By Richard Pickering, Head of Futures Strategy
Climate change – Climate change issues have come under renewed focus this week following the release of a study by the Intergovernmental Panel on Climate Change on the impact of global warming. In order to stay within the 1.5°C temperature rise that scientists consider to be a tipping point; the report estimates a need to invest 2.5% of global GDP every year for the next 20 years. Driving consensus around the actions required to prevent climate change has been notoriously difficult, mainly due to the short-term economic trade-offs associated with the response. However, with consumers increasingly putting pressure on both governments and big business, the trend is likely to be towards both greater regulation and more market-imposed action, each of which carries a cost. The built environment accounts for ~40% of total carbon emissions in the UK, and so might realistically be expected to be a focus of attention. This is likely to have a couple of impacts; firstly, a continued escalation in the cost of traditional construction, and secondly greater incentives to adopt new innovative techniques (e.g. circular construction) and materials (e.g. timber), which are less environmentally damaging. However, the largest source of CO2 in the built environment (35% of all emissions) comes in the downstream use and particularly heating of buildings, which requires an industry-wide commitment to behavioural change, aided by a raft of new smart building systems.
Hyper Local – A report released by McKinsey this week, describes how big data is transforming real estate. In particular, it points to how large data sets allow for increasingly granular and ‘hyper-local’ analysis of investment decisions. The report notes that traditional metrics (e.g. vacancy rate) only partly explain the potential for future growth. The combination of these metrics with non-traditional variables (e.g. number of cafes within a mile, or proximity to highly-rated points of interest) enables much greater accuracy when predicting market changes. For example, proximity to highly-rated restaurants (on Yelp) and changes in nearby apparel stores, ‘explained 60% of the changes in rent in an area’. Similarly, when the same tools were applied to multifamily buildings in Seattle, ‘the models predicted rents with an accuracy rate that exceeded 90%’. Whilst the technology is available today to be able to obtain such insights, the challenge remains one of data integrity, platform and skills. The report concludes with a need to start building diversely-skilled teams now, in order to capitalise on the increasingly rich data sets in the future.
Data (to have in) – The most powerful influence on the value of real estate is its location. Locations where affluent people are likely to congregate, spend money or carry out commercial activity tend to deliver the highest economic residual and hence the highest rent. However, the way in which we monetise such activity is starting to evolve. If you are sitting in Starbucks all day working on your MacBook whilst sipping a single lukewarm cup of coffee, are you really paying for the coffee, or paying for the seat? A new Japanese café concept, ‘Shiru Cafe’ takes this a step further; the coffee is free, as is the seat, the electricity and the Wi-Fi. How does it work? Only students (and faculty members) are welcome, and the payment comes through sponsorship, advertising opportunities and from data collection specific to the body of students. In return for comfy study spaces, the Shiru team run surveys and collect data on their customers through the store app. This is reflective of a wider trend in retail toward recognising the true value and purpose of the store. It also evokes online pay-per-click and social media business models. If the store of the future is more to do with customer engagement than it is to do with sales, then making explicit the value of data in this equation is arguably the more honest approach.
Kitchen United – We live in a world where big is better. Big brings economies of scale, which keeps unit costs low and drives competitive advantage. It also brings economies of learning, which in a world where technologies are becoming more complex creates significant barriers to entry. As Warren Buffet once said, ‘you don’t want to give Jeff Bezos a seven-year head start’. However, the increasing influence of the sharing economy, combined with the ostensible benefits of ‘coopertition’ over pure competition, helps to break down some of these barriers. We see this, for example, in the form of resource and knowledge sharing in coworking centres. And now a new food production concept seeks to bring similar benefits to catering. Kitchen United provides a ‘top-tier food production facility combined with insights and ideas on how to profitably expand into the food delivery business’. Space can be rented by the hour. It’s not just start-ups that have challenges with economies of scale; consumers do too. Inevitably your dinner can be procured and cooked more efficiently by a business than by you. As hard-working urban consumers start to evaluate the use of their time more scientifically, we have seen a corresponding rise in online food delivery. A recent report from UBS asking, ‘Is the kitchen dead?’ suggests that the online food delivery market could rise by a factor of 10 over the period to 2030. For some urban apartment schemes the kitchen may go the way of the dining room (outside your home).
Winning in Growth Cities – C&W’s annual report considering ‘where next’ for global capital markets has been published by my colleagues this week. The report finds that despite greater geopolitical uncertainty in the world, global investment in real estate rose on the back of strong demand from APAC. 22% of all investment over the past year was cross-border, and London remains the top pick for international buyers. Noting structural changes affecting the traditional sectors, the report considers the opportunity around alternatives, which tend to have different drivers. These include: reworking data centres, student housing in APAC around globally renowned universities, healthcare market growth in Europe, and new housing models. There are three identified modes of responding to the changes we are seeing in the world: (a) ‘defensive’ (retreating to prime), (b) ‘daring’ (rethinking retail and moving into fast growing emerging markets typically in Asia), and (c) ‘disruptive’ (moving into new operating models, and property typologies). Download a copy of the report.
Self-automation – Sometimes corporate innovation can lag individual ingenuity. A report in The Atlantic this week cites a series of instances where employees have beaten the automation curve. Among the more compelling disclosures was one by a Reddit user who asked, ‘Is it unethical for me not to tell my employer I’ve automated my job?’. The canny coder had reduced a data entry role that would ordinarily take a month, to 10 seconds worth of whirring algorithms. Being allowed to work from home with limited supervision, the employee then put their feet up for 40 hours each week and watched the cash roll in. Another had managed to achieve this same feat undetected for 6 years. Opinion appears divided as to whom the benefit should accrue in these instances, the employee or the employer. If the labour was outsourced then surely the supplier should be rewarded for their efficiency, but when you’re on the payroll it becomes more debatable. The Washington Post and the Los Angeles Times both have robot reporters that prodigiously cover matters such as earnings reporting and sporting events. Hopefully no one will find out that I’ve had a bot writing this briefing for the past 50 editions, although the improvements in grammar might be a giveaway.