24 April 2020
A personal view of the evolving role of real estate in a world of technological, social and business change, by Richard Pickering, Chief Strategy Officer, UK.
‘Cities have always been the fireplaces of civilization, whence light and heat radiated out into the dark’. American reformer Theodore Parker was pointing to the role that cities have played in the progress of our species. From the early settlements of Ur and Jericho, to modern megalopolises of New York, London and Tokyo, cities have been the catalytic forces behind innovation, growth and trade. Why?
Cities perform a number of roles. Firstly, they create predictability of demand. In business, you want to expose yourself to markets where there is likely to be a sustainably high number of customers – this gives you the confidence to invest. Secondly, they create agglomeration. The benefit of industries delivering their services in alignment and geographic proximity creates learning benefits and economies. Thirdly, they create serendipity; the chance encounter, the overheard conversation that leads to opportunity.
All of these benefits rely on density. The same might be said of the office or creative venues. Putting people together creates value. However, these fundamental principles are now being significantly challenged by COVID-19. Do we need to rethink density? If so, do we also need to rethink cities and offices?
In the short-term, density undeniably increases the spread of disease. Humans are the primary vectors for transmission, and so it stands to reason that the more humans present in a given space, the more likely it is for transmission to occur. Evidence published in the New York Times shows that the COVID-19 mortality rate in large metros is x4 greater than in low density suburbs and x8 times higher than in non-metropolitan areas.
For this reason, we are currently looking to de-densify, which at a city level means keeping people out of busy public spaces and underpins policies around social distancing and lockdown. However, this comes with consequences, and exposes significant inequities also associated with density. For those of us that live in houses in semi-rural locations:
- gardens have taken the sting out of being confined to home
- typically larger properties mean that finding a space to work from in your home is more manageable
- if you’re still travelling to work, it’s likely to be in your car
- the chances of coming within 2 metres of someone on your 60 minutes daily exercise are very limited. Contrast this with a keyworker living in a multi-occupancy flat in a dense inner London high rise who needs to take the tube to work; the benefits of space become apparent.
Density is not just about people, however. Cities also tend to provide density of amenity; coming in the form of retail, cultural, health or social infrastructure. Areas with low amenity density are now coming into focus. The most topical example of this relates to intensive care facilities. The international picture paints significant disparities in the number of ICU beds per capita; however, even within the UK there are wide variances. Data from Edge Health suggests that while London is reasonably well provisioned, the South West has a very low density of ICU beds. Overlay the predicted transmission rates however, associated with more dense populations, and areas such as the Midlands are highlighted as low on capacity relative to predicted demand.
A further amenity consideration is the presence of public space, or semi-private space. Private gardens have become invaluable in this crisis. Were present conditions to continue over a longer term, one wonders what additional premium would attach to houses with a garden. However, in current lockdown conditions where travelling to exercise is discouraged, density of local public amenities such as parks also draws greater importance than in normal circumstances. In a world that is growing ever upwards, ground floor amenities by definition are squeezed to lower ratios relative to denser populations. Ironically, the parks that have been shut down are ones in areas of high population density that need them the most. The public wood at the back of my house unsurprisingly remains open.
Retail is another key amenity, but in a world where pretty much all high street shops are shut, and where delivery order slots for the big supermarkets are gold dust, new factors take importance. The key competitive factor in convenience retail has always been…erm, convenience (also a bit to do with price). Your choice of supermarket, and even more so local store or sandwich shop, is driven primarily by the convenience of location. You are unlikely to travel twice the distance based on brand preference. This means that density of footprint is in normal circumstances a USP. However, uncertainty over stock levels, and not wanting to spend long periods in crowded supermarkets, means that convenience is in some cases being sacrificed for safety.
In the short-term, non-traditional operators are using a breakdown of traditional rules to access markets that they had no chance of competing in previously. Half of the Pickering family food deliveries are now bizarrely coming from garden centres. The price is higher than we’d pay in normal conditions; but the products are in-stock, they deliver quickly (a recent business model innovation), and the level of friendly, personal customer service is leagues ahead; the true definition of a retail ‘experience’?
So how might this new focus on density affect real estate in the longer term?
The health sector feels like a special case in this new world. The adequacy of public health care provision will be judged both in the short and the long-term against its potential to cope with peaks in demand, rather than the interquartile range. In the short-term this means the adaption of existing unused facilities (stadia and events centres) to hospitals (Nightingales). In the longer term as a bigger share of GDP is likely allocated to the NHS, the elimination of white space on the map is likely to be a priority.
Comparisons being made against the density of provision in countries like Germany surely must translate into public investment in more health care space in the medium-term.
In the office, things are a bit different. Based on the typically modelled scenarios for the duration of post COVID-19 recovery, it feels unlikely that many will be making major capital investments wholly predicated on virus containment that can’t be recouped in say a 2-year horizon. For similar reasons, radical long-term easing of the density of office occupation feels unlikely. The trend over past decades has been to the denser use of space driven by cost pressures that will continue to be relevant.
However, shorter term cost-lite adaptions, such as those proposed by our ‘6-feet office’ concept are a different story. Recent industry discussion has refocussed from managing the cost of real estate to using it to create enterprise value for corporations. Here is a clear example of how a ‘safe’ adapted environment could deliver significant value for organisations, faced with the binary alternative of not being able to trade.
The bigger impact on the commercial sector is likely to come in the location of these offices. About 20 years ago, corporations started moving into cities to capture their target workforce. That was where young talent wanted to be. I don’t see a sudden COVID-19 related shift in this trend. However, combined with affordability issues, the case for being in cities, and not in spacious, leafy out-of-town campuses, is starting to soften.
Let’s not forget than density comes and goes in waves over time, with real estate fortunes ebbing and flowing in tow. In the 1950s in response to a health issue (pollution), an incentive (more space) and an enabler (better rail and road connections), city centres emptied and the suburbs boomed. Moving to present day, we have another health issue (COVID-19), another incentive (cheaper, better natural amenity) and another enabler (the internet). The benefits of the city remain in principle. Cities are the crucibles of culture. ‘Live’ pop concerts delivered over the internet don’t have the same buzz. And whilst remote working seems to work, the serendipity and joie de vivre is lost. Inherently, most of us prefer cities for these reasons. Hence whether current events will result in a similar shift to that see in the 1950s will likely depend on, as Dan Doctoroff said this week, ‘the ability to rebuild trust in the city – and in dense city life itself’ rather than being a matter of preference.
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