Predicting Future Disruptive Trends in Real Estate
Abraham Lincoln once said, “The best way to predict the future is to create it”. And there is no industry where that is truer than in the real estate industry. After all, you can control the location, the asset class, the architect, the general contractor, the target market, the capital decisions, the tenant mix. You control everything, right? Or do you?
When one thinks of a “disruption” in an industry, they generally think of a new technology or a new “start-up” as the disrupter. Therefore, something as mature and stable of an industry as real estate, one would think, should be immune from shockwaves caused by these disruptions and “new ideas”. However, in the current and uncertain times in which we live, nothing could be further from the truth.
Predicting the future, when it comes to real estate, is essential to success in the field. Although there is no crystal ball when it comes to real estate, it is important to sit back, analyze, and think outside the box when it comes to a list of predictions of the major things that the industry should focus on in the coming years. These items range from impacts caused by demographic, psychographic, pandemic, economics, geopolitical and many other trends and impacts caused by the “new normal”.
The Corona Effect
Yes, we have to talk about it? As we have all learned this year, life can be very unpredictable. Normal life has been flipped on its head and has tested everyone. One of the effects on real estate has been the movement out of office space, ostensibly for social distancing purposes, but what does this mean for the future of office buildings – and their tenants. Yes, technology has advanced to enable everyone to be connected, whether they are sitting at their desk in an office or sitting at their kitchen table. Plus, many folks are seeing the benefits and efficiency of zero commute time, a more efficient workforce, lower facility cost, etc.
While right now it seems like a short-term reaction to the pandemic, this is a trend that will, most likely, not die soon. Many major companies have already started to permanently get rid of their office space and move to remote working arrangements. British Petroleum, for example, is in the process of permanently shifting almost 50,000 employees towards remote working and flexible workplace layouts over the next 24-months. So, it seems like office space is getting ready for a shock as existing tenant leases come up for renewal. The prognosis is that office vacancies will grow, and rental rates will be stagnant or decline.
As for retail, the International Council of Shopping Centers (ICSC) has historically cautioned retailers that digital technology will have an affect on the brick and mortar sales, but, what the ICSC did not see coming, was the large amount of tenant defaults, bankruptcies and downsizings that were as a result of the government-mandated closure of many retailers. So, what this means is that many retailers that once never thought a certain center or location was in their price range, now have the ability to negotiate from a position of strength with these desperate landlords that are now looking to fill vacated space. The prognosis is that retail vacancies will grow, and rental rates will be stagnant.
But not to fear, there is still need for other forms of traditional real estate, in particular commercial and multifamily real estate. There will still be some demand for office flex space, along with increased demand for industrial spaces as constraints are put on the supply chain. Furthermore, there will be increased demand for assets such as fulfillment centers, cold storage and dry storage for online ordering, and additional factories as popularity of onshoring sweeps the nation. The prognosis is that demand for the industrial, storage and fulfillment facilities will grow, and rental rates will escalate.
With respect to multifamily, the current economic forces have had an impact on the incomes, livelihood, and savings of many citizens. As a result of this, and in particular for middle class America, it appears that many of these folks will continue to stay in a rental pool for the foreseeable future. The prognosis is that the demand for multifamily will remain high, and due to the effects of Covid-19, rental rates will remain flat, until clarity is reached for future employment outlooks.
A note about Covid-19 when it comes to the residential sector is that people have learned that their home (whether multifamily or single family) matters – a lot. Months on end stuck in the house has led people to question their current living conditions. And to go along with the shift away from offices, private designated workspaces in homes or apartments will be more important. People will be spending more time at home and as a result, spending more time inside the home. For these reasons, people are now be looking for larger residential units with private office space and as much yard as they can get.
Another underlying impact of Covid-19 is that people have also learned to appreciate public outdoor spaces a lot more. Parks and other outdoor areas have become a very important commodity. Access to outdoor amenities will feature more prominently in the future of real estate, whether we are talking about private communities, commercial spaces, or urban planning. While Covid-19 is temporary, its effect on the world, and impact on real estate, will be felt for decades to come.
International urbanization is the name of the game. Cities have been, and will continue to be, welling across the fast-growing countries in Asia, Africa, Middle East, and Latin America. Along with that, developed western nations will continue to urbanize. By 2050, urban populations are projected to increase by 75% to 6.4 billion, from 3.6 billion back in 2010. China will be leading the way by moving 70% of their population, about 900 million people, into cities by 2025. Asia will be the fasted growing region, with sub-Saharan Africa right behind.
Populations are rising and the United Nations has stated that by 2050 the world population will be 9.8 billion, up from 7.8 billion in 2020. The need for living space will be highly in demand for both the emerging markets we have already looked at, but also already established markets in the west such as cities like London, who’s population is forecasted to rise to 10 million by 2023, from 8.9 million today. Along with the growth in population, the middle class will rise by about 180% from 2010 to 2040. Global construction output is expected to almost double to $15 trillion USD by 2025. Also, by 2025, emerging markets will host 60% of global construction activity. China, United States, Indonesia, Russia, Canada, and Mexico will account for 72% of expected construction activity.
Public Private Partnership
The economic implications of Covid-19, and the ability for cities to maintain consistent sales and property taxes, will ultimately have an impact on the revenues and capital budgets of municipalities. Consequently, these municipalities will be searching for additional ways to advance economic development efforts and encourage development in their respective cities. Going into this new age of real estate development, working in partnerships with government bodies, will be very important. Not only will the investment community need in-depth knowledge of local economies, but also, they will need to navigate opaque planning laws, access to governmental incentives and to work in partnership with the government and to make sure their strategy is aligned with the private sector. Governments are going to want construction and economic development in their cities and will be looking to collaborate with private developers.
The advent of the “sharing economy” has made an impact on several industries ranging from Ridesharing, to co-working to vacation rentals. But what about a “co-living” trend? While it might seem like something like a commune or a kibbutz, co-living has become one of millennials favorite ways to live. The idea of co-living is to create a cost-effective environment for likeminded people to live and work.
People rent individual rooms, but share common areas such as a kitchen, living room, recreation area and outdoor space. This allows for the individuals rental cost to be lower as common areas are a shared expense, and the stress of setting up a new home is eliminated. Another desirable aspect of the “co-living” space is the social opportunity of meeting and living with others with similar interests. For whatever reason they choose, co-living is a growing lifestyle for the younger generation. While it has started to take off in the United States, other areas such as Asia and China have already fully embraced the idea.
A great example of an early-adopter is Ziroom. Ziroom is a co-living style apartment building that has properties in nine of China’s major cities that total over 1 million bedrooms. Ziroom already has over 1.2 million residents that have embrace the concept. The rooms that they offer range from around 100 to 300 square feet and come with the many shared spaces including coffee shops, bars, gyms, libraries and relaxing spaces such as rooftop greenspaces. Ziroom has already seen much success and has made the idea of co-living “cool and desirable”. The trend of co-living seems like it will continue to spread through Asia, while it becomes a mainstay in living in the west.
Technology in Real Estate
Blockchain is here and it is not going away. If you are not yet familiar with blockchain, here is a short explanation: at its most basic level, blockchain is literally just a chain of blocks. Blocks store information about transactions like the date, time, and dollar amount of transactions. In simple terms, it is a way to store transaction information in a decentralized data base. Real estate transactions are, for the most part, conducted in offline engagements and transactions. Blockchain has opened up a way to change this in the future.
The introduction of smart contracts in blockchain platforms now allow assets like real estate to be virtually “tokenized” and be traded like “cryptocurrencies”. Because of this, blockchain could remove the need for Brokers, Lawyers and Banks. Blockchain can assume functions such as listings, payments, and legal documentation on a real-time basis. Cutting out these intermediaries will result in buyers and sellers getting more out of their money, as they save on commissions and fees charged by third parties, and also makes waiting periods caused by human delays and interactions non-existent. All of this could lead to a more inexpensive and efficient way to buy and sell property without dealing with banks or other slow processes.
A future with A.I. We have all heard of Artificial Intelligence and have seen it implemented in many different parts of our life such as smart cities, big data mining, Siri, Tesla, Alexa, etc. The future of A.I. is very bright and its limits are endless. As of now humans have just scratched the surface of Artificial Intelligences uses. As for real estate, there are already opportunities to use A.I.
Machine learning can help with property management by detecting suspicious spikes in energy use by analyzing weather data to give managers ways to save money. As for selling homes, A.I. can find homes that clients would like, much faster and easier than any human. With an input of data, it can use algorithms to determine every listing that falls into predetermined categories. It can learn more about the client and use A.I. to determine brick colors, appliance, layout designs, size, yard, etc. In the future, home selection, commercial site selection, etc. will be a far more accurate and quick process with the use of A.I. Those who use this technology will be able to anticipate rent, expense, and sale price fluctuations, or identify the perfect timing for selling property to optimize returns. Real estate, as a whole, is normally late to innovations. Being a first adopter to these new technologies will give you a true advantage.
Embrace the change – be an early adopter
In the coming years, the real estate space will be seeing some major changes. Yes, there will be some difficulties, but by and large, many great new opportunities will exist. The key for the coming decades will be to embrace and be a first adopter to change. With these advances happening so rapidly, what would have been months behind in the past, will now be equivalent to years behind in the future. New innovations will happen at an even faster rate, and if you do not adjust fast enough, you will be left in the dust. So, go out there and create a better future for yourself!
Written by: Jett Scarborough
MarketSpace Capital, LLC is a Houston, Texas-based private equity real estate development firm focused on ground up developments and value-add investments throughout the United States.
Disclaimer: *For sold properties, actual sales price is reported. For active investments, the Estimated Current Value is based on the Managing Member’s estimate of current value. Recent acquisitions are generally valued at the acquisition price. Values may be internally prepared. This web-page/website is for informational purposes only and is qualified in its entirety by reference to the Confidential Private Placement Memorandum (as modified or supplemented from time to time, the “Memorandum”) of any offering of MarketSpace Capital.