The Bank of England has forecast that, in the next 20 years, 15 million jobs in the UK could be replaced by robots, equal to broadly half of the workforce.
Many of the white collar jobs in insurance, legal and accounting lost will be replaced by algorithms, while many blue collar jobs in logistics, manufacturing and administration will be lost to a combination of robotics and artificial intelligence. As well as fewer workers, the robots that replace them will use space more efficiently. Virtual reality will allow us to create virtual work environments, making the need to physically go to work obsolete.
The outlook, therefore, is for less commercial real estate. Further, the pace of this dissipating requirement is accelerating, with computing power doubling per unit cost every two years (as per the now 50-year-old Moore’s law).
When I consider these factors, I can’t help but think the market is too conservative. At Palmer Capital, we are trying instead to be radical when predicting what real estate will look like, given we need to build tomorrow’s buildings today.
Across all sectors, we think we will build fewer but better commercial assets that are configured to attract the shrinking pool of corporate occupiers. However, we also see demographic growth in birth rates and people living longer. Alongside, most people are predicting more urbanization, with the UN forecasting 86 percent of the developed world to be urbanized by 2050. These trends will impact each sector slightly differently.
In offices, we need buildings able to motivate people to travel to work. Better integration into a mixed urban community, better communications – both transport and media – and a more interactive social aspect to the internal environment are likely to become the baseline. People will expect to commute easily and use personal devices to manage their experience of working – an app to co-ordinate relevant co-workers to hot desks, or maybe tailor the micro atmosphere in the area.
The best buildings will attract tenants prepared to commit to lease the building. Other tenants will want operational flexibility and to leave property-related risks to the landlord. The digitization of building information will allow all landlords to run and manage office solutions and allow better pricing of occupational costs through the lifecycle. New offices should be cheaper to design, build and run, with better energy and space efficiency. As offices will be a ‘luxury’ item for corporates, obsolescence will be a constant threat.
In logistics, buildings will be designed foremost for cubic size, as height is less of a constraint for robots. Landlords in this sector should ask whether online retailers will want dock levers and yard space – and will smaller autonomous vehicles, whether by road or air, just require parking and level loading? Will last-mile logistics be as essential as certain sector experts believe once drone technology is widely embraced?
In retail, we think consumers will value the convenience of purchase and delivery – which, with the internet, virtual reality and 3D printing, can largely be done from the sofa. Relatively few retail centers will thrive, and these will be where people congregate for social and leisure activities that include retail. The remaining space will need to reinvent into the only asset type we really see growth in: residential.
We see residential as being one of the few safer areas of real estate investment, whether for sale or rent, whether affordable, sheltered or private market. Technology will have the least impact on this asset class, reducing the pace of change that creates obsolescence risk for developers. Where else does a 500-year-old building sell for more than the five-year-old building next door?
A new digitized world is not only coming, but already here. Indeed, it is possible that Trump, Brexit and other recent shocks may, in part, be symptoms of a societal shift resulting from technology hollowing out increasingly larger parts of the job market. Investment managers need to think further ahead to match the speed of this change. We need to be more creative and thematic when developing and owning property if we want to attract the occupiers of tomorrow, and, for that matter, the capital to house them.