the shifting narrative over the past 12 months
TRANSCRIPT
The shifting narrative over the past 12 months
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Sars?
A Chinese
problem
A global
problem
Lockdown
Spanish Flu 2?
Travel restrictions
Civil unrest
Social distancing
Empty CitiesEconomy
Building adaption
Vaccine
Working from home
Two different future time horizons – two different answers
Return to Normal
End 2021?
The Future of Cities
The Economy
Social Distancing
Health Concerns
Technology
Social Change
Resolution
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
% of total assetvalue accumulated
Years
The wood and the trees
>85% of YP perp
>5% of YP perp
This is what matters
Cities have always been the fireplaces of civilization, whence
light and heat radiated out into the dark.
Theodore Parker
US Reformer and Theologian
Why, Sir, you find no man, at all intellectual, who is willing to
leave London. No, Sir, when a man is tired of London, he is tired
of life; for there is in London all that life can afford.
Samuel Johnson
British Essayist and Poet
…but something isn’t right
9% want life to return to normal after COVID-19
15% increase excessive hours over 5 years
221 hours per year commuting
43% increase in ‘alone-together time’
~x8 salary to house price multiples
10 years to save our planet
1% of young people identify as CoE
41% report stronger community ties
27% are getting more exercise
23% say relationship with children improved
61% spending less money needlessly
>50% have adapted happily
61% reduction in NO2 levels
Things weren’t actually that great Some things have now improved
Caveman video
In the beginning…
Urban change is driven by technological and societal change
Stable settlements
Agriculture
?
Defence
Defined boundaries
Permanent Construction
Trade
Market place
Regional hub
Government
Public construction
Infrastructure
Economic shifts
Deserted settlements
Industrialisation
Massive urbanisation
Rapid mass transit
Suburbanisation
Why do cities exist?
Minimises average journey time
Existing infrastructure corridors aligned
Agglomeration benefits
Predictable interchange
Reduces pricing / exchange risk
Reduces investment risk
x1
Source: New York Times
Rate of coronavirus spread
x4 Urban coreSuburban
Extra-urban
x8
The failing proposition of our city centres
“The Urban Revival is Over “
Richard Florida
Cost of land > increased massing
Increased massing > wellness / safety
Worsening amenity ratios > worse quality of life
Land supply issues > public amenity suffers
Cost of rent > business penalties
Cost of housing > pushes out talent
Increasing city sizes > increase commute
Creaking infrastructure > penalties of distance
Central focus > lack of suburban amenity
Sources: ONS (2018), CityLabs, WSJ
Urban exodus
New York
Chicago
San Francisco
Washington
‘Most people in fact want
to live in detached
suburban homes’
Richard Florida
LondonAmsterdam
Paris-50000
-40000
-30000
-20000
-10000
0
10000
20000
30000
40000
0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80-+
Net migration to London by age group
Inner London
Outer London
London and Sectors in Focus
Source: Allianz Global Investors ‘The Sixth Kondratiev Wave’
Super-cycles and Kondratiev waves
Steam engine
Steel / Railways
Electrification
Petrochemicals
Computing
Digital / Biotech?
Rolli
ng
10
-ye
ar
yie
ld o
n S
&P
50
0
1800 1850 1900 20001950
The increasing impact of the internet
-
20
40
60
80
100
120
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Internet use (UK) Ecommerce (UK) IoT (m) Data Volume (Zb) Internet traffic
Source: Internet use (Statista), Ecommerce as % total sales (ONS), IoT devices (Ericcson), Data Volumes (Statista), Internet Traffic (Cisco)
% of global
population
using
internet in
past 3
months
Other series
indexed and
normalised
to 2020
Asymptotic to 100%
A shift from moving people and products to moving ideas
Home Office
Factory Shops
Source: Bain / Bank of England/ ONS
Some activities will be taken out of the real estate value chain
MOOCs Chat bots
Retail UniversitiesOffices
AnywhereOnline
consultations
GP
Surgeries Libraries
The internet
Sports
E-sportsE-commerce
Call
Centres
12
3 4
4 future scenarios
Output from C&W workshop
Hermit
Virtualisation
Urbanisation
Social Animals
The Matrix Hyper reality
REMOTE ECOSYSTEM
A new ecosystem of work-spaces
6
Core office
hub
Campus
On Demand
Event space’
Flexible touch down
and meeting spaces
Accessible &
memorable locations.
35
1Core office urban hub
Open to the public
Key meetings / Collaboration / Learning /
Mentoring / Innovation / Connection to
Culture
Third places in city
Lunch/Coffee
Informal meetings
4
Local Community
Hubs
Short commute
Atmosphere & services
3
Limited travel
Home work 2
CENTRAL ECOSYSTEM
Bid rent theory – the pricing of cities
M
F
F
$
$$
CBD
R
R
R
CBDCBD
CBD
R
David Ricardo ‘Bid Rent Theory’
New value drivers will take precedence
60% inverse correlation
Valu
e p
sf
Time to CBD
Lower density of amenity and
transport infrastructure in
outer zonesWinners will be areas of weak
transport infra and high
amenity
Zone of Defence
Zone of Disruption
The variable impact on different sectors
Impact of
COVID
measures
Ability to pivot to virtual delivery
High Street
HIGH
LOW /
POSITIVE
HIGHLOW
City Offices
Business
Parks
Retail
Warehouse
Retail
Showcase
Hotels
F&B
Resi
Health
Student
Industrial
Shopping
centre
Cinema
Data centres
The dislocation of assets
Sandwiches and pubs Business Parks Last mile logistics
A greater delineation between the central and outer zones of cities
INTERACTIVE ZONE FOCUS ZONE
Experience
Interaction
Innovation
Exhilaration
Wellness
Peace
Green
Community
Experience+
L+T Osnabrück
WeWorkAmazon Go
Deskdog
Second Home
Sidewalk Toronto
Facebook Menlo Park
Source: Zoopla / Rightmove/ Eurostat
The workforce of the future
What does £1,000,000 buy you?
Clapham Greek Islands
…how much does an employee cost?
€1,446 pcm€3,087 pcm
LENS 1
LENS 2
A new world of digital experiences
Decentraland – a new world of real estate
1. Investment strategy – take risk off the table
0
2
4
6
8
10
12
14
16
18
Tota
l R
etu
rn (
%pa)
Long income outperforming
Double down on prime
Long income focus
Reverified covenants
Divest dynamic sectors
Longer structural tilts
Greater focus on stock selection
2. Product strategy – extend maturity phase / invest when you don’t need to.
INTRODUCTION GROWTH MATURITY DECLINE
Placemaking
Anchor letting
Leasing Stabilised income Vacancy
Obsolescence
EXTEND PHASE
High marketing spend
New commercialisation
Brand differentiation
‘INNOVATION WINDOW’
Planning consent
Capex
LIMIT OUTGOINGS
Dial off marketing
Reduce rents
Divest non-core income
Wind down
Source: Charles Handy ‘The Second Curve’
3. Business planning – shift from deterministic to stochastic approach
DETERMINISTIC
PROBABLISTIC
Assume:
(1) Tenant leaves = no
(2) Retail demand down 10%
NPV = £100
Assume:
(1) E(Tenant leaves) = 30%
(2) Retail demand: = -10% = 5%
£90< E(NPV) <£100 = 95% confidence
30%
70%
PREDICTIVE
Lead indicators
Machine learning
4. Design strategy - Don’t ‘build to last’ / eliminate waste in the design phase
Time
Value
100%
0%
50%Waste
Physical
deterioration
alone
Economic /
functional
obsolescence
Mass timber built with disassembly in mind
Source: Sidewalk Labs Toronto Tomorrow MIDP1
Technical
improvements
Industrial
change
5. Create real options – create value from ability to pivot
Real option
value levers
Period of which
option is valid
(+)
Present value
of fixed cost
(-)
Unpredictability of
expected cashflows
(+)
Present value of
expected cashflow
(+)
Yield of riskless
security
(+)
Source: McKinsey & Company, ‘The Real Power of Real Options’ / Corporate Finance Institute
Park 20|20, Amsterdam
Modular building components
Deconstructable / cradle to cradle by design
Overspecfication
Prefabrication
Externalised M&E
Value lost of
duration of option
(-)
6. Corporate sustainability strategy - Eliminate negative externalities to reduce value risk
P0
P1
Q0Q1
Cost / Price
Output
Private
Cost
Social
Cost
Negative
Externality
Regulation Pigovian taxes CSR
RISKS
Unsustainable
buildingsToxic tenants
Wellness
failings
Social
displacement
NEGATIVE EXTERNALITIES IN REAL ESTATE
Demand Supply
7. Vertical scope - Transfer risk to those better placed to manage it
Market cycle
Funding / Financing
Tenant Failure
RE operations
M&E Obsolescence
Economies of scale
Expertise
Learning / innovation
Risk Management
Analytics
SUPPLY CHAININVESTOR
Contracting
(Subscription rental)
UPSTREAM?
?
8. Corporate boundaries - position your business where you are most able to create value
Source: Harvard Business Review ‘Profit Pools: A new look at strategy’
25%
20%
15%
10%
5%
0%
100%
Share of industry revenue
Op
era
tin
g m
arg
in
Auto manufacturing
New car sales
Used car sales
Auto loans
Leasing
Warranty
Petrol Insurance
Service / repair
Aftermarket parts
Auto rental
If all else fails… a new generation of real estate professional
The Luddite Rebellion Mojo Vision + Hyper reality
Neuralink Epicenter
Summary – key takeaways
Cities have changed radically over the course of history. Change is the constant
The value proposition of cities rests on the agglomeration, centralised trade and serendipity
An internet enabled workforce threatens to break the concept of distance entirely.
Urban exodus is a reality not a threat.
In recent years, underinvestment combined with scale issues has created challenges that remain unaddressed.
We will work in new places. We will live in new places. This will break current value dynamics and leave some assets dislocated
We need to be willing to reinvent our system around how people want to live their lives, including amenity and free time
Find solutions through backing long term trends, being laser focused on product, creating real options, being clear on ESG,
and reconsidering your role in the industry value chain.
Find out more @ futures.cushmanwakefield.co.uk
