Perspective

Markets

Why global cities can still thrive despite Covid-19’s impact


Hugo Machin

Hugo Machin

Fund Manager, Global Cities

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Tom Walker

Tom Walker

Co-Head of Global Real Estate Securities

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The Covid-19 pandemic has accelerated our digital future with remote working set to become the norm for many people. But although fewer people will be travelling into cities each day to work in the knowledge economy, the interactions they have with colleagues and clients in the city’s urban core – the most connected part of the city – will be of greater importance. So, rather than diminishing the power of global cities, these changes will potentially make them even more valuable.

Cities will still be important, despite an increase in remote working

Technology has allowed huge numbers of people to work from home during the current lockdown, supplanting the need to be in an office on a daily basis. At Schroders, 98% of the workforce is now working remotely. This would not have been possible 20 years ago. The current pandemic has accelerated our digital future and going forward many people may choose to continue to work from home.

As such, we envisage that there will be fewer people who work in the knowledge economy travelling into city centres each day. However, when people do come into the city, and particularly the urban core (the most connected part of the city), they will have a greater number of interactions, making them more important to the worker and the city’s economy. Cities nurture and monetise ideas.

Before the Covid-19 pandemic, demand for real assets in cities was increasingly derived from the digital economy. Data centres and warehouses were the prime beneficiaries, while shopping centres were being shuttered. Demand for office space was already weakening as people worked more flexibly and utilised the services of flex office companies. This trend has accelerated.  

Buildings will be repurposed

The way we use buildings in global cities will change. However, this is nothing new. In London, for example, old warehouses by the side of the Thames that were once used for storing commodities brought to the city’s port by ship, have been repurposed as high-end luxury housing.

The urban core will still be vital to the effective running of a global city’s economy. For example, life-science buildings near universities are hubs for biomedical research. These assets contain specialist equipment used by researchers. Boston, which is arguably the world’s leading city for medical research, will become even more important, given the emphasis on healthcare and research.

Data centres and warehouses have already replaced the need for shopping malls. The reality is warehouses are beginning to physically replace retail parks; the value of warehouses close to large, affluent populations is now greater than the value of retail outlets. Transactions by large internet companies reflect their need to be able to distribute from where people use to shop from. This is a profound shift in land use.

The need for social distancing is a key factor that will hasten our digital future. Offices will suffer a collapse in demand, already witnessed by retail assets, in all but the most interconnected locations. Office buildings in secondary locations, outside of the urban core, will be the most at risk of being repurposed. With higher numbers of people working from home, it will make no sense for businesses to maintain these type of offices.

Most companies will prioritise their offices in the most connected locations or use flex office alternatives. This was already happening as flexible working ensured only the best connected offices remained relevant. This is bad news for office owners: less aggregate demand and customers controlled by flex office providers will reduce pricing power even further.

Excess office space will need to be re-purposed in the future, unless it is in a city’s urban core (the most essential part). Demand for higher and better use will, in all likelihood, see office assets converted in the way retail assets are now being converted.   

Urbanisation remains a long-term trend

Urbanisation is a long-term trend which has been accelerating since the earliest days of the industrial revolution. we believe Covid-19 is not going to derail that. Economic activity is not going to move back to rural areas and the strongest cities, such as London and New York, will continue to create economic opportunities. We believe cities remain the most efficient way for humans to live and work.

One of the main advantages of global cities is the ability for industries to cluster together, boosting efficiency by sharing knowledge and expertise. This attracts external capital (venture capital) creating a self-fulfilling prophecy of investment and returns.

In fact, some global cities’ expertise may become more concentrated, such as finance, media and technology: as people travel less, the need to be centred in the recognised hub of your professional field will increase. This would be Los Angeles for entertainment or London for insurance. Again, it is about maximising the interactions.

From an economic perspective, global cities have huge buying power, often referred to as mass points of consumption. Post Covid-19, global cities will continue to be the drivers of GDP for the country and region they are located in. However, we see the demand for asset types changing, particularly in office buildings, and the need to be located in physical hubs that excel in specific fields accelerating.

 

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