Digitalisation on the US real estate market: What investors can learn
Digitalisation on the US real estate market: What investors can learn
In the meantime Donald Trump has been the president of the United States for nearly a year. A lot of things have changed in this time, but the US real estate markets have scarcely been affected to date. These markets continue to enjoy a robust development and great popularity among investors thanks to excellent economic framework conditions. At present it would seem that digitalisation is having a far greater impact there than the new president. In the opinion of the author the US real estate markets and American society in general are some way ahead in this field. In the following article he describes the most important digital trends for the office, residential, retail and logistics asset classes. In addition, he explains what real estate investors have to prepare for as a consequence.
In times of low interest rates and record levels on the stock markets many investors with a long-term orientation increase their real estate ratios. As well as the greatest-possible diversification of portfolios across countries and regions, and also across differing real estate segments, investors should keep a close eye on fundamental changes in the real estate sector as a whole.
Digitalisation is undoubtedly such a fundamental change. More than this, it is a paradigm shift, one which will turn our lives and working worlds upside down – across the board and on a permanent basis. And naturally the real estate industry will not be spared such a change.
The upheaval there is not merely limited to the obvious elements such as the technical fit-out of properties and good connections to fast data networks. The digital change is of a structural nature; it is inexorable and will also affect the real estate sector and, in the long term, it will also have an enduring impact on the structure of our cities.
Europe lagging behind
But when it comes to digitalisation, Germany and Europe are lagging behind. “We have missed the boat,” stated Günther Oettinger quite rightly some time ago in his then function as the EU Commissioner for Digital Economy and Society. In contrast to the United States – one of the absolute forerunners. The reasons for this are diverse, with a substantial one being a mentality that is more open to risk and all things new.
According to a survey by Etventure and GfK only six per cent of employees in the USA feel unsettled by the digital upheaval and its impact on the working world. By comparison: in Germany this figure is 37 per cent.
In interplay with this technological development, the generation of “millennials”, which has grown up with the internet, plays a key role. In the USA this generation – with its some 80 million “digital natives” – represents the largest group within the working population in the meantime and is pushing ahead with digitalisation anything but hesitantly. Yet the direction being taken by the digitalisation train is the same on both sides of the Atlantic. The American locomotive has placed itself firmly at the front, with the European wagons trundling along behind.
But nobody should shy away from the uncertainties and possible risks posed by the digital revolution on the US real estate market. Instead the changes should be anticipated as much as possible and used to advantage in the investment strategy – where necessary with the aid of the expertise of regional partners.
US real estate suitable for diversification
In the United States real estate investors can already observe and experience what they are likely to face in Germany and Europe in the future.
For reasons of diversification US real estate should be a feature of an institutional investor’s diversified portfolio anyway, for the US real estate market is not only the biggest, but it is also very transparent and has a low correlation with Europe. The digital change encompasses all real estate sectors. It is leaving its mark on the individual segments, yet at the same time it is ensuring that the borders between them are becoming blurred – with the effect that the residential, working and leisure-time worlds can be clearly demarcated to an ever decreasing extent.
Office users with rising expectations
First of all the predominantly good news as far as investors are concerned: on no account will office work be displaced by digitalisation, not even in the USA. The home office continues to play only a limited role. Rather the expectations of officer users with regard to the quality of their place of work will increase, and not only when it comes to technical equipment. Cost and energy efficiency are expected of the place of work itself, as is a flexible and modular office space layout. Innovations such as co-working and desktop-sharing would be unthinkable without the digital advances seen in recent years.
The attraction of the working environment and a certain feel-good factor will likewise become increasingly important, as well as the proximity to the home and to leisure-time and shopping offerings. The current buzzword is “amenities”. By which is meant features which make the working world more pleasant.
The new Apple Park in Cupertino, California is regarded as being particularly “amenity-rich”. The brand new, ring-shaped corporate headquarters with a diameter of 461 metres – and with a glass roof from Germany – has enough space for more than 12,000 employees, and also for cafés, a fitness centre, an auditorium and extensive parks. Such ultra-modern corporate headquarters for the major Silicon Valley companies are undoubtedly not a blueprint for every business, but they are a magnifying glass and offer an indication of the destination at the end of the journey.
Among the consequences for investors are a slight downturn in space requirements and an in part considerable yet worthwhile need for investment in portfolio properties. The greater flexibility is also reflected in the ever shorter terms of lease agreements. Yet at the same time the demand for quality office space – incidentally not least of all on the part of the technology companies themselves, which in the USA already account for more than one fifth of all property wanted ads, and in some conurbations such as Boston and Seattle as much as two thirds.
Smart home gaining in significance
In the residential real estate sector the impact of digitalisation was not initially as swift or as obvious. The clearest expression of this can be seen in the rapidly growing demand for smart home solutions. In the USA these are expected to account for sales of 15 billion dollars this year alone, in 2020 it will be as much as 30 billion dollars.
For the “millennials” the permanent availability of fast internet in their own four walls is essential of course. At the same time they attach more significance to a favourable energy balance and to shorter paths, to “bikeability” and, better still, to “walkability.
For investors an improved technical fit-out initially means a certain need for modernisation. The result can then of course be marketed as a competitive advantage. At the same time, digitalisation also harbours significant potential for enhanced efficiency in the administration of residential buildings, for instance when online tools ease administrative processes and billing.
Radical change in consumer behaviour
The consequences of digitalisation can be seen most clearly and over the longest period of time in the retail trade sector. The internet has radically changed buying patterns. Consumers are making more and more purchases online and are increasingly better informed. This is putting tremendous pressure on the stationary retail trade on both sides of the Atlantic.
But all is not lost. The magic formula is omnichannel: through a meaningful conjunction of a local physical presence and an extensive offering on the internet, it is still possible to entice consumers to visit stores. In this respect the focus is no longer on the goods, but increasingly on the shopping and leisure-time experience.
The need for standard sales areas is decreasing, at the same time the quality of the sojourn is becoming more decisive. Big data also give retail traders the possibility to align their offerings more quickly and more closely to the needs of customers. This may be observed particularly well in the shopping malls that are so typical for the USA. Nearly one in three of the some 1,200 malls will be threatened with closure in the coming years.
Older properties in poor locations without any marketing concepts – or at best only with poor ones – and without a suitable online strategy will hardly stand a chance. Modern high-end malls, in contrast, which turn shopping into an experience and score points with additional leisure-time offerings, remain crowd-pullers.
At the same time we are seeing movement at the other end of the retail trade spectrum: above all it is the “millennials” who value a local supply with shops and stores in the immediate vicinity of their place of residence. For investors the retail trade segment undoubtedly offers opportunities. But a selective approach is to be recommended.
Logistics is a real estate segment that is being heavily impacted by digitalisation, and at the same time it is the major beneficiary of e-commerce. In the USA ten per cent of retail trade earnings are already accounted for by this segment. While at the outset the focus was on the major greenfield distribution centres of Amazon et al, of late the “final mile” to the customer has increasingly been the focus for logistics companies and real estate investors. Smaller inner-city logistics sites are meeting the desire for ever shorter delivery times.
This trend will be amplified should online trade with food pick up pace. As shown by the competition between several US cities for the location of Amazon fulfilment centres, the era of the large-scale logistics centres has not yet come to an end.
Logistics as a major beneficiary of e-commerce
On the whole, logistics and the retail trade are growing closer together. Although it is above all retail traders that are looking to move on to the internet, the take-over of the bio supermarket chain Whole Foods by Amazon shows that this development is by no means a one-way street. The impact of digitalisation on the logistics sector is not only being felt with the rapid growth of e-commerce.
Industry is optimising its supply chains on digital paths; robots and materials management are also changing the face of warehouses. The “last mile” currently offers investors a great opportunity to profit from this. The possibility of an alternative subsequent use should, as a matter of caution, not be ignored, however.
Digitalisation is having a profound impact on the real estate industry, and this across all segments – much more quickly and more radically in the USA than in Europe. As ever with disruptive change, opportunities and risks have become apparent to investors. Here regional partners with extensive market knowledge can help tap the potential at an early stage and assist in circumnavigating dangerous waters.
Managing Partner, US Treuhand Verwaltungsgesellschaft für US-Immobilienfonds mbH, Munich