Investors must prepare for the digital disruption of real estate. Richard Bloxam looks at the rise of smart buildings and ‘platinum prime’
Technology is redefining how and where people work. Faster, ubiquitous connectivity, big data and artificial intelligence are technological advancements set to revolutionise real estate and it is a topic that has become important for occupiers and is now impacting investors.
From individual properties through to global portfolios, technology and its adoption into working and social life is placing fresh demands on workspace to be more flexible and facilitate collaboration.
Smart buildings are becoming vital in today’s war for talent. Tenants want to know how real estate can attract and retain staff and enhance productivity. Real estate investors who understand this will gain a competitive edge.
Building owners forecast smart building technology spending to grow from $6.3bn (€5.8bn) in 2014 to $17.4bn in 2019, according to the International Data Corporation (IDC).
Deloitte’s The Edge, in Amsterdam, is a relevant example. The building is equipped with more than 30,000 sensors and employees are connected to it via an app, which helps them find parking spaces, desks or other colleagues. Sensors are also used to monitor temperature, movement, light, CO2 and humidity. As a result, it uses 70% less electricity than comparable office buildings.
At the heart of The Edge’s success is personalisation. The success of an asset will depend on its ability to provide a tangible link between property and productivity. In doing so, landlords will command higher rents, or at least retain tenants by improving the operation of their business.
The boom in co-working is already under way and evident in a trend towards shorter leases, reflecting both the changes in how business operate and how technology is facilitating different ways of working.
JLL estimates that, by 2030, 30% of a corporate’s portfolio will comprise flexible space. If this happens, it will mark a seismic shift. While large corporates will provide traditional, strong covenants (although some may choose to owner-occupy), many will need less ‘core’ space than in the past, thanks to efficiencies and maybe fewer permanent staff.
At one end of the scale, these core corporate spaces will be in city centres to attract the best talent and they will be fitted out to a high digital specification. At the other end of the scale, smaller firms may only need a co-working space. Finally, in between these extremes is a need for more flexible collaboration space to satisfy the changing requirements of both corporates and start-ups.
Around these workspace hubs will be a network of spokes comprised of co-working spaces, services offices, hotels and other flexible locations for staff to work from.
As a result, we well see the emergence of a new asset class in the office sector – ‘platinum prime’. This grade-A space in top-tier locations will be designed to suit the new business world. Beneath this we will see more super dynamic assets – flexible, modular spaces, built to suit fluctuating business cycles, catering primarily for start-ups. A new asset class will develop through partnerships that marry equity with expertise. This will bridge the gap between institutional leasing and co-working.
Already, British Land has a profit share arrangement with co-working provider ‘Central Working’ to provide flexible space in British Land buildings. Elsewhere in the UK, W Hotels has partnered with Desk Near Me to provide guests with workspace access.
Square footage aside, the question of connectivity will become more relevant. Many companies will make location decisions based on the availability of fast and resilient connections.
Investors will choose assets in cities that combine so called ‘hard connectivity’ – which relates to physical infrastructure such as transport links – and ‘soft connectivity’, and links to education and quality of life, as well as cultural amenities.
Better connectivity between people and places will generate a plethora of data. Used wisely, this can be used to guide a building’s design by illustrating how people interact with space and each other. The most futureproof buildings will house modular fit-outs, allowing spaces to be re-tooled and reconfigured between occupiers, making refurbishments quicker and cost effective.
In addition to the design and management of assets, using data to analyse tenant behaviour and requirements will give landlords a competitive edge in helping occupiers to manage fluid workforces.
Ride the wave of change
While the notion of an office is being challenged, office use is rising and demand for workspace will increase, albeit in different ways.
Cynics may dismiss many of the working and business trends as passing phases, similar to patterns displayed in the 1990s during the dot com bubble. However, many of the trends identified then have come to pass – albeit after the usual cycle of overconfidence and creative destruction.
The fundamental drivers of change and the increased pace of change are here to stay. Buildings and cities are becoming smarter; people and businesses are more sophisticated in their space management; and the traditional realms of real estate are being challenged by a technology-led market.
Successful investment will require new skills and disciplines as the ends of the spectrum require different strategies and management. To thrive in this landscape and reap the benefits, investors will need to put their office space to work.
Richard Bloxam is global head of capital markets at JLL