CIO and COO, MARK
head of investments, Europe, Oxford Properties
MD global strategic capital, Prologis
executive MD, global investment management, Greystar
Is regulation likely to impact the sector?
WF: Creating more affordable housing will be a huge focus of both governments and the industry, because there is not enough being delivered to meet demand, particularly for the middle market. There are forward-thinking countries and municipalities creating a logical roadmap for how housing can be built faster and less expensively. But there are others where it is difficult to add new supply because planning approval takes a long time, is very expensive and risky. There, we sometimes also face the risk of unknown, pending regulation. Those things drive lower supply, which exacerbates the issue of affordability. But smart regulation, which helps to allow development and increase supply, is welcome.
KK: Almost everyone thinks that pressures from investors, occupiers and regulators for more sustainable logistics operations will only increase in the coming years. At a minimum, owners need to be at the forefront of the requirements today, but real estate is a long-term business, so they must also anticipate what those requirements are going to be in the future. For example, all new eligible Prologis buildings will have solar-ready roofs, even if installing the panels in some cases might not be viable today, because within five to 10 years it may well be a requirement.
PL: The sector will have to do much more, much faster to meet environmental performance thresholds in Europe. Decarbonization is already one of the main objectives for several European countries, and the rate of change is likely to only accelerate further. For owners of non-prime assets, complying with regulation will be extremely challenging. The US is still some way behind on this, but that will evolve.
JK: In many countries, planning and zoning law has focused on regulating retail much more than office or residential because it had the biggest impact on small businesses, noise and traffic. Retail is now far less impactful because it is shrinking and spreading out, adapting to the urban environment around it. Municipalities are waking up to the fact that the problem is no longer too much retail, but how to ensure the survival of what they already have.
What will be the most pressing capex considerations for investors?
JK: Retail is spreading out as part of mixed-use districts, but also being heavily reduced where it was present on upper floors. Vertical retail, with outlets on the upper levels of multi-story shopping centers, no longer works except in areas of very high population density. We will see a massive wave of repurposing to mixed-use, with a mix of retail and gastronomy kept at ground or minus-one level, where it still commands the highest rents. Rents for office and other uses increase on upper floors, so repurposing can generate additional value. Repurposing is possible provided flexible bridge debt at the right price can be secured from alternative lenders, prior to refinancing with banks at a lower cost when the asset is stabilized. It will also become the only way forward from an ESG perspective, because of the carbon impact of demolishing to build new.
PL: Many buildings will require considerable capital investment to meet the needs of modern occupiers, and that will be fine where managers can attract the right occupiers to generate the value needed to cover the margin. But that is only possible for the best locations. A significant proportion of the market, especially in secondary locations, will face an issue because it will be impossible to increase rents enough to cover the capex necessary for repositioning. Conversion of those buildings will be a major trend in the coming years, when values for that type of product have fallen far enough for it to be viable.
WF: In the US, there is a huge market in the acquisition, renovation and repositioning of older pre-2000s apartment blocks. In fact, this stock provides for much of the attainable housing product. In Europe, most of the existing rental housing stock is individual investor-owned units in older buildings, so as environmental regulation is tightened, it will force landlords to either spend capex or sell their unit. That will further reduce supply and create more demand for purpose-built and professionally operated new generation product, accelerating the institutionalization of rental housing. Another example of where capex will be needed is to modernize amenity space, which is even more valuable for people spending more time at home.
KK: The most obvious capex requirement will be for energy efficiency measures such as solar-ready roofs, improved insulation in temperature-sensitive areas/products and LED lighting. Owners who don’t commit to those additional costs now will find it very expensive to do so in five to 10 years. Another significant capex expense will be the infrastructure required to support various new technologies, such as electric vehicles, advanced scanning technology and automation that will enable logistics operators to track each individual product across its whole life cycle.
How is the design of real estate likely to evolve?
PL: Ten years from now, core prime product will have more of a mix of uses, more amenities, more services, and more flexibility. There may also be a move toward multi-let buildings and away from single occupiers. Technology will play a key part in the way that we manage buildings, especially to collect data on energy consumption and emissions. Because of environmental concerns, planning authorities will not give as many permits for new ground-up development. Instead, investors need to think about selecting the buildings that are the best placed for retrofitting, because not every building can be converted easily.
KK: Logistics buildings were once just sheds, but have now become much more sophisticated and a key component of the supply chain. For last mile products in particular, a trend towards specialization will continue. They might use a building to store a product of a specific size at a specific temperature, or need one with access to more power for energy-intensive usage such as electric vehicle charging. Logistics operators will need to deliver more products, more quickly, to more people, and that means getting closer to them. For some businesses, a particular plot of land could be so important because of its proximity to customers that the economics of a multi-story building make sense.
JK: The influx of people to large urban centers that offer job, culture, leisure and education opportunities has returned post-pandemic, which means that urban densification will continue. In retail, location will be everything, and retailers will be very picky about the areas they select to open fewer and bigger stores, in which their physical and online offer will be combined.
WF: We have to figure out a faster, less expensive way to deliver housing that has less of an impact on the environment. One way to do that is building using modular technology, and 3D printing is another example. While site-built construction has become much safer over the last 30 years, it has not evolved dramatically. We are going to see a major trend over the next 10 years of instituting new technology to speed up housing delivery.
How will demographic, geopolitical and climate trends impact the sector?
WF: The proliferation of purpose-designed, professionally-operated rental housing in major global cities will continue, and in 10 years’ time it could be a truly global asset class like office, logistics and retail. It is a segment that is very demographically-driven, and the urbanization that we have seen for more than 50 years is not going to stop. As populations grow and people continue to migrate to cities, the demand for high density housing increases. In the US, we will see more people moving out of high-cost cities into lower-cost, higher-quality-of-life cities. In Europe and Asia, people will continue to move into the established cities where jobs and entertainment are located.
JK: Much retail real estate will remain more of a liability than an opportunity, because in many markets the full impact of online sales has still not set in. In many cases locations where physical retail is still holding up are poorer areas that still have limited online penetration. As those economies develop, stationary retail will be increasingly impacted. Hypermarkets may eventually feel an even greater impact from ecommerce than fashion retailers. Fashion chains have been quite successful in adopting “clicks and bricks” strategies. However, that is more difficult for hypermarkets to do, and they currently make much of their margin from non-food items. The model that is emerging is smaller, urban supermarkets for convenience shopping, linked with an online offering.
PL: The workplace trends that we have seen develop over recent years, and which were amplified by covid, mean that there will be less overall demand for offices. But there will still be a strong need for space in each of the global regions, although investors will have to be much more selective and much more mindful of the type of product they deliver and where they deliver it. There will be continued demand for prime space which offers flexibility and strong ESG characteristics in amenity-rich locations, but also a widening pricing differential between core and non-core assets.
KK: The legacy of recent disruptions to supply chains, which have extended beyond natural disasters, congestion and labor disputes to include geopolitical issues and the pandemic, will prompt occupiers to focus on higher inventories to increase their resilience and their need for logistics real estate.