Helge Vahlenkamp explains why understanding micro locations is important and how technology can support real estate investors
Hybrid and remote work have been booming since the pandemic, with employees increasingly opting to work remotely and avoid crowds and long commutes. How sustainable this trend is remains to be seen, but it is undeniable that this shift is having a noticeable impact on the market for office properties in major cities.
This raises anew the question of what actually constitutes attractive office space. One factor has traditionally played a decisive role: location. A well-founded assessment of the micro location in question is therefore indispensable; however, not least due to the pandemic, it is often not practical or possible to physically explore every potential acquisition target and its immediate surroundings when first interested. Digital micro-location ratings can provide valuable support in this regard – at the click of a mouse.
It is worth taking a close look: the German office property market is much more heterogeneous than, for example, the centralised British or French markets. Here, especially, it is crucial for investors to analyse not just the macro but also the micro-locations of the properties. In the past, this was the exclusive task of experts who could get a concrete picture of the location directly on site. Digital innovation is opening up new possibilities in this respect: today, digital analysis tools already support the evaluation of micro locations. Such technological solutions hold great potential already and will continue to improve in quality going forward.
Why is the micro location so crucial? Because it is virtually impossible for an individual investor to significantly modify a property’s location, transport links and the surrounding area with its specific offerings. Investors instead have to work with the existing environment and infrastructure. Depending on the type of usage – whether office, residential or retail – the individual potential of a micro location has to be assessed to find precisely the space that is perfectly tailored to the needs of potential tenants.
For office space, for example, it is important to analyse the specific micro location. Requirements for the property can vary greatly depending on tenants‘ industry and employee preferences. A co-working property requires different specifications for the immediate environment than traditional office space. In any case, the key issues with regards to the micro location of office properties are accessibility, connections to public transport, available parking spaces and whether it is a more functional or a lively neighborhood. These factors affect a tenant’s reputation, work culture and ability to attract and retain talent. In particular, employers that seek a full or partial return of their workforce to the office must provide attractive incentives. Accessible, well-connected office space located in desirable locations are thus decisive.
Proptech companies and established asset managers are working on using modern analytical tools to make processes within the real estate industry more efficient. In addition to fields such as energy efficiency and capital raising, this also includes the analysis of micro locations. The information provided by these analytical tools is supposed to be fast, uncomplicated and reliable. But do they actually meet these requirements?
Currently, there is a wide range of such analytical tools, one example is the KGAL Location Rating. Based on continuously improved algorithms, these work with standardised ratings. In this way, the respective tool provides all relevant information at a glance. A major advantage over conventional analysis is comparability. Various factors such as accessibility to public transportation, dining options, shopping and leisure opportunities or other public facilities are fed into the system, weighted and aggregated into a score. In addition, socio-economic indicators are made available to the user.
Thanks to this standardisation, the ratings create transparency and ensure optimal comparability of results. In this way, they enable investors to be much more independent. Even without local expertise or investment advisers, they thus have access to valid information about the micro location of the respective property. With the analyses, a very differentiated and at the same time detailed picture of the city in question and its sub-markets can be drawn. Objectively quantifiable data filters out unsuitable assets right away, which is why the digital analysis tool is ideally suited to give investors a first indication of property locations.
Despite all these positive effects, however, micro-location ratings harbour potential sources for errors that must be eliminated. For example, the algorithms can only be fed with currently existing data; uncertainty remains with regard to long-term future developments. They only provide a snapshot that can by definition only take current trends into account with a certain delay. In addition, some providers work with a system that is limited to a specific hard-wired radius around a property without including actual pedestrian accessibility. Under certain circumstances, this can lead to misjudgements on the part of investors.
The information provided by the algorithm must therefore be reliable and practical. In any case, such scoring tools can contribute to a deeper understanding of a given micro location and help to make a preliminary selection. As an investor, you thus save yourself some of the work. Nevertheless, in the end, there is no way around a personal appraisal of the micro location and the property itself – taking into account other aspects relevant to real estate, such as urban planning.
While ratings for analysing micro locations cannot fully replace the informed appraiser, they do create transparency as an additional evaluation criterion. Innovative, digital analysis tools are used in parallel with on-site expert opinions. Given the tremendous speed of development of digital solutions, scoring tools have enormous potential for further development. Until then, hybrid micro-location ratings that combine physical as well as digital methods will remain best practice.