going to become a prized skill within the industry.
Being human really matters in a deeply technological world. But being human alone will not win the race.
You must learn to embrace the machines. Human + Machine wins.
3. The ‘office as spreadsheet’, where we lined up desks like cells, and everyone did something structured, repeatable or predictable in them, is dead. The mainstream market does not realise yet just how dead the old form factors of offices are. But they will soon.
4. Google put out a report in 2015 entitled ‘Workplace 2020’. In it they wrote:
‘Flexible working is the defining characteristic of the future workplace’.
Kudos to them as they nailed it – the only thing they could have done better would have been to replace workplace with real estate.
How flexible is your real estate? Do not buy real estate that is not flexible.
5. Improving the pleasure or productivity of people is the core value proposition. In offices and industrial spaces we need to enable people to be as productive as they can be. In retail and residential we need to create pleasure zones.
Being in our real estate needs to be better than being anywhere else.
6. This change in value proposition of course changes our business model. We can no longer lease someone space and sit back and wait for the rent to roll in. We used to be in the Bond business, but now we are in the business business. Our customers have a multitude of needs, and we need to be able to satisfy as many of them as possible.
Our job is to service as many of those needs as we can and to think of total income rather than rent as the metric that matters. If you only focus on rent, you’ll be seeing less and less of it.
7. Which means we have new KPIs, key performance indicators. Our customers, our investors, and we care about sustainability, so we’ll be needing better, clearer, more real time, and honest, numbers to keep us as exemplars in the marketplace. These will help us provide our customers with spaces that promote their ‘health and wellbeing’. And of course we will need to fixate on flexibility.
Throughout our business we will be intensely human, but always supported by data.
8. The user experience we can deliver our customers is what will set us apart. That user experience will become entwined with our Brand. Our customers will stay loyal to our Brand because our Brand gives them what they want.
For landlords with office space to let, who want to offer flex space, the operator they choose to work with matters. Seriously matters. As the market deepens and matures this point will only get stronger.
Real estate is about to become much more differentiated. Our customers will be singling out Brands they want to do business with.
9. Assets matter more going forward as well. Creating desirable space does require the right type of asset. There will still be low risk assets for investors to buy but the returns will be increasingly low as prices are driven up through low supply. Decent returns will only be achievable through active management. Lease and leave is going to be a harder game to play.
You need the right asset with the right operator. Across all asset classes. Beware the ordinary.
10. Because fundamentally the real estate industry is no longer about real estate. Deep real estate knowledge is still a necessity, but it is no longer sufficient.
The real estate company of the future is a different beast to the real estate company of today.
Most notably it is now human centric. We no longer start with the real estate, we start with the customer, and work back to the real estate.
Those ten trends were all in place pre pandemic – these next ten are the result of the forcing function of Covid. That is compressing the next decade into the next year.
11. Starting with the obvious point that the only thing, related to the office market, that we do not know about the rise of distributed working, is to what degree it will take hold.
The pandemic has irreversibly broken the chain that bound work to the central HQ. We have 18 months evidence that all of us turning up at HQ five days a week is not a prerequisite of a successful business.
The Genie IS out of the bottle, and you know what they say about putting it back in again.
12. At a macro level demand for office space will decline. Historically we never used office space very efficiently, or effectively. Every CFO is now keenly aware that they were probably paying for too much of it. Overall, per person, core office space is 100% certain to be in less demand. You cannot move from a five day week, to a two or three day one and not expect change.
13. BUT, and it is the critical but …. At a micro level, demand for space will grow. The point is that the right type of office space, operated in the right type of way, will be in high demand. Very high demand. Because there will not be all that much of it.
Space that catalyses human skills, and is managed and operated with a keen understanding of the wants, needs, and desires of customers will thrive. Really thrive. Because it will enable people to be unusually happy, healthy AND productive.
Creating and curating this type of space is not easy. Not easy at all. But that is a feature not a bug. The fact that many, if not most, landlords will not be able to offer such space, means that those who can will be prized.
This is no longer a market where everyone rises and falls in lockstep.
14. Demand for industrial space cannot fail but to grow, in line with the increase in e-commerce. But a word of warning: first, the real holy grail in e-commerce is being able to get goods to people quickly, so networks of smaller, utility spaces, are where the real action will be. Watch out for the changing nature of delivery patterns. And secondly, old fashioned sheds are nowadays some of the most high tech real estate out there. So who actually benefits most from increased demand is a moot point. Just dumb walls and a roof isn’t going to get you very far anymore.
15. In a world where you can work remotely (as we have largely done successfully for the last 18 months) or only need to be in HQ a couple of days a week, is bound to lead to different residential demand patterns. The ‘commuter’ belt might be many hours further out from CBDs. Superstar cities are great, but super expensive. People will rethink their relationship with them.
They’ll also be much more conscious of the need for space to work. Either in dedicated areas at home, or in ‘work near home’ spaces.
Conversely, if we see much more residential developed to replace offices in central business districts we might well see many more people living centrally in 10 years time than we do now.
Expect to see many new business models develop in the residential sector.
16. One of those business models, across all asset types, will be in providing spaces that are both better designed, with a greater focus on individual human needs, and massively more data driven.
A great space needs quantitative AND qualitative data. Very often we have one or the other. Or the data resides in disparate, unconnected systems.
It is imperative to not only build more robust, real time data systems, but to merge these with your human systems. For example, we need to be tracking environmental conditions throughout our spaces, at a very granular level and in an ongoing, real time manner, but we then need to be analysing and acting on this data, in a very human centric way.
What does our customer want. Are we providing it. If not, what do we need to improve?
And repeat. And repeat.
17. As mentioned before, there will be no success in real estate without great attention being paid to flexibility. The more, the better.
This might mean flexible terms, but it is also going to be about creating flexible spaces, where the form factor can be continually iterated based on need. We have a stage, and we have sets. How easily can we redesign, or rearrange the sets. How many different plays can we accommodate?
But flexibility costs. All sides know this. But the lack of flexibility also costs, often much more. We need to strike a balance, and it will not be cost free. Remember though that we are aiming to create more efficient and more effective space. The gains from that can be fed back into the costs of flexibility.
18. Historically in real estate we have aimed to lease the most amount of space possible, for the longest amount of time.
But in the new, high service delivery, real estate world we should be thinking about how we can optimise space, and the length of time it is available for, in order to achieve the highest revenue.
Giving our customers exactly what they want, for the amount of time they want it, is the future.
We want to sell concentrate – at higher value.
19. But we also want to sell the best space.
What does that mean today, and in the future.
This is my take on that for the office market, but the principles apply across asset classes.
For offices, I think the best means space that is sustainable, provides exceptional indoor air quality, and a human skills catalysing environment.
Does everyone care about these things? No absolutely not. Many individuals and companies have no interest in such things. But my contention is that the best companies, with the highest skilled employees, most certainly do. The employees do, their investors do, and so do their customers.
And by best, I do not mean only the ‘financially’ best companies. The best companies, across all categories, care about such things.
And with companies like these, doubling down on providing the best space is a serious competitive advantage.
Be the best to attract the best.
20. And finally, as an industry, we need to better align interests amongst stakeholders. The only way to create and curate truly great spaces and places is by being able to control hardware, software, and services. To maximise each of our returns we need to maximise all of our returns. We need to stop playing a zero sum game where for one of us to win the other has to lose. We need to be playing the bigger pie game.
To sum up all of these twenty trends I think we need to understand that real estate is no longer about satisfying needs, it is about creating desire.
Certainly within the office and retail sectors our customers no longer NEED our real estate. All of us can go shopping without shops and can work without offices.
So we need to make people want our real estate.
We now have the tools and capabilities to design, build and operate better real estate than ever before.
Do that and you win the game.
If you have any questions about how to create winning workplaces or any of the information mentioned above, get in touch with our team