By Richard Pickering, Head of Futures Strategy
Hothouse – We live in a world where the emphasis is on short-term pursuits, rather than longer term value creation. This is driven by market inefficiencies, human biases, misaligned incentives and uncertainty; it is usually irrational and almost always financially damaging. But there it is. For this reason, and despite the fact it is probably preventable, I hold little hope that we will do anything about climate change, in spite of the report this week that we are potentially 10 years away from an ‘irreversible’ shift to a hotter planet. This shift would leave vast tracts of our planet uninhabitable; one result of which would be large scale emigration from these areas to cooler climates. The combination of global population growth (1.1% pa) and further loss of usable land (33% of high-quality land already lost in the past 40 years), must lead to denser use of the land that remains. We see our cities getting bigger and taller, but in the absence of significant reductions in consumption (another manifestation of short-termism), the real issue is surely the land available for food production. Currently 57% of all land in the UK is used for food production (compared with 8% for urban uses). Farming techniques have improved crop yields by more than double over the past 50 years, but if we are to have a sustainable future, we need to think more radically. Vertical farming is a potential solution and one in which there has been considerable recent investment (VC funding up 650% in 2016–2017). Some of the ‘futuristic’ topics in this blog may seem fanciful or remote, but unless we as a society start to focus on our future with greater sincerity, we may soon find that we don’t have one.
Convexity complexity – Last week, in the context of a tightening labour market, expectations of wage growth and above target inflation, the Bank Rate was increased by another 0.25%. This wasn’t a big surprise (the market had implied a probability of c.90%), and so was largely already priced in. Does this make a difference for commercial real estate? As rates move upwards, sterling should gain; but this has in the past week been entirely counterbalanced by increased concerns over a no-deal Brexit. Bank rates are also directly and positively correlated with bond yields (hence inversely correlated with bond prices). A consideration in today’s low rate environment is ‘convexity’, which describes the rate of movement in price against the rate of movement in yield. When yields are very low, a small addition to the bank rate will have a much greater effect on price (high convexity) than when yields are high. Because of this increased potential for price movement associated with low yields, there is higher interest rate risk in the bond market. Property yields are much higher than government bond yields and less directly correlated with bank rate rises. Hence the downward pressure on property pricing arising from a rate rise is weaker. Deconstructing the yield on a property into its three constituent components: risk free rate (bank rate), other systematic risk (market volatility, efficiency etc), specific risk (covenant, location etc), right now the latter two therefore provide the greater potential for price movements.
Back in your box – In knowledge businesses, driving productivity by increasing employee interaction has long been the goal of office managers. There is considerable evidence that the biggest determinant of whether employees interact with one another is proximity – no surprises there. For that reason, the modern business environment has deconstructed barriers to proximity by moving to open plan environments. However, a new study by Harvard Business School suggests that this may be a mistake. The findings from two field studies tracking interactions using Humanyze technology found that ‘open, unbounded offices reduce face to face interaction with a magnitude of about 70%’. Conversely, in open plan environments email and other electronic interactions rose by 20-50%. The authors speculate that in fact it is privacy that increases productivity, and that the lack of privacy in open plan offices decreases willingness to engage in deeper discussions. This is particularly the case for more introverted employees. This is an important consideration, because it is not just the levels of interaction that were found to be affected by moving to open plan, but also, the authors conclude, it skews with whom in the business a person interacts. Plenty to think about here for space planners and HR teams.
Untethered – When is a phone not a phone? Perhaps when, as revealed by Ofcom in their annual communications market report last week, 92% are using it primarily for internet access, compared with 75% who use it to make calls. Some technologies incrementally improve our lives, whereas other fundamentally change it. The modern breed of smart phone is undisputedly in the latter group. According to the report, 65% of those under 35 will use their phone within 5 minutes of waking and 60% within 5 minutes before lights out. Untethered internet, allows opportunities to source data ad hoc whilst exploring the real world. Therefore mobile applications are now just about the top influence in how we move around cities (Google Maps / Waze), where we eat (Tripadvisor), how we pay (Alipay), how we shop (targeted ads on Facebook, mobile sales such as Hema), our source of live news (Sky News) and our world outlook (Twitter). Of note, mobile purchases account for c.60% of global online sales; now dominant over desktop e-purchasing. They also change how we think: Microsoft estimates that it takes the average customer just 10 seconds before they lose interest in something, or… but anyway… It’s easy to forget that just over 10 years ago, smartphones didn’t really exist. However, if as a business that occupies or operates real estate you don’t already have a mobile platform offering, you will soon be in the minority.
Cherry Tree Cottage – I’m on the cusp of buying a new home. Mrs P. wanted ‘something with character’, which trumped my desire for modernity. However, to redress the balance I’ve been drawing up plans to comprehensively retrofit our new seventeenth century cottage with smart home tech. Following a trip to John Lewis’s smart home showcase in Westfield London, I’ve lined up voice controlled: plug sockets, door locks, security cameras, blinds, light bulbs, a coffee machine and a pet food dispenser which allows you to fire treats at your cat using an Angry Birds style aiming interface; (just the basics really). However, how secure is all of this? Earlier this year, hackers were able to access a Las Vegas casino’s high-rollers database by tapping into a digital thermometer in the fish tank in the lobby. Meanwhile, in March, targeted ransomware left 8,000 employees of Atlanta City Hall unable to access their computers, at a cost of $17m. Whereas Cherry Tree Cottage is not likely to be the target of a globally coordinated cyber-attack, city governments, shopping centres and major campuses are a different proposition. Gartner estimates that there will be 20.4bn IoT devices worldwide by 2020, and these will play a significant role in commercial property estates. For property managers, expenditure on cyber security may well soon exceed more traditional measures.
Grammable – In the world of social media, Facebook is the mass market offering, whereas its corporate sibling Instagram skews heavily to the youth segment (53% are in their 20s). Focussed on geotagged (and often filtered) photos and short videos, it has become a key branding tool for retailers wishing to hit this audience. Users search out iconic and cool backdrops for the express purpose of creating ‘Instagrammable moments,’ to the extent that Farshid Moussavi recently posted that the creation of Instagrammable locations has now become part of architectural briefs. To have a trending location can be a big boost to business, with nuanced and brand heavy locations and pop-ups such as The Egg House in NYC ($20 entry), or the Museum of Ice Cream in San Francisco ($38 entry) trading off their Instagram appeal. Hence for developers looking to brand their assets, creating unique and interesting backdrops and finding homes for exciting single product pop-ups can be a route to value. However, be careful what you wish for. The recent posting of a field of sunflowers by its owner Brad Bogle, a Canadian famer, went viral and resulted in a horde of 7,000 Millennials descending on the farm in pursuit of sunflower selfies – an event that was later described as ‘a zombie apocalypse’. The farm is now closed ‘forever’. #bogleseeds
All the world’s a stage – There is growing sentiment that the world in which live, might not be the world in which we live. Elon Musk stated a view that the odds are “a billion to one against us living in base reality” whilst renowned futurist Ray Kurzweil thinks that we might be living in one giant “junior high school lab experiment”. Whilst the notion of living in the Matrix might seem to be the domain of conspiracy theorists and those with overactive imaginations, a number of recent events potentially suggest otherwise. Firstly, the Terminator was appointed as Governor of California. Secondly, Dennis ‘The Worm’ Rodman took on the role of peace broker between the US and North Korea. This week ‘under siege’ Steven Seagal has been appointed as Russian Special Envoy to the United States. Think about it. In what actual world would this ever happen? Given that Dominic Raab’s career as Brexit Secretary seems destined to be a short one, watch this space for his replacement. If it ends up being Jason Statham or Daniel Craig, you’ll know that it’s time to take the red pill and ‘find out how deep the rabbit hole goes’.