Credit: allvision | Adobe StockSpace 3.0: Real estate for society of the future
Industry leaders contemplate the transformation of traditional RE: merged asset classes, third-place offices, and operational RE
November 6, 2023Real Estate
Written by Helen Richards
In 2021, following tremendous shifts in the real estate industry, GRI Club held the Real Estate Reset Day to reconvene regarding strategy and market outlooks post pandemic. Two years later, members gathered once again to assess where the market sits at present, and more specifically, the challenges and opportunities involved in Space 3.0 - the new era of tenant demand.
Anthony Slumbers, Real Estate Tech Strategist from Real Innovation Academy, joined as discussion provocateur, asking where the real estate industry will be in five, ten, and twenty years time.
Opinions among participants varied regarding the extent of the importance of entering into the world of operational real estate, however one topic brought unanimity - real estate is no longer valued on the location and the bricks and mortar; it is about the value that can be brought to the end user of the space. Putting a number to this value and understanding the risks are among the challenges.
One participant reminded the group that the current trend of strong rental growth may not last indefinitely, making it crucial to prepare to offer attractive, in-demand products.
The merging of traditional asset classes is one approach. Rethinking what constitutes a home or an office allows the creation of new and unique types of assets. A prime example is the hybrid hotel-office model, successfully executed by Zoku - a business hotel operating in Amsterdam, Copenhagen, Paris, and Vienna.
Zoku gained prominence during the COVID-19 pandemic. Their spaces are uniquely designed with the bed being cleverly concealed, making way for multifunctional areas like a kitchen table that doubles as an office desk and dining space. This creative approach has not only attracted remote workers but also those seeking flexible spaces that aren't classified as traditional offices - especially during the pandemic while returning to the office was prohibited.
The company has also innovated in the hotel lobby, creating co-working space. This approach increases the value provided by a space which is often redundant. In the morning, it serves breakfast to hotel guests, by 9 am coworking members occupy the space, and in the evening there is a fusion of the two. On Friday evenings, it hosts live music, attracting local residents, and on weekends they serve brunch.
The merging of various functions within a single space is a testament to how creative thinking can redefine asset classes. Many operational real estate models have been driven by the densification of space, while this merging of functions works through the intensification of space.
Traditionally, real estate has adhered to strict silos when it comes to asset classes, funding, regulations, and licensing. However, our lifestyles have evolved significantly. The way we work and shop, particularly with the rise of remote work and third-place offices, demonstrates a shift that the real estate industry can't ignore.
The COVID-19 pandemic accelerated this change, with office utilisation plummeting. Before the pandemic, office utilisation was around 65% for a standard 40-hour workweek, and 50% for a 68-hour workweek. During and after COVID, it dropped significantly, with spaces currently appearing empty for up to 90% of the time.
This is unsustainable both financially and environmentally.
As potential consumers have more choices and the freedom to choose where they live and work, the question becomes, "What are you offering me?" In this context, even traditionally non-brand-conscious asset classes, such as student housing, may start to consider branding in their decision-making process.
Humans align themselves with brands that resonate with their values and identity. The real estate industry is fundamentally in the "people industry," and value must be created for the end user, while also outsmarting the competition through innovation.
This perspective represents a shift from viewing real estate as a bond to understanding it as a dynamic business. Valuation in this context comprises three key categories: the physical attributes of the building, the creditworthiness of the tenant or occupier, and the operation within the asset.
The third aspect, which pertains to the quality of operation, is often overlooked in traditional valuations, but it's becoming increasingly significant. While location is a tangible factor that can be valued, the value derived from the income generated by a business is more elusive. Businesses are constantly changing and evolving, and predicting their trajectory can be challenging.
Long leases may not necessarily guarantee the tenant's long-term survival. The quality of the tenant becomes pivotal in these cases. Event participants showed hope that, over time, as the industry gains more experience and witnesses more of these cases, this challenge may normalise.
Other participants claimed that the attractiveness and value of an asset is in its demand, for which there are clear external indicators - how many people are wanting to purchase that asset?
Of course, incorporating the operational and business aspects into valuations presents opportunities and risks that come with a broader range of considerations, impacting profit and loss statements.
Ultimately, the key question is whether the business conducted within an asset represents the best use of that asset.
Traditionally, office space was considered a reliable and low-risk investment, but this is no longer the case. As one participant pointed out, presenting a pension fund with an impressively sustainable, high-quality building, but which is empty 90% of the time, isn’t an attractive investment.
The participant continued to explain that pension funds are increasingly looking to diversify for three reasons:
While investors may not allocate all their resources to these new asset classes, they are certainly inclined towards diversification, recognising that the key to success lies in adaptability and risk mitigation in an increasingly dynamic market.
While a building's location and construction quality play vital roles, it's equally crucial to operate it in a manner that adds value for tenants. Differentiation is key in a competitive environment, and real estate companies are exploring strategies to adapt, with new models, innovative business approaches, and fresh ideas.
Whether all will adapt, or if plain and simple real estate will survive the transformation, we will only know as the story unfolds.
Join GRI Club Europe to participate in the conversation and gain invaluable insights into strategies and perspectives in the ever-evolving real estate market.
Next year’s GRI UK & Europe Reunion 2024 will take place on February 21-22 in London, and is fast becoming GRI’s flagship event for real estate players active in the UK, as well as those with diversified pan European portfolios across countries and sectors. Read more and register here now.
In 2021, following tremendous shifts in the real estate industry, GRI Club held the Real Estate Reset Day to reconvene regarding strategy and market outlooks post pandemic. Two years later, members gathered once again to assess where the market sits at present, and more specifically, the challenges and opportunities involved in Space 3.0 - the new era of tenant demand.
Anthony Slumbers, Real Estate Tech Strategist from Real Innovation Academy, joined as discussion provocateur, asking where the real estate industry will be in five, ten, and twenty years time.
Opinions among participants varied regarding the extent of the importance of entering into the world of operational real estate, however one topic brought unanimity - real estate is no longer valued on the location and the bricks and mortar; it is about the value that can be brought to the end user of the space. Putting a number to this value and understanding the risks are among the challenges.
Introduction
Slumbers kicked off discussions introducing the “four (plus one)” significant challenges regarding the new era of real estate:- Sustainability - The industry is facing a wave (or wall) of regulations to be implemented by 2030 - a mere seven years from now. UK regulations will demand offices to be at least grade B in energy efficiency. Currently, 80% of London’s office market is graded lower than grade B, meaning 80% of current office stock will not meet regulations by 2030. Many are banking on these regulations being “kicked down the road”, however as Slumbers pointed out, the pressure comes not only from regulatory bodies, but also real estate’s customers. Tenants are demanding sustainable and green assets.
- Hybrid or remote working - An office culture come-back continues to draw debate, with those claiming we will inevitably return to the office, and those claiming we will not. Slumbers forcefully declared the latter - office culture will never return to what it was in 2019. The market for remote working tools is huge and it is the future. It isn’t necessarily about working from home, but working from “somewhere else”. The youngest working demographic have never worked in an office for five days a week, and they will never work in an office for five days a week, claims Slumber. The office market is being reinvented, which leads to the next challenge.
- Obsolescence - Assets may be obsolete due to sustainability problems, or simply because they don’t provide the right product. A Cushman & Wakefield study reveals only 15% of US office inventory in 2030 is expected to be new Class A supply. Around 60% will require some form of upgrade to overcome obsolescence, and the remaining 25% will be “increasingly undesirable” and “need to be reimagined and made relevant for the future.”In Europe, the story is similar, with only 25% of office inventory expected to be up to scratch in 2030.
- Cities - As work culture changes, everything else changes. Slumbers provocatively asked: What is an office? What is a home? Where do we live? Why do we live there? The substantial changes in office culture will have knock-on, second and third-order consequences for all types of real estate.
- And, the “plus one” challenge: Artificial Intelligence - AI will be irreversibly huge and affect all real estate customers. It is a general purpose technology and will be everywhere, similar to the internet, electricity, and the combustion engine.
The hybrid GRI meeting gathered participants both online and in person. (Image: GRI Club)
Merging Asset Classes
Many players in real estate already participate in operational aspects of the industry, this was nothing new for many of the participants at the event. However, developing real estate assets for society of the future requires a certain level of creativity, and stepping away from the stable, sturdy idea of real estate that investors have relied on and enjoyed for so long.One participant reminded the group that the current trend of strong rental growth may not last indefinitely, making it crucial to prepare to offer attractive, in-demand products.
The merging of traditional asset classes is one approach. Rethinking what constitutes a home or an office allows the creation of new and unique types of assets. A prime example is the hybrid hotel-office model, successfully executed by Zoku - a business hotel operating in Amsterdam, Copenhagen, Paris, and Vienna.
Zoku gained prominence during the COVID-19 pandemic. Their spaces are uniquely designed with the bed being cleverly concealed, making way for multifunctional areas like a kitchen table that doubles as an office desk and dining space. This creative approach has not only attracted remote workers but also those seeking flexible spaces that aren't classified as traditional offices - especially during the pandemic while returning to the office was prohibited.
The company has also innovated in the hotel lobby, creating co-working space. This approach increases the value provided by a space which is often redundant. In the morning, it serves breakfast to hotel guests, by 9 am coworking members occupy the space, and in the evening there is a fusion of the two. On Friday evenings, it hosts live music, attracting local residents, and on weekends they serve brunch.
The merging of various functions within a single space is a testament to how creative thinking can redefine asset classes. Many operational real estate models have been driven by the densification of space, while this merging of functions works through the intensification of space.
Traditionally, real estate has adhered to strict silos when it comes to asset classes, funding, regulations, and licensing. However, our lifestyles have evolved significantly. The way we work and shop, particularly with the rise of remote work and third-place offices, demonstrates a shift that the real estate industry can't ignore.
The COVID-19 pandemic accelerated this change, with office utilisation plummeting. Before the pandemic, office utilisation was around 65% for a standard 40-hour workweek, and 50% for a 68-hour workweek. During and after COVID, it dropped significantly, with spaces currently appearing empty for up to 90% of the time.
This is unsustainable both financially and environmentally.
Branding
Whoever said you can’t brand a building will be hastily corrected in the coming years. Brands have become a crucial aspect of staying competitive in a changing landscape.As potential consumers have more choices and the freedom to choose where they live and work, the question becomes, "What are you offering me?" In this context, even traditionally non-brand-conscious asset classes, such as student housing, may start to consider branding in their decision-making process.
Humans align themselves with brands that resonate with their values and identity. The real estate industry is fundamentally in the "people industry," and value must be created for the end user, while also outsmarting the competition through innovation.
Valuation
Valuation in the realm of operational real estate can be a complex endeavour, primarily due to the challenge of managing risk and certainty. Convincing appraisers of the sustainability of a business model over time can be tricky, especially when it's difficult to quantify the operational value.This perspective represents a shift from viewing real estate as a bond to understanding it as a dynamic business. Valuation in this context comprises three key categories: the physical attributes of the building, the creditworthiness of the tenant or occupier, and the operation within the asset.
The third aspect, which pertains to the quality of operation, is often overlooked in traditional valuations, but it's becoming increasingly significant. While location is a tangible factor that can be valued, the value derived from the income generated by a business is more elusive. Businesses are constantly changing and evolving, and predicting their trajectory can be challenging.
Long leases may not necessarily guarantee the tenant's long-term survival. The quality of the tenant becomes pivotal in these cases. Event participants showed hope that, over time, as the industry gains more experience and witnesses more of these cases, this challenge may normalise.
Other participants claimed that the attractiveness and value of an asset is in its demand, for which there are clear external indicators - how many people are wanting to purchase that asset?
Of course, incorporating the operational and business aspects into valuations presents opportunities and risks that come with a broader range of considerations, impacting profit and loss statements.
Ultimately, the key question is whether the business conducted within an asset represents the best use of that asset.
This new perspective on real estate shifts the view of real estate as a bond to a dynamic business. (Image: GRI Club)
Funding & Measuring Risk
The changing landscape of real estate raises important questions about who will fund these projects and how to provide secure investments. The concept of risk has gained prominence in this new paradigm.Traditionally, office space was considered a reliable and low-risk investment, but this is no longer the case. As one participant pointed out, presenting a pension fund with an impressively sustainable, high-quality building, but which is empty 90% of the time, isn’t an attractive investment.
The participant continued to explain that pension funds are increasingly looking to diversify for three reasons:
- Diversified income streams;
- Increased asset utilisation;
- Adaptability of flexible assets to tap into different market spaces and safeguard against external shocks.
While investors may not allocate all their resources to these new asset classes, they are certainly inclined towards diversification, recognising that the key to success lies in adaptability and risk mitigation in an increasingly dynamic market.
Conclusion
The next decade will ideally see real estate craft a master plan that integrates workplaces, living spaces, and more.While a building's location and construction quality play vital roles, it's equally crucial to operate it in a manner that adds value for tenants. Differentiation is key in a competitive environment, and real estate companies are exploring strategies to adapt, with new models, innovative business approaches, and fresh ideas.
Whether all will adapt, or if plain and simple real estate will survive the transformation, we will only know as the story unfolds.
Join GRI Club Europe to participate in the conversation and gain invaluable insights into strategies and perspectives in the ever-evolving real estate market.
Next year’s GRI UK & Europe Reunion 2024 will take place on February 21-22 in London, and is fast becoming GRI’s flagship event for real estate players active in the UK, as well as those with diversified pan European portfolios across countries and sectors. Read more and register here now.
