Publications

- May 1, 2019: Vol. 6, Number 5

The future is urban: The advance of technology and urbanization means cities are here to stay

by Mark McLaughlin

One of the key issues facing real estate investors is the ability to separate cyclical changes from long-term structural ones when assessing the future potential of any particular asset class. We have already seen this play out in the retail sector as the impact of technology and online retail continues to permanently reshape the landscape.

But what about technology’s impact on other asset classes — offices and cities, in particular? Knowingly or unknowingly, technology touches our world on a continuous basis and around the clock. So, are cities profiting from the wave of technological advances? And do real estate investors still want or, indeed, need to buy offices?

There is much talk about how technology is enhancing our work-life balance. In theory, it is making it easier for companies to harness knowledge that is spread far and wide across their employee base. This leads to the logical conclusion that cities may not hold the significance they once did. After all, a city is a city because people live, work and play there, bringing the buildings to life; otherwise, it is simply a collection of bricks.

If you believe what some people say, technology and increased connectivity will make the daily routine of an alarm call, followed by a quick coffee and a journey to the office, redundant. If the sole reason for such a process is to sit down at a piece of technology that only serves to connect its operator with someone who is either sitting on the other side of the world or on the other side of the office, then, as the argument goes, what is the point?

THE FUTURE IS URBAN

Mapping out the future is not that simple, however. We firmly believe the future is set to be urban. We have taken a close look at the statistics and underlying data behind the real estate markets in some of the major cities in Europe and Asia and found urbanization — a key indicator that cities remain important — is rising.

Today, 55 percent of the world’s population live in urban areas, according to the United Nations, and this number is set to rise to 68 percent by 2050. Ninety percent of this movement from rural to urban areas will take place in African and Asian countries, but it is happening in Europe, too. As the populations in towns and cities continue to increase, more pressure will be exerted on infrastructure, services, climate and the environment, ultimately spurring further opportunities for growth and job creation.

As we all know, rising employment feeds real estate across the board because, at the most basic level, everyone needs a place to live, somewhere to shop and somewhere to work.

THE IMPORTANCE OF THE OFFICE

We are inherently social beings that enjoy the company of others, and the office provides a place for those interactions to happen. Offices are places where ideas can seed, incubate, grow and evolve. They provide landlords with an income stream, and we believe they are here to stay.

That is not to say technology will not have an impact. New technologies are already enabling changes to long-held living and working practices, and these are influencing the function, design and offering that landlords provide. The most pronounced manifestation of this is the rise of the serviced office provider.

Evidence to support this can be seen in Europe, where the technology that enables home working has been widely available for some time. Trading volumes in the office sector continue to rise, however, limited seemingly only by the lack of suitable space.

RESILIENCE

Core cities have remained resilient despite the current political and global economic backdrop. The office sector in Europe continues to attract capital and has consistently peaked  investor interest and appetite, with the sector’s share of total trading volumes consistently hovering between 40 percent and 45 percent each year since 2007.

London tops the ranking for the most active market in the 12 months ended December 2018, followed closely by Paris, with Frankfurt holding the No 3 spot.

The rankings by volume of capital invested are similar. Despite political volatility, London continues to attract the majority of global capital, with €10.1 billion (US$11.4 billion; 55 percent) invested over the course of 2018, rising to €13.2 billion (US$14.9 billion) if capital from the continent is included (71 percent). Paris secures the second spot in terms of volume with €5.1 billion (US$5.7 billion; 29 percent) of the total, with Frankfurt coming in marginally behind the French capital in percentage terms at 28 percent, or €2.4 billion (US$2.7 billion).

Taken in isolation, these high-level figures show the resilience of core cities across Europe despite the political headwinds and, in some countries, macroeconomic challenges. European real estate is benefitting from the strength of the occupier market and the underlying property fundamentals. A combination of low vacancy rates and constrained supply is supporting rental growth and creating appeal for investors, pushing yields to historic lows in multiple cities across the region.

As these cities grow and expand, investors continue to be attracted by the stability of core real estate and are willing to put their hands in their pockets to secure long-term, stable income in more central areas of core cities. Many are also being drawn into the search for yield in the more peripheral areas around cities.

A HUMAN CHOICE

The attraction of cities, however, is more than whether they can offer well-priced, shiny, value-add or opportunistic assets. The choice is a human one, too, and will ultimately help to set the appeal of the office sector. Over time, the better-connected cities that are walkable, transit rich, and well connected to commuter towns will prosper.

The urban environment has come to the fore and has never been more important. It has a major role to play in ensuring the health of its residents, and in promoting cultural and environmental diversity. We are confident properties in cities will continue to provide a reliable source of stable income and some capital uplift over the long term.

As a result, managers’ ability to deliver real estate solutions to occupiers and investors, who work in an increasingly-technology-enabled world that embraces new agile ways of working, will be crucial.

 

Mark McLaughlin is managing director at Cromwell Property Group in Europe.

Forgot your username or password?

We use cookies and other tracking technologies to personalize your user experience on our site and perform site analytics. By clicking on “I accept”, you consent to our Privacy Policy.