05 June 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.
It is a statement of the obvious that cities were built from the inside out. For that reason, the most historic part of our cities tends to be the bit in the middle. As populations have increased, so the boundaries of our cities have moved ever outwards in concentric circles. Until the recent and now reversed urban renaissance, the middle wasn’t where you wanted to live; it was noisy, polluted, dense and congested. Exciting, yes, but not a place to live. The outside by contrast was roomy, leafy – boring, certainly – but pleasant. Nevertheless, every day most of us have fought our way back into the middle to do our work and our shopping.
Did we ever stop to question why? …What if we turned our cities inside out?
There are lots of good reasons to bring people into the middle of cities; some of which I have touched on in previous blogs. Chief amongst these is that everyone has an equal chance of getting there. The nature of circles is that they have a common radius, and the point that minimises the average journey time is the centre. This dates back to the days when people brought crops to the marketplace using horse and cart. The market acted as a predictable interchange, sourcing buyers and sellers from all compass points, which for small businesses helped to manage pricing risk. It was the genesis of our modern-day capital markets, the nucleus for the distribution of public goods and the location of much of our social infrastructure.
For decades our planning system in the UK has promoted centre-first development in the form of sequential tests. This has ensured predictability on the supply side for investors, and predictability for occupiers wishing to tap into talent pools. It also underpins sustainable principles, seeks to minimise transport movements and ensures that developments have the best possible chance of viable economic longevity. For these reasons, many consider the idea of developing outside the city centre as a form of heresy, equivalent to Galileo’s heliocentric theory. This was the past however, and the future might now look a bit different.
What is the problem that needs to be solved?
There are several contemporary reasons why concentrated central development might no longer be appropriate.
Firstly, it is becoming increasingly difficult to develop good quality housing or commercial space in city centres at a sensible cost. Problems around affordability have reached fever pitch. All brownfield sites have an existing use value and hence a land value which creates a financial hurdle to redevelopment. Consequently, building in city centres means building at ever increasing height. The successful bidder for a site is likely to be the developer whose bid is predicated on the greatest massing – this is a one-way street. However, height carries financial diseconomies, and in a post-Grenfell world, safety concerns. A complete lack of outdoor space in many flatted schemes leads to social issues; density in office buildings often limits natural light, and living in a block of flats is shown to engender weaker community ties than living at ground level.
Secondly, the strains on city centre infrastructure have become too great. Green areas as a percentage of headcount in cities is declining, schools and hospitals are having to compete with residential uses for land, driving up the cost of public services. Centralisation of service provision is effective up to a point …and then it breaks. We have passed this break point in many of our global mega cities.
Thirdly, local communities are dying. People exiled into suburban settings are failed by the local infrastructure as demand, focus and investment are sucked into the centre.
When as a society do we get off the conveyor belt and say that this is no longer acceptable?
Perhaps now is that time. We have entered into a period where for at least this year, and perhaps quite a bit longer, people are shunning the dense social contact provided by city centre environments. If all workplaces resume under social distancing density guidelines and no one works from home, then we are going to need a lot more office space to cater for the spike in demand. City centres will not be able to supply this space quickly enough. If, however, a significant percentage of our workforce do end up working from home, then we are about to see a profound structural shift in where people spend their time, and hence in the locus of demand. Both eventualities point to the need for significant interventions in our suburbs, second-tier towns and neighbourhood centres.
All of these locations have faltered over the past 30 years. Once vibrant local centres have been replaced by clone high streets, charity shops, stagnant offices and cleared sites. No wonder people prefer to head to the city. However, it doesn’t have to be like that. Progress and circumstance, combined with a new approach can unlock change.
The challenges to shifting focus onto the outer ring of our cities lie in the opposite of why city centres work. That is that not everyone can get there; demand becomes diffuse and unpredictable, longer average journey times are less sustainable and scale economies and agglomeration benefits are weakened. Take the example of a shopping centre. If there are fewer people in the catchment, there will be less footfall, less demand for goods, and in turn this will attract fewer retailers. If you want to go to a restaurant, you have a cornucopia of cuisine choices in the centre, whereas if you live in a village as yet untouched by the gastro pub you’d better get used to pies and fish and chips. And if you’re an employer how do you deal with the increased commute times for more remote locations less well served by transport modes?
However, all these things can be resolved in what I propose as a 4-point model for off-centre development:
We have to make things smaller, more specific, cheaper, and more flexible.
Firstly, if you make something smaller (smaller footprint, fewer staff), you can sustain it on less demand, limiting people movements to local ones only. The historic problem has been getting over the hurdle of fixed operating costs. However, robotics and automation present significant new opportunities to drive down the fixed cost of operations and reduce the minimum efficient scale for businesses. Resource sharing with other businesses (e.g. admin staff) provides further benefits. Why not divide your HQ into a series of smaller interconnected sites closer to where your staff live? Why not have five dispersed 10-cover restaurants rather than one central 50-cover one?
This comes to the second point. By reducing the product offering along with the scale, you can be highly specific in targeting a customer segment. A large shopping centre in the centre of town needs to appeal to the mass market; whereas a small facility in a local neighbourhood can match much more closely to a known demographic and deliver a much more personal experience. Data helps us to define these segments and match demand more effectively than ever.
Thirdly if revenues are going to be lower and scale economies weakened, you need to reduce costs to preserve margin. This means building cheaper to keep rents lower. It is the folly of many developers to over specify; whereas we now know that you can build a shopping centre out of shipping containers, and tech occupiers are happy with exposed service media. New construction techniques using sustainable materials like cross laminated timber or bamboo can deliver at a fraction of the cost, especially in lower density environments.
And finally, where demand is more fickle, real estate needs to be more responsive and flexible. Start by not building to last. Cheap, dismantlable structures built to circular economy principles can be adapted much more readily. Modular designs that can be disassembled and reassembled in weeks overcome demand relocation risks and provide a sustainable solution.
We face many uncertainties this year that are challenging long held conventions and sacrosanct thinking. We will never move on as a society or as businesses if we are not willing to take a critical look at these dogmas and decide whether they are still fit for purpose. They say that you should change strategy as rarely as possible; capriciousness defeats a good long-term plan. However, when technology and social change conspire to alter how the world works, it’s time to rip up the playbook.
In particular, a new view is needed on how we deliver work and shopping environments for a new era. This era is one where people movements are fewer, where society’s resources are distributed more equally and are more diffuse, and where the importance of local is reinforced. Critically the rules need to change to accommodate this new world and quickly. Town planning, typically slow to react, could and should be leading the change rather than responding to it. And real estate investors need to show the way, rather than waiting for someone else to clear the fog.
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