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A peek ahead: Driverless vehicles and commercial real estate
What is the potential impact of driverless cars and ride sharing on commercial real estate properties? Are commercial real estate (CRE) investors prepared? Recent results from a global Deloitte Center for Financial Services survey suggest that potentially high to significant impacts on industrial, office, and retail properties could be in store. However, there are things that CRE owners and operators can do to prepare and respond to the evolving environment.
November 1, 2018
A blog post by Surabhi Kejriwal, real estate research leader, Deloitte Services LP
There is tremendous buzz around the impact of driverless vehicles and ride sharing on parking spaces. Our recent global survey of 500 institutional investors revealed that nearly one-quarter of the respondents expect parking space to free up and create development opportunities for CRE companies over the next 18 months. Another third said they anticipate this phenomenon to take place 18 months to three years from now. Interestingly, a relatively higher proportion of investor respondents from Japan, China, and Hong Kong anticipate the impact to take place within the next three years (see figure 1).
Figure 1: Institutional investors' expectations of the likelihood of autonomous vehicles and ride-sharing freeing up parking spaces and creating development opportunities for CRE companies.
Source: Deloitte Center for Financial Services analysis.
Along with parking space, sidewalks will likely be freer as these new mobility options reduce the need for curbside parking and wide streets, due to more efficient management of auto traffic. Consequently, there is likely to be a shift in the urban landscape as the freed-up space can be repurposed for other use. As a commercial real estate owner/operator, perhaps you are assessing the potential impact of driverless cars and ride sharing on your property portfolio. I believe that driverless cars will affect demand, supply, and valuations of CRE properties.
At the property level, more than two-thirds of our surveyed sample globally said they expect a high to significant impact on industrial property, and almost 64 percent anticipate a high to significant impact on office and retail properties. Among the various investor categories, sovereign wealth funds expect a significant impact from autonomous vehicles and ride sharing across a majority of property types. On the other hand, a relatively lower proportion of real estate investment trusts (REITs) said they expect a significant impact from these trends. Slicing the survey results by investors' assets under management (AUM) uncovered that more than 70 percent of respondents with $20 billion to $30 billion anticipate a significant impact of these trends on retail, office, and multifamily spaces, whereas more than three-quarters of those with $30 billion-plus AUM expect a significant impact on industrial properties (see figure 2).
Unlike the past, some urban planners have started deprioritizing the car while planning community reforms.1 For instance, Minneapolis reduced parking requirements for multifamily properties in select parts of town.2 In another example, Santa Monica, California has done away with minimum parking requirements for new downtown developments.3
Figure 2: Institutional investors' expectations of the likelihood of autonomous vehicles and ride-sharing impacting various properties
Source: Deloitte Center for Financial Services analysis.
As a CRE owner/operator, do you consider the shifting landscape a threat or an opportunity? How are you factoring in the impact of driverless vehicles and ride sharing in portfolio management and (re)development of the built space?
Considerations for CRE owners and operators
CRE owners/operators might consider the following to prepare and respond to this evolving ecosystem:
- Use analytics to evaluate property valuations and location: Wider use of driverless vehicles will change location dynamics of real estate. Given the fluidity of the ecosystem, CRE owners may find it challenging to evaluate the existing portfolio mix and narrow down new investment options. They will want to explore a broader set of locations. Using analytics enables CRE owners to make efficient and informed decisions. Increased use of technologies such as the Internet of Things (IoT), geospatial technology sophisticated satellite imagery, and social media provide a larger variety of data at the location and property level. As a case in point, more than 40 percent of our survey respondents said they plan to somewhat increase use of data analytics over the next 18 months, and 30 percent plan to significantly increase its use. Respondents also noted that they are complementing traditional data sources with those non-traditional ones listed above.
- Human-centered approach to planning: While CRE companies are likely to benefit from using technology in their business, they should also ensure putting the occupier front-and-center in their planning and development process. Driverless vehicles will likely add another dimension to occupiers' "live, work, play" preferences. Owners will potentially want to gain an in-depth understanding at the planning stage itself. Here too, they can consider using analytics to garner sophisticated insights about occupier preferences.
- Flexible and adaptable designs: One cannot deny that the constant evolution of driverless vehicles, ride-sharing options, and technology in general makes it difficult to develop long-term plans. However, CRE companies can prepare for uncertainty by increasing their focus on mixed-use developments and creating flexible spaces that can be modeled for different uses. They may also attract more investor capital, as 54 percent of the survey respondents said they aim to invest in mixed-use properties and flexible spaces, and 44 percent plan to increase these investments, with the intention of diversifying their portfolios.
In summary, the automobile industry has a strong linkage with the CRE industry. Unlike the past, the technology-induced ecosystem interconnectedness is likely to result in a relatively faster and larger impact from ride sharing and self-driving cars. It is becoming increasingly important for companies to change their mindset and be agile in responding to the ecosystem developments. To learn more about investor preferences with respect to CRE investments and approaches to enhancing agility, please read our 2019 CRE Outlook: Agility is key to winning in the digital era.
1 Jefferey Spivak, "People Over Parking: Planners are reevaluating parking requirements for affordable housing", Planning magazine, October 2018.
QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.