Our industry is in transition. So says the circa 1,000 European real estate leaders who took part in the Emerging Trends in Real Estate report (ETRE), published by the Urban Land Institute and PwC last week.
Repurposing of buildings and business transformation, respondents said, are the key challenges we face. The way we use, operate and manage a building is changing, and therefore the way real estate organisations are run must also adapt. The return to normality that we have been hoping for, concludes ETRE22, is never going to come.
We could welcome this as a positive outcome of the pandemic. Lockdowns paused our lives and disrupted our inertia, forced us to confront the inevitable evolution of our habits, along with the redefinition of our priorities: flexibility, wellbeing, environmental and social ethos are key to the profile of emerging building occupiers.
In the past, the landlord was compensated (through rent) for providing a functional building, and that building’s value was mainly determined by location, quality of design, its age and the level of maintenance it required. A landlord could expect a bond-like income stream for years.
Today, occupiers expect - and are prepared to - pay more, but only for quality service that meets their values and prioritises their needs. There has to be a new purpose for certain space functions. Why go to the office when you can work from home? Why not move into a residence with a fitness centre and bike storage? Why not choose a net-zero energy building for your HQ?
It is now common to treat the occupier as a customer in order to maximise the utilisation of the building and increase its asset value. Landlords need to understand their users, expand their expertise and secure their returns through ongoing asset management. Technology has been a major disruptor, but it can be turned into an advantage. Innovators are developing smart solutions to engage with customers and protect returns effectively.
Transformation comes with disruption. Some markets are already experiencing it. The UK retail sector for example, has seen rising vacancies, even before the pandemic, as ecommerce penetration rates reached about one-fifth of total retail sales. Public authority initiatives and asset repricing have attracted renewed investor interest and there are several examples of innovative ways of retail repurposing across the country.
Should we expect similar disruption in the office sector? It depends. 85 per cent of the ETRE22 respondents expect a lasting increase in time worked remotely. The viability of offices depends on their location, design and configuration, but also on city governance and leadership. The return to the office has been faster in liveable cities, with better mobility infrastructure and mixed use city centres, with a higher degree of city centre living. The majority of cities recognise that liveability will play an important role to their future attractiveness and resilience.
Repurposing or repositioning of assets will be key. Offices may be converted to residential, shops to medical and community uses, or retail to fulfilment centres, for example. The main aim in most cases will be to create mixed-use communities integrating ESG in the development process, in order to ensure their long-term viability; by using energy efficiency and smart technologies and by focusing on diversity and affordability, resilience will be ensured, too.
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