Outlook 2018: Global cities
The rise of the global technology giants will increasingly impact real estate investing.
An outlook that incorporates a view on the global economy is highly likely to be wrong. It is simply too hard to know where positive or negative news might come from and how markets will then react to that news.
Where it is possible to provide an outlook, however, is relating to our area of expertise: investing in specific cities and in specific real estate sub-sectors.
Second industrial revolution
We think the world is changing at a rate that has not been witnessed since the Industrial Revolution. This has profound implications for where we live and how we use buildings.
As the world industrialised in the mid 19th century, the new factories required capital formation in order to grow. Crucially, the bankers, lawyers and accountants who facilitated this financing did not need to be near to these factories. This white collar expertise started to form in larger conurbations – cities. The advent of new technology – cheap postage, the telephone and electric lighting – meant buildings in cities could still serve heavy industry located more remotely.
The advance of technology as a catalyst for city formation was an inflection point in the history of our cities. We are at the second inflection point.
The parallels that we draw today are the sheer scale of the companies dominating the economy and our daily lives. We are, of course, talking about technology companies.
The difference between today and the 19th century is that the largest employers were outside the city, now large technology companies need to be inside the city. This increases or decreases demand from companies for certain locations. We call this the re-centralisation effect.
These technology behemoths are major employers and need a large, well-educated workforce. Unlike the large employers of the industrial revolution – the factories – the tech companies need to be in cities to attract the right calibre of employee and take advantage of mass transit to get people to the workplace. The technology sector is the reason for re-centralisation.
This tech demand impacts on which cities do well and which don’t. We are witnessing a bifurcation in the economic strength of global cities, as more regional centres become marginalised. Only a few cities will be able to accommodate the largest employers, resulting in a winner takes all scenario.
Investing in specific locations, as per the Schroder Global Cities index, has never been more important.
The top 50 cities for real estate investment
Source: Schroders. For the basis of the rankings see here. Darker blue circles indicate a higher global city ranking score. The size of the circle represents the size of our exposure to that global city.
The impact of tech on real estate
Technology companies are not only a source of huge employment which impacts the economic health of a city, but their products impact changing demand patterns for real estate in those cities.
Technology is changing the way we use real estate. Take ecommerce as an example. Currently 16% of all retail sales are transacted online in the US.
Source: Morgan Stanley as at November 2017.
The impact this shift is having on demand from retailers is re-shaping bricks and mortar retail. If an estimated 84% of spend is not utilising ecommerce, then there is a long runway, as younger ecommerce adopters replace older bricks and mortar users. Already we are seeing department stores go bust and numerous other businesses succumbing to the power of Amazon. The data would point to the fact that this is just the beginning.
Again, the parallels to the Industrial Revolution are clear. In Victorian times, the advance in manufacturing opened up new areas of demand and caused huge societal change.
Fast forward to today and technology is impacting almost every area of our lives and the boundaries are being re-drawn. The way we shop, travel, communicate and source information is being undertaken from handheld devices.
The consequences of this change are driving investment returns.
What’s hot; what’s not
The use and adoption of new technology is reshaping real estate and this demand is occurring at the points of mass consumption – cities.
Let’s provide some examples. The demand for warehouses has risen as packages are ordered online; the demand for data centres has risen as more data is transferred and stored; the demand for flexible office providers has risen to accommodate different work patterns.
The flip side to this is a drop off in demand for physical retail stores; and a drop off in demand for de-centralised office space.
The point that is born out is this: if you do not own the right type of real estate, there is a very real danger that technology has done to your investment what Amazon has already done to the book trade and Uber is now doing to taxi services. Boundaries are being re-defined, ‘disruptors’ are moving in and real estate is not immune.
We do not think that this change has reached its denouement. Far from it. We observe a number of broad changes that are just beginning to play out.
One interesting paradox is that the ability to work remotely does not result in de-centralisation. Quite the opposite. The rise of the flexible office providers is proof that massing of skills is more important than ever to build networks. The difference is that the location of that workspace is not the same building every day. We are moving into the era of remote working, as distinct to homeworking. Technology allows us to work almost anywhere; flexible office providers such as WeWork facilitate it.
Never has investing in the right assets in the right locations been more important. The need to re-centralise is based on knowledge sharing but out of multiple locations, not just one.
Large companies are massing more people into fewer places and technology is changing demand patterns, rendering some types of real estate hugely valuable, others obsolete.
Using the unique global cities approach of identifying companies with the best cities exposure, we can invest in key global locations and pick the demand pockets within those locations.
Second guessing the direction of the global economy is impossible. However, we remain optimistic that our strategies will provide durable returns to our clients, particularly if we do move into more uncertain times.
For the other 2018 outlooks please visit here
Important Information: The views and opinions contained herein are those of Schroders' Global Cities Team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or schroders.com contains additional disclaimers which apply to third party data. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London, EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.