More than half of the planet’s population now lives in cities, up from one-third 50 years ago, according to the UN. Over the next 40 years that figure is expected to rise to more than two-thirds. This is changing how we live, work – and shop, and has implications for all types of property developers.
In retail, it really is all about location. Population growth is becoming a more important driver of development decisions than economic performance. For example, Klépierre, a French developer of shopping centres across Europe, has looked at cities’ population growth to decide where to expand and where to sell holdings. It believes, for example, that southern France, particularly near Toulouse, is attractive despite the woes of the wider French economy.
For office developers, the blending of leisure with work is driving home the importance of a central location. For the past few decades, offices have relocated from city centres to non-prime areas, where costs were cheaper and car-based commuting was king. But in recent years, occupiers have been drawn back into central areas. Staff want to shop and go to bars and restaurants after work. For prime office developers, the important question is where opportunities for value growth lie. That means identifying geographically well-positioned areas that have so far missed out on star status.
A good example is Farringdon in London. For decades it has been a rundown and overlooked area, lying between the West End and the City. The opening in 2018 of Crossrail, the east-west cross-city rail line, should reinvigorate the area, with Farringdon station set to become one of the UK’s busiest transport hubs. Developers have already started snapping up tired old buildings in the area.
The confluence of work and play means the type of space occupiers want is also changing. The working style of technology, media and telecoms companies is shaping other occupiers’ demands, not least because banking and financial companies are increasingly having to compete with tech upstarts to attract and retain talent. What Google adopts for its staff today will often be seen in investment bankers’ offices tomorrow.
The digital economy is also increasing interest in warehousing and distribution. As shoppers around the world move online, the way in which goods are sold and distributed is being transformed. Retailers need big-box logistics, warehousing and distribution with “tech specs” to match. According to a survey by the Urban Land Institute, a UK-based property research organisation, developers in the US and Asia-Pacific rate industrial as having the best development prospects this year. Europe has been a little slower to embrace online shopping, but demand is growing there too.
Developers are keeping a keen eye on the situation: traditional distribution methods do not work in built-up residential urban areas. An articulated lorry is ideal for restocking an out-of-town hypermarket but is hardly suitable for inner-city deliveries. Instead, distribution specialists are acquiring peripheral sites on city fringes, where lorry-loads of goods can be split up into smaller van-loads and transported less obtrusively to smaller local shops.
Ultimately, the divisions between different types of property are becoming obsolete. Commercial developers are moving into residential, rather than, for now, the other way round.
Companies that previously only had to think about their corporate clients are now marketing directly to the consumer market – a massive shift and a strategic challenge.
Commercial developers could mitigate the risk by partnering with residential specialists, but they must choose carefully. A volume housebuilder’s approach of “build, sell and get out quick” might not result in the sustainable neighbourhoods with which a developer’s brand wants to be associated.
Kate Allen is the FT’s property correspondent