Nuveen: There’s a world of opportunity in cities

For real estate investors, developers and occupiers, there are a multitude of regional nuances to keep in mind when choosing cities, says Nuveen Real Estate

This article is sponsored by Nuveen Real Estate

The decision to live, work or invest in a particular location is more complicated than ever, with quality of life, costs and sustainability all among key considerations. For global capital, which is constantly moving across international borders, political developments and regulatory frameworks are other important issues.

In spite of these multifarious factors, city real estate continues to exude a powerful magnetism for workers, graduates, entrepreneurs and investors. PERE spoke with a global team from Nuveen Real Estate to understand more about the opportunities and challenges for cities hoping to attract investment, and the regional factors that investors should be aware of.

Donald Hall
Head of research, Americas

Stefan Wundrak
Head of research, Europe

Andy Schofield
Director of research, Europe

Harry Tan
Head of research, Asia-Pacific

Leo Chung
Director of research, Asia-Pacific

What are some of the main trends shaping city economies?

Andy Schofield: One of the major trends concerns the emergence of life sciences, medtech, biotech and renewables within city center locations. These sorts of innovations, when they can be combined with a high quality of life, represent a winning formula in terms of attractiveness.

The likes of Helsinki, Amsterdam, Dublin, Berlin, Barcelona and Madrid are just some of the European cities where life science is thriving. In Berlin, for example, the World Health Organization opened a new global hub for pandemic and epidemic intelligence last year. Some smaller cities are thriving, too. The likes of Utrecht, Leiden and Lyon are all performing well.

Stefan Wundrak: The cities doing best are those that are strong in terms of new business generation. Some are at the center of wider regional economic clusters, which enables them to enjoy network benefits where cities and suburbs reinforce each other. Many of the conurbations that could be described as up and coming, like Antwerp or Rotterdam, score highly for business friendliness, which ensures they attract a great deal of FDI from other parts of the world.

It’s also important for investors to consider demographic shifts within the countries where particular cities are located. The UK was doing well in this regard until relatively recently, for example, due to high levels of immigration, but that has shifted slightly of late. Conversely, the numbers in Germany are more promising. Although cities may not have much say in these national issues, they are certainly impacted by them in terms of their attractiveness.

Harry Tan: Demographic changes are having a huge impact on city economies in APAC. Increasing urbanization and the rise of the middle class are reshaping urban areas. China, for example, is predicted to have more than 220 urban centers with one million inhabitants or more by 2025, as well as eight mega-cities. These demographic trends will force governments to create new policies to meet emerging needs.

What are some of the main differences between global gateway cities and regional hubs?

Donald Hall: Global gateways tend to have more long-term advantages, with higher levels of immigration ensuring they remain dynamic. However, in the US, it has really been regional markets that have been strong of late, with the rise of work-from-home policies having an impact. Companies have figured out how to enable remote or hybrid work, which will continue to be an additional benefit to cities once termed ‘secondary.’ The challenge for these regional hubs is making sure they have strong infrastructure in place as they experience rapid growth.

SW: Gateway cities score really well in general, but you have to expect some sort of trade-off in terms of cost or quality of life. Europe is a bit different from the US in that it’s divided by language and national borders. Businesses and investors can’t choose from an entire country like in the US. European cities are also generally smaller than US cities, so if companies want access to a really big talent pool, they are somewhat restricted even if they look to global gateway cities.

As Donald mentioned, the pandemic and the emergence of flexible working have shifted the conversation slightly. People can move further out of the city center due to remote working, so the geographic boundaries of the city have expanded somewhat. That’s why we always use the economic boundaries of cities, not the political boundaries.

What are some of the sustainability risks and opportunities within urban areas?

AS: There are multiple pathways to net zero and the spectrum of city responses reflects this. At the same time, how quickly a country moves to adopt sustainable initiatives is key – cities always operate within their broader national confines. Nevertheless, city real estate investment has embraced the movement towards greater levels of sustainability and is working hard to comply with changing regulations.

Sustainability is one of the very few risk areas where Europe is better off than other parts of the world. The best performing cities in the region don’t face as many risks as those present in other parts of the world. Even in terms of sea level rises, for example, countries like the Netherlands have the technology to cope. As such, there are a lot of highly investable cities in Europe that score highly in terms of sustainability.

Leo Chung: Sustainability has already become a major theme in APAC, with many city leaders setting targets to reduce carbon emissions. Real estate is under increasing scrutiny as it accounts for nearly 40 percent of all energy-related carbon emissions globally. As such, governments mandate high sustainability requirements. In Singapore, for example, new office buildings must meet green regulations. In Australia, office buildings larger than 1,000 square meters are required to have the NABERS building rating. Across the region, more corporations are looking at buildings with green credentials to fulfill their ESG initiatives. Taking sustainability into account helps investors futureproof their real estate portfolios. It means they are better placed to withstand the effects of climate change.

What are some of the key ingredients city leaders need to focus on to make their local economies thrive?

SW: There are a few different things that real estate investors, developers and occupiers look for in an urban location. Cost is paramount, of course, so cheaper cities can be attractive. Being an open-minded, diverse area with a good quality of life and a robust mix of language skills is also important. Anything that city leaders can do to support this is helpful.

HT: City leaders can enact policies to enhance economic vibrancy. State policies that support the rule of law and stringent regulatory frameworks are also favored. Singapore is particularly strong in this area. Ultimately, we want to invest in cities with long-term resilience, so any municipal or national policies that help with this are appreciated.

LC: It is worth remembering that APAC cities are huge. Tokyo makes up a third of the national GDP of Japan. This is quite different from the situation in the US and Europe. In the US, there are perhaps one or two huge cities. As a result, this impacts how investors view cities as part of their real estate portfolio. A city leader in Tokyo, with its population of just under 14 million, has different considerations from a leader in, say, Leiden, in the Netherlands, which has a population of 120,000.

How are you viewing private real estate as an investment opportunity today?

DH: There are a lot of regional differences across all asset classes that make people hesitant before investing in private real estate, but, in the US at least, current fundamentals are strong. Coming out of the global financial crisis, a lot of developers and banks got hurt financially so you saw a lot less construction. As a result, a lot of markets have been undersupplied, so you entered into the pandemic with relatively strong demand.

Of course, the pandemic created supply chain issues. While it’s true that we do have some pockets of oversupply, a silver lining of recent supply chain issues has been less-than-expected supply risk.

SW: There are a lot of inflation-linked leases, but it’s important to remember that after a lease expires, you are back at the mercy of the market. In some residential or self-storage markets, you want happy tenants that are comfortable staying put for a long time or you risk a lot of churn. With commercial leases, you get a lot of pushback, so I don’t expect a 100 percent uplift in terms of inflation.

LC: We still hold the long-term view that real estate is a solid investment choice; it is, historically, a very stable asset, providing less volatility than other asset classes. This will remain attractive, especially to institutional investors. At this moment, there is a lot of macroeconomic uncertainty, so we need to be more selective in our city choices to ensure we have a real estate portfolio that works for the long term.

HT: Our underlying investment philosophy is selecting cities that are resilient and backed by strong mega-trends. We are conscious of different economic cycles and we take decisive tactical decisions that allow us to pick the right markets at the right times. Within real estate, some markets are more vulnerable to the current economic disruption, while others are more resilient. We aim to help our clients find city real estate that falls in the latter category.

The WHO chooses Berlin

Berlin is gaining renown as a center of health expertise.

“One of the most prominent examples of life science investment boosting a city is Berlin,” says Nuveen Real Estate’s Andy Schofield. “By combining a focus on innovation with good quality of life scores, it has attracted significant attention from the life sciences sector.”

This attention is, perhaps, most obviously demonstrated by the WHO Hub for Pandemic and Epidemic Intelligence, which was opened in September 2021 following a $100 million investment from the German government. The decision to set up the hub in the German capital forms part of the city’s plan to become a world-class center for global health. Berlin is already home to the Global Health Hub Germany, as well as 11 digital health accelerators and incubators. First-rate universities, including Humboldt University, the Free University of Berlin, and Charité – Universitätsmedizin, where the WHO hub is temporarily operating, are additional attractions for urban developers.