The future of commercial real estate in Europe
Real Estate Predictions 2018
Social, economic, ecological, political, and technological disruptions will change the way we work, live and shop. These developments will have a significant impact on today’s established market players in the Commercial real estate sector and their share of the value chain. Who will be earning money and who will become obsolete in our future real estate world?
08/03 - Written by Jörg von Ditfurth and Hendrik Aholt
- What will the real estate markets look like?
- Who will earn money with real estate assets in the future?
- Real Estate Predictions 2018
What will the real estate markets look like?
For this RE prediction, experts of Deloitte Real Estate Consulting teamed up with the colleagues from the Deloitte Center for the long view. Using the innovative approach of Scenario Thining paired with Data Analytics, the following prediction shows what we believe will be the most likely scenario for the future of the commercial real estate industry:
The current development of technologies in an era of digitization and automation, will lead to a massive disruption of the industry. Today’s job profiles will change as well in their demands as in the way the work is executed. Low-skilled, blue-collar workers without digital expertise will become obsolete to a significant extent. White collar-jobs will be more data-driven and often be performed remotely, changing the demand for office spaces, their fit-out and their infrastructure. Increasing gaps in the incomes of the educated working class and unskilled workers are likely to emerge. Due to that, new social concepts like unconditional basic income will be evaluated and implemented. This development will reshape the commercial real estate landscape fundamentally, changing the market players and their share of the real estate value chain.
How we work
The total amount of office square meters is likely to reduce, due to the tendency to work remotely, but people will still go to the office from time to time. The office spaces will be mainly downtown in fully modernized or newly built high-tech buildings, which are highly efficient and dedicated for to interaction and teamwork. It is where colleagues or business partners will meet to develop ideas and make direct social contacts. Public Transport and autonomous cars will reduce time effort to reach offices.
How we shop
The overall demand for retail real estate assets will further decline due to online shopping or even 3D-printing at home. Just-in-time logistics are standard; deliveries by drones are safe and fast. Logistics centers are located at the periphery of the city, releasing space for other uses in the city center. Luxury high street miles will probably still be existing, thanks to their leisure “see-and-be-seen”-function, but smaller retail shops in decentralized regions will see increased pressure. Shopping malls will need to develop more event-driven concepts that meet the demand of new customers, to experience rather than to shop.
Who will earn money with real estate assets in the future?
In the following chart, we forecasted the distribution of the future rental income between the market participants, compared with an estimated status quo. As a basis, we have set today’s market rental level as 100.
Currently, the direct cashback for real estate investors arises from the rental income. In the future, a second source of value will become more and more relevant. The worth of the collected user data, which is likely to become a component of rental repayments to the investors. The “classic rent” as we know today will decrease, but taken the value added of the collected data into account, the total value that can be generated from the assets will increase. The overall price movement will be moderate, since digitization increases productivity and efficiency and lowers the demand for commercial real estate in general, leading to an oversupply of space.
Regarding the individual market players in the real estate sector, real estate brokers will become less relevant due to higher market transparency and more automated, direct rental negotiations between owners and lessees. In general, real estate transactions will often be based on technologies like blockchain, reducing the need for all kinds of intermediaries.
The governments will make sure to benefit from those new developments through new tax models (new digitization- or “robot taxes”). This additional income will be needed to fund the increased costs for the mitigation of social problems due to increased unemployment. The banks of the future will be able to take advantage of the high degree of debt financing for property projects to fund expensive building technology. However, crowdfunding platforms and FinTechs become strong competitors, leading to a lower share of the value chain for the banks.
Tech companies, today an almost irrelevant market participant, could be the greatest beneficiaries. Current tech giants or dedicated startups will find their way into the real estate sector, which becomes more attractive the more data it generates. Those companies will establish data-driven business models that add value for the tenants, while simultaneously collecting user data. Supported by the high tech environment, combined with their comprehensive experience in digital business models, these tech companies will conquer the construction and facility services sector, gaining a large share of the value chain in the real estate sector, if current players cannot explore and utilize this data-gold by themselves.