The 2010s were actually been the best decade in history. Extreme poverty more than halved, the child mortality rate was reduced by a third and life expectancy across the globe increased by 8 hours every single day. And 28% of all the wealth mankind has ever created (as measured by GDP per capita) was created in those 10 years. But when you look back on it, did you actually notice any change? Fast forward to the first 100 days of the new decade and everything changed.
“There are decades where nothing happens; and there are weeks where decades happen.”
— Vladimir Ilyich Ulyanov, aka Lenin
Real estate (or shelter) lies at the heart of that change, it’s one of our very basic human needs, oxygen, shelter, water and food.
Historically we have been able to divide our use of real estate into 3 distinct sectors:
- home – a living space for us and our families;
- work – a place of employment where we go to earn money; and
- leisure – a place where we go in our free time for enjoyment
The past few weeks has just placed the above in a blender and pressed blitz!
We are currently living at home, working at home, shopping at home, exercising at home, socialising at home, medicating at home and trying to enjoy free time at home. It is generally believed to take between 21 to 66 days to form a new habit, so given the current lockdown what new habits are we forming and what are the knock on effects for real estate?
Few people now NEED an office to do their work, or a shop to do their shopping. They can just as easily do either from their home, or from a co-working centre, or from a Hotel lobby, or in fact anywhere there is a solid, reliable internet connection. The key now is where do people WANT to work, or shop, or live and more importantly are they able to do that effectively?
There has been a question circulation on social media which asks; Who or what is driving your digital strategy?
A: your CEO;
B: your CTO; or
C: Covid-19
And the same could be asked on who or what is now driving your real estate strategy?
Perhaps real estate is moving from being an industry that sells a Product, to one that delivers a Service. And that means the dynamics of the market, and the industry, will undergo significant change, dislocation even.
Retail was already a sector in a state of reset, all around us we see a rise in empty shops and just waiting for the cycle to turn will not refill them. Technology has a key role in helping retailers across the entire customer life cycle. Personalisation, optimisation, and localisation are the key words, improve on any of them and you have a good business.
The future of retail:
- either provide cheap, everyday items, that are not worth shipping to customers (immune to online competition), or
- provide a retail experience that entices people to visit, explore, engage and interact with physical environments. Here you acquire the customer, collect customer data and then service the customer online; or
- provide smaller data driven fulfilment centres enabling the “last mile delivery”
In the office sector a similar dynamic applies, historically this sector with long leases and strong covenants, had bond like characteristics. Whilst this will still exist in some sectors of the market what the past few weeks have shown, perhaps if properly set up (dedicated work spaces) and technically supported, more office workers could work part of the week or even full time from home (WFM).
Whilst everyone thinks they want to WFH, people will miss the real value in teamwork and business activities offered by face to face contact. Office layouts will change, moving away from open plan rows of desks, to more dedicated use areas (one on one meetings, group meetings, presentation areas etc). As the WFM movement grows, less office space will be required but what is required, needs to be of a higher quality.
So like retail, we still need offices but what we want from them and how we use them will change. The clever landlords will morph from just being ‘collectors of rent’ to ‘operators of space’.
The industrial market was for many years the ugly duckling of real estate. Historically big metal boxes (or sheds) built in the right location, but today industrial is easily the most highly technical real estate asset class. Stuffed full of robots, vertical rather than horizontal and planned to within an efficiency inch to enable the online retailers nirvana of same day delivery.
This is fine for the supermarkets, the DHL’s and the Amazons of the world who develop and manage their logistics in-house but there is a growing demand from smaller operators who need that service but cannot afford the infrastructure or technology themselves.
Industrial value will either come from either highly efficient, landlords just in providing physical real estate (the box), or by moving into becoming ‘Warehouse as a Service’ operators that offer customers full on-demand services, much as Amazon do with their cloud offering AWS. This could eventually cover the whole industrial range from manufacturing, storage, logistics right through to the last mile delivery.
Will we also now see a true merging of Use Classes? Where single buildings offer multiple commercial uses, combining building and service efficiency. All manner of spaces are now available on an on-demand basis for activities that are not their core; working all day from Starbucks, hotel lobbies used for meetings, parking lots used for storage or dark kitchens, gyms in office basements, nurseries in offices and offices with overnight sleep pods. This building efficiency will only grow over time.
So where does this really leave commercial property?
Commercial property covers many asset classes, some will continue to benefit (even during the COVID lockedown) and some will fall into demise but we need to think about more than just the physical building. I believe, like Lenin’s quote above,
we have just seen the next 15 years’ worth of commercial property trends, condensed into 8 very short weeks.
If rising prices leads to inflation concern, then commercial real estate (asset and debt) is an attractive alternative hedge. Uncertainty and stock market volatility may also drive new investors to commercial real estate.
For the foreseeable future, we are in an even longer uber low interest rate environment, commercial property rental income and commercial property debt returns, can both go part of the way to meet the demand for attractive rates for risk adjusted fixed income returns.
Commercial property as an asset class is not finished by any means, there will be obstacles to overcome and with those obstacles come opportunities.
Focus on the opportunities.
