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JLL CAPITAL MARKETS 2016

Workspace, reworked: ride the wave of tech-driven change

ACTIVATING

INSIGHTTHIS IS

THE EDGE

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1.0 WORKSPACE, REWORKED

Introduction

You’re only as smart as the buildings you invest in

Put your office space to work

Be active in a new era of investment

A new market dynamic

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Contents

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1.0 Introduction

Fixed, immovable and, in many cases, illiquid, real estate is traditionally slow to respond to change. Technology is not. It’s impacting the way people work and the nature of business itself and this is playing out in the built environment, from individual buildings right up to global portfolios. In this report, JLL explores the effect that tech, data and digital disruption will have on the real estate investment market as well as on investors’ strategies and portfolio structures.

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1.1 INTRODUCTION

Bitcoin, robo advice, augmented reality and artificial

intelligence: innovations that were once reserved for the

realms of science fiction have emerged in the real estate

investment world in recent years.

The way people communicate, work, shop, travel and

think has changed dramatically as technology has

advanced and become more widely adopted and,

combined with the Global Financial Crisis, the pace

of change has accelerated. In the wake of 2007, tech

companies boomed, banks went bust, real estate markets

rallied and new companies emerged to challenge

sources of income in every corner of conventional

commerce. These disruptors, which once nipped at

the heels of global conglomerates, have reshaped the

real estate landscape, particularly the office sector,

which is increasingly dependent on its ability to service

organisations of all sizes.

The next few years will present businesses with powerful

challenges and opportunities. Technologies such as

artificial intelligence and the Internet of Things will

enable companies to reinvent their business models and

unlock new sources of growth. All of this combined will

result in an explosion of data, which will give businesses

unparalleled insights into their customers.

Meanwhile, as more process–driven elements of work fall

to artificial intelligence, the companies of the future will

be leaner and more dispersed.

New working patterns and company structures are

placing fresh demands on workspace and its ability

to support flexibility and collaboration, both within

organisations and between organisations.

At the same time, buildings are becoming smarter.

The Internet of Things, ubiquitous connectivity

and a plethora of data puts the industry at an inflection

point. Corporates today want to know that a building

can improve and maximise employee wellbeing,

as well as enhance productivity and foster innovation,

and real estate owners and investors must engage

in greater dialogue with their tenants to better

service their requirements.

As a result, the way investors assess and drive returns

from real estate, as well as understand the risks

involved in their portfolios and individual assets, will

fundamentally change over the next 15 years and beyond.

Those who actively participate in change will reap the

rewards. Those who passively observe these changes risk

competitive disadvantage in the years to come. Although,

as always, companies will be constrained by what the

market is able to provide.

Corporates today want to know

that a building can improve and

maximise employee wellbeing,

as well as enhance productivity

and foster innovation.

How investors can ride the wave of tech–driven change

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JLL’s Workspace, reworked investor report, looks at

the impact of technology on the real estate investment

landscape and explores the ways in which investors can

ride the wave of tech driven change in order to build

strategies and portfolios that will stand the test of time.

It’s clear that the real estate industry has reached

a crossroads. Technology has facilitated flexibility and

this has given rise to a greater desire for new types

of space, which is already translating into new lease

structures. Workspace will become increasingly polarised

over the next 15 years and beyond as a market

of extremes emerges.

At one end of the spectrum, investors will target

a new class of ‘platinum prime’ space; Grade A, top tier

location space designed to suit the behemoths of the

new business world. This space will become increasingly

scarce, which will make it the least volatile corner of the

market. This will underpin prices. Platinum prime space

will provide stable, long term yield for the more risk–

averse investors.

At the other end of the spectrum, a growing cohort of

super–dynamic assets will offer investors capital growth

opportunities. This space-flexible, modular and built to

suit fluctuating business cycles and erratic growth paths

among an increasing number of dynamic start–ups - will

require a greater understanding of the building and the

behaviour of the businesses within it, in order to generate

income and manage risk.

Between these extremes, a new asset class will emerge

to bridge the gap between institutional leasing and

co–working. Designed for dynamic businesses that

require 5,000 - 20,000 square feet of space, this

segment will often be facilitated through partnerships,

which will marry equity with the expertise to actively

manage what will become an increasingly fluid use

of space.

Technology has facilitated

flexibility and this has given

rise to greater desire for

new types of space, which

is already translating into

new lease structures.

Future–proof property investment

1.1 INTRODUCTION

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With this new market dynamic in mind, Workspace, reworked draws

three key conclusions, which investors must take note of today

or risk obsolescence tomorrow:

1.You’re only as smart as the buildings you invest in

By 2030, best in class smart buildings will be able to command higher rents than comparable

Grade A buildings. As a result, more owners will become operators, with the winning investors

excelling in building and asset management through their deep understanding of changing

tenant demands, spaces and places. Seeing change is one thing, being able to respond

is another; successful real estate owners will apply data science to their assets and portfolios

to enhance operations and maximise productivity and profit. Where equity lacks the expertise

to actively manage assets, partnerships will become commonplace.

2.Put your office space to work

By 2030, 30% of a corporate portfolio will comprise flexible space and investors will need

to restructure their portfolio to profit from this trend. It’s no secret that flexibility will impact

lease lengths, but savvy investors will see this as an opportunity. Buildings in non–core areas

will offer ‘churn’ space, which will come at a premium, with businesses willing to pay as they

place greater emphasis on flexibility and the productivity benefits this brings. Space will evolve

around corporate growth cycles, allowing occupiers to grow in the booms and contract during

the busts. Increased volatility will offer increased reward for active owners of the right space

in the right places.

3.Be active in a new era of investment

From new space to new locations – polarisation between prime and secondary locations

will play out; less adaptable space and offices in weaker locations with poor connectivity risk

obsolescence, but the most relevant offices and locations will prevail. Meanwhile, redevelopment

will become more attractive as technology enables the reconfiguration of old or sub–optimal,

previously untenable space. New locations will open up – those with superior connectivity

and technical infrastructure will entice greater capital flows in the future.

1.1 INTRODUCTION

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1. Change mindset

Recognise that you are only

as smart as your buildings and

adapt your acquisition, design

and build strategies to ensure

assets are ‘tech-ready’.

This will have a material

impact on managing

operational costs and driving

occupational efficiency.

2. Invest in expertise

Put your assets to work in new,

innovative ways. The emphasis

on collaboration, both within

an organisation and between

organisations, is driving

demand for greater flexibility

in spaces and leases. Investing

in skillsets and appropriate

application of data analytics

will support this and drive

efficiency and productivity, as

well as investment strategies.

3. Think beyond

Change is here. Look at

new markets and investment

models, accept and mitigate

increased risks and harness

opportunities in new forms

of buildings, submarkets

and cities.

1.1 INTRODUCTION

Future-proof investment relies on much more than simply understanding these drivers of change, however. The real estate investment community must become as nimble as the businesses and people it serves. To ride the wave of change successfully, investors must:

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2.0 You’re only as smart as the buildings you invest in

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1 Epstein S. 2014. Deloitte’s Amsterdam HQ senses staff movements to save energy. Available at: http://www.wired.co.uk/magazine/archive/2015/05/start/deloitte–hq

2 Legg–Tero R. 2016. Is this the most eco–friendly office in the world? Available at: http://www.opusenergyblog.com/greenest-office-world

3 Wired. 2015. Legendary Inventor Inks Deal to Test ‘Personal’ Cell Networks. Available at: http://www.wired.com/2015/11/legendary-inventor-inks-deal-to-test-personal-cell-networks/

2.1 YOU’RE ONLY AS SMART AS THE BUILDINGS YOU INVEST IN

The success of real estate assets will increasingly depend on the ability of owners and asset managers to use data to optimise occupancy and inform decisions around design.

Smart building automation systems, along with building

management systems, allow building owners to monitor

an entire portfolio and fine–tune building performance.

Until now, many of the use cases for smart buildings have

focused on operational tasks, such as lighting, heating

and air conditioning, and investors and building owners

have been hesitant to invest in technology upgrades,

but real gains can be made in sustainability, managing

operational costs, as well as the productivity, acquisition

and retention of staff. This technology also allows for

the mass personalisation of space which will become

increasingly critical in creating a ‘workplace experience’.

Using space to engineer collaboration and encounters

will, ultimately, enhance productivity. Real estate owners

may be at a competitive disadvantage if they choose

to rely on manual and traditional processes in building

design, management and maintenance as technology

drives fundamental shifts in the way the real estate

end–users operate.

Evidence

The adoption of smart technology by building owners

has already increased significantly. According to a

survey by International Data Corporation (IDC), building

owners forecast smart building technology spending

to grow from US$6.3bn in 2014 to US$17.4bn in 2019.

Deloitte’s The Edge1, in Amsterdam, is an overused but

relevant example because it has put personalization at

the forefront of its design. It is equipped with tens of

thousands of sensors which help employees to locate

what they need in the building, from desks to parking

spaces. Employees are even able to customise their

working environment and the building management

system can use data to adjust the lighting and heating

in the building2.

As a result of this technology, The Edge uses

significantly less electricity than comparable office

buildings. Sophisticated buildings reduce energy

consumption and carbon emissions, which fulfils

another widely-held corporate objective, Corporate

Social Responsibility (CSR).

Impact

Real estate owners can generate greater returns if they

implement smart building technology. Smart, predictive,

maintenance and analytics capabilities can significantly

reduce maintenance, operational and energy costs.

Personalisation of space is critical3 and, through

technology, building owners can provide tenants with

the insights they need to create a better user experience

for employees. As has been the case with social media,

workplace technology such as sensors and badges will

eventually evolve to bring about a greater work–life

blend. Providing a tangible link between property and

productivity will allow landlords to command higher

rents or, at the very least, retain satisfied tenants.

Building owners who respond to this and offer space

that can meet individual employee requirements will stay

ahead of the curve. However, tracking staff movement

and behaviour does raise issues pertaining

to cybersecurity and individual privacy, which must

be considered.

How to profit from productivity

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4 CoreNet Global. 2013. CoreNet: Office space per worker shrinks to 150 sf. Available at: http://www.bdcnetwork.com/corenet–office–space–worker–shrinks–150–sf

5 Frey C B. Osborne M. 2013. The Future Of Employment: How Susceptible Are Jobs To Computerisation? Available at: http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf

As the desire for flexibility permeates office buildings, space will be expected to adapt quickly to cater to tenant demands.

Evidence

IT company Cisco implemented a design standard

across its global footprint known as the Cisco

Connected Workplace. Devised to attract and retain

Gen Y employees, the standard has yielded some

impressive results, including a 50 percent annual

reduction in cable, IT and furniture capital expenditure

and a 30 percent reduction in the space required per

person. A survey by CoreNet Global highlights how

average desk space per person has declined to 150

square feet or less, down from an average of 225 square

feet in 20104. Over half of the respondents said they

expect an average of 100 square feet or less per worker

to be the norm in five years’ time. This is supported by

one particularly stark statistic: according to estimates

from Carl Benedikt Frey and Michael Osborne from

the Oxford Martin School, almost half of all jobs

done today could potentially be automated

in the next two decades5.

Impact

I. Using data to analyse tenant behaviour and

requirements will give landlords a competitive

edge in helping occupiers to manage more fluid

workforces and meet their modernisation goals.

Building owners will come under more pressure to

offer solutions around the efficiency of occupancy

but tenants will often pay higher rents for the right

space, which will offset the reduced square footage

per person. Real estate owners must ensure that they

incorporate open architecture design standards and

the interoperability of their assets, which will facilitate

easy digital and physical updates. The most future

proof buildings will house modular fit outs, which will

allow spaces to be re–tooled and reconfigured easily

from occupier to occupier.

II. However, amassing data and tracking and

monitoring individuals raises questions over

employee privacy, which must be addressed

through robust data and cyber security policies.

In some cases, excessive monitoring may prove

counterproductive; employees may become

demotivated if they feel that overzealous attempts

are being made by management to keep tabs

on their movements. Offering a genuinely better

office experience will help to convince staff that

harnessing their data is for the greater good.

Improved data analysis will drive better building design

Data will cement the link between the strategic aims of

a business and a building’s design, making fit-outs and

refurbishments quicker and more cost-effective. This

can be achieved through adaptive building structures,

efficient floor plates, flexible building services and best

in class facilities. These changes will also cut capital

expenditure when a lease ends.


6 MBT. 2015. Report: IoT Devices To Increase By 40 Percent In Smart Cities. Available at: http://www.mbtmag.com/news/2015/12/report–iot–devices–increase–40–percent–smart–cities

7 Riley M. Elgin B. Lawrence D. Matlack C. Missed Alarms and 40 Million Stolen Credit Card Numbers: How Target Blew It, 2014. Available at: http://www.bloomberg.com/news/articles/2014–03–13/target–missed–warnings–in–epic–hack–of–credit–card–data

8 EY, Various authors. 2015. Managing real estate cybersecurity. Available at: http://www.ey.com/Publication/vwLUAssets/ey-managing-real-estate-cybersecurity/$FILE/ey-managing-real-estate-cybersecurity.pdf

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The merging of building data with business data will bring about a better understanding of workers, corporates and buildings, but with increased data comes increased risk.

Evidence

According to Gartner research, there are around

377m connected devices in use in commercial

smart buildings. This is forecast to grow to around

1.06bn by 20186. In 2014, US retailer Target suffered

a security breach which resulted in the theft of data

on 40m credit and debit cards. The attack likely came via

the HVAC firm, which had access to Target’s

in–store energy consumption monitors and temperature

controls7. The costs associated with ignoring such threats

can be significant. Consulting firm EY refers to a 2014

survey by the Ponemon Institute which reports that

the most expensive corporate cyber–attack incurred

more than US$51m in damages and remediation costs;

the smallest was still over US$1m, and the average

expenditure to remediate these attacks was US$7m8.

Impact

Building management systems (BMS) can take a more

fundamental role in determining the performance of

an asset, which will enable owners to become more

sophisticated in interpreting and understanding

cybersecurity issues. Owners must learn to use BMS and

other related technologies effectively and defensively

to support building and business performance. However,

there is a custodial risk for some sectors - which means

that investors can charge more / retain clients if they

mitigate. Such measures are applicable across all asset

classes and are not just limited to offices.

More data means increased risk

Data governance and management issues are

increasingly becoming real estate issues, as threats

permeate the built environment. Risks around hacking,

for example, are particularly prevalent in the office sector

where more sensitive business information is wrapped up

in building management systems.

Landlords, developers and managers of real estate,

who fail to put data management and security issues

at the top of the agenda, will lose out to more forward

thinking competitors who embed security in the fibre

of a building.


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3.0 Put your office space to work

139 JLL & BCSC. THE RISE AND RISE OF MULTICHANNEL RETAILING. 2012. Available at: https://www.revocommunity.org/documents/get_lob?id=68&age=&field=file

The growing influence of technology and the manner in which it can disrupt real estate markets is well established in the retail sector. Driven by the consumer, ecommerce is capturing an increased share of planned shopping trips, leaving traditional retailers to redefine retail and to create offline experiences to compete.

Evidence

In 2012, JLL predicted that 25 percent of all retail sales

will migrate online in more mature markets by 20209.

Fast forward four years and major retail landlords now

offer more flexible rental contracts and smaller store sizes

for certain retailers, as well as food, beverage and leisure

operators, in order to respond to changing requirements

from consumers and tenants. Flexibility has allowed the

next generation of retail and leisure to take off and, in a

sense, prime has been redefined; new, exciting startups

have been able to access retail space and this, in turn,

has enabled more dynamic asset management and

responsive place-making.

In offices, technology has increased mobility, which has

changed people’s expectations around work-life balance.

Multiple facilities are now required in one workspace.

Office landlords are beginning to respond to this by

providing flexibility, not just in lease contracts but also in

the type of space on offer - appealing social spaces with

cultural venues and activities. The refurbishment of the

White Chapel Building in London by Fletcher Priest has

resulted in a 25,080 square metre office building with a

public event space and coffee house in the atrium, which

hosts live music and theatre out of hours.

Impact

Office investors would do well to look at the retail sector

for a glimpse into the future. Workspace must offer

a mix of designated workspace and unassigned seating

(‘hoteling’), social and community spaces, as well

as other amenities such as fitness and leisure facilities.

Food and beverage will become a consideration too,

as it has in retail. First came vending machines and now

high–spec workspace often includes barista coffee

bars and high–quality catering. Greater choice and

transparency forced mall owners to adjust their terms

to attract new tenants. The same patterns are presenting

themselves in offices. In the years to come we may see

multi–use developments with a mix of tenants on multiple

lease terms - large, secure anchor tenants will underpin

income with further streams stemming from ‘churn’

occupiers, who will be charged more per square foot.

As with retail, this will drive polarisation between prime

and weaker secondary locations, where obsolescence

is inevitable.

Lessons from retail: leases will respond to changing tenant demands

Similar trends are becoming evident in the office sector.

Technology has fundamentally changed the location

and use of office space. For example, cloud computing

and mobile technologies have enabled remote working,

whether that’s from home or hub offices, to span borders

and time zones. Within the office, the same activity

monitors, sensors, smartphones and social networks that

gave retailers greater insights into customer behaviours

now offer potential productivity gains in the workplace.

3.1 PUT YOUR OFFICE SPACE TO WORK

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10 Reeves, M, Pueschel, L. Die Another Day: What Leaders Can Do About the Shrinking Life Expectancy of Corporations. 2015. Available at: https://www.bcgperspectives.com/content/articles/strategic–planning–growth–die–another–day/

11 MSCI in association with Strutt & Parker. UK Lease Events Review. 2015. Available at: http://www.bpf.org.uk/sites/default/files/resources/A4–LeaseEventsReport2015–cbr–en.pdf

Technology has given rise to some global corporate giants and the new commercial real estate landscape is increasingly dependent on its ability to service organisations of all sizes.

Evidence

According to the Boston Consulting Group, almost

one–tenth of all public companies fail each year, a

fourfold increase since 1965. The five–year exit risk

for public companies traded in the US now stands at

32 percent, compared with the five percent risk they

would have faced 50 years ago10. Technology has fuelled

innovation and leases have had to adapt to such changes.

Already, figures from the British Property Federation

(BPF) show that average lease lengths for the UK office

sector have fallen from an average of 20 years in the

early 1990s to an average of seven years since the

dotcom bubble burst in 200011.

Impact

Investors and owners will respond to shorter business

cycles by working with new tenant types and they will

support these new tenants by offering more flexible

space. Flexibility may benefit landlords, too. Active asset

managers will attract more businesses to move into the

right space at short notice.

While corporates will have fewer or smaller core locations

they will invest more in them. Core spaces will be fitted

out to high digital specifications and will be situated in

or near city centres, served by public transport, to tap

into deep networks of skilled individuals. Around these

hubs will be a network of spokes made up of co–working

spaces, serviced offices, hotels and other flexible and

liquid locations for staff to work from. Polarisation will

grow between core locations for corporates, at least in

hub locations and locations where greater flexibility and

turnover is seen. These locations may not necessarily be

submarkets, but rather more fine–grained than that; they

could be as close as street to street.

Corporate growth will dictate lease lengths and values

While some large corporates will provide traditional,

strong covenants (although some may choose to

owner–occupy), many are likely to need less ‘core’ space

than in the past, owing to increasing efficiencies and

maybe fewer numbers of permanent staff. Smaller firms,

meanwhile, may only ever need a co–working space.

In–between these extremes is a need for more flexible

collaboration space to satisfy the changing requirements

of both corporates and startups.

From flexible space to flexible leases, occupiers today

are moving faster than building owners and they are

increasingly commanding shorter leases or more

flexibility for aspects of their businesses, to respond

to rapid corporate growth, as well as failure.


1512 Susman A. 2015. Four Ways the Tech Boom Has Changed NYC’s Real Estate Landscape. Available at: http://www.huffingtonpost.com/aron-susman/four-ways-the-tech-boom-h_b_8341514.html

Source: JLL

Central London serviced office take-up

One of the most important issues for landlords is reacting to the changing and more demanding needs of a new type of tenant. Under the right conditions there is opportunity for more flexible owner / occupier relationships.

Evidence

The obvious example is WeWork, a US–based co–working

space provider – whose model operates by leasing floors

and then charging monthly memberships to startups and

small companies. This trend is particularly pronounced in

the US. JLL figures show that, in Chicago, the number of

shared workspaces (accelerators, incubators, co–working

and executive suites) almost tripled between 2013 and

2015 to 88 locations (2.1 m square feet), representing 1.5

percent of the total downtown office stock. According

to a recent article in the Huffington Post, in New York’s

commercial real estate market, tech startups drive much

of the new demand and now account for nearly half of all

bids in neighbourhoods like Flatiron, Chelsea and Union

Square12. Similar patterns are emerging in Europe, too.

Of course there are critics of the co–working movement.

However, what’s clear is the underlying trend: businesses

want flexibility and new innovations will emerge to meet

this demand. As this trend takes shape in the years to

come, many models will materialise; more sustainable and

scalable platforms will evolve, enabling developers and

landlords to work together on a profit share basis.

The co–working movement will continue to evolve

Of course, this relies heavily on market dynamics: it’s not

enough simply for occupiers to ask for flexibility, market

conditions must facilitate flexibility and force developers

and investors to innovate. This is already evident in the

tech industry; companies are asking landlords for non–

traditional office space or flexible lease terms because

they simply do not know what their business will look

like in 12, 24 or 36 months. Therefore, landlords are

transforming their properties, and their lease structures,

to attract these new renters - but in certain markets this

comes at a premium.


13 Deloitte. 2015. Commercial real estate redefined: How the nexus of technology advancements and consumer behaviour will disrupt the industry. Available at: http://www2.deloitte.com/us/en/pages/real-estate/articles/commercial-real-estate-redefined.html

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Impact

I. By 2030, 30% of a corporate portfolio will comprise

flexible space and investors will need to restructure

their portfolio to profit from this trend. And the

profits should not be underestimated. Growth in

rents in previously non–traditional areas in London,

such as King’s Cross and Shoreditch has outstripped

traditional financial centre locations such as the City,

West End and Canary Wharf. For example, prime

rents in Shoreditch recorded growth of 73 percent

between 2012 and 2015, compared with 23 percent in

the City. In the Kreuzberg area of Berlin, where many

startups occupy once dilapidated brick warehouses,

the average annual rental in this submarket has

increased by 64 percent in the last three years,

compared with 16 percent for prime office space,

according to JLL figures.

II. Partnership arrangements will become commonplace

as owners seek the expertise required to tap into

this trend. Already, British Land has a profit share

arrangement with co–working provider ‘Central

Working’ to provide flexible space in a number of

British Land buildings13. Elsewhere, W Hotels has

partnered with Desk Near Me – a short term office

space provider – to provide its guests with

access to workspaces. Other real estate owners

are likely to partner with established co–working

providers or launch their own co–working brands

to respond to increasing demands from occupiers

for flexible spaces.

III. It’s in secondary locations that the real innovation will

take place. Landlords will have to ensure that assets

boast the best fit–outs, connectivity and amenities to

continue to attract occupiers, given

that the aggregate demand for traditional office

space may reduce. In core areas, cost will become

less of a concern and we will see corporates become

more prepared to pay more for top spec in terms

of fit–out, local amenities, and connectivity.

By 2030, 30% of a corporate

portfolio will comprise flexible

space and investors will need

to restructuretheir portfolio

to profit from this trend.


Data covering Germany’s

seven biggest cities shows

that secondary and tertiary

locations combined account

for around 70 percent

of total take up.

Source: JLL

PRIME LOCATION

TERTIARY LOCATION

SECONDARY LOCATION

2015

50.2%

31.9%

17.9%

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4.0 Be active in a new era of investment

18

As technology enables work environment transformation, the demand for commercial real estate space – and the size, shape and location of that space – will develop and respond in line with changing occupier preferences. Instead of creating more space in urban areas, for example, it will not be unusual to see Class A office space housed in obsolete industrial assets.

Evidence

In Europe, the tight market conditions in many cities have

accelerated opportunities for repositioned / redeveloped

assets. For example, in Amsterdam East (a secondary

location), one office asset from 1974 was repositioned

in 2014 through full redevelopment, which focused on a

high–tech fit–out, flexible floor plates, a range of leisure

and hospitality amenities and highly flexible leases. Gross

rental values increased by 40 percent. Other examples

of especially well–connected redevelopments include

the White Collar Factory in London or the 1960s office,

Nova Place, in Pittsburgh, which earned a Platinum

WiredScore–certification for superior connectivity.

Impact

A two–tier market will emerge whereby investors

will choose whether to deploy capital in high–spec,

‘built–from–scratch’ smart buildings, or rejuvenated

assets. Both of these options offer a blank canvas

to entice occupiers with the highest specification

fit–outs. New developments are clearly capital

intensive. However, even in redeveloped assets,

investors will increasingly be expected to cover

costs of non–negotiable infrastructure as they seek

to future–proof assets. The deployment of specific

technology, will, in many cases, be borne by occupiers.

Meanwhile, rejuvenated areas will offer investors new

locations in which to diversify, as well as the added

benefit of increasing a locations’ attractiveness as a place

to deploy or invest capital.

Redevelopment will become the new development

This trend is already established in a number of major

European cities where redeveloped warehouses or

former factory space, which occupy premium locations,

have been repurposed to combine office, retail and

residential. What’s more, technology has enabled the

viability of some redevelopments. Office buildings that

were obsolete due to poor technical specifications (such

as large server rooms, raised floors, cooling plant and fire

suppression systems and poor connectivity) have been

revitalized. Previously unoccupied space in urban areas,

such as railway arches and industrial units, can now

be connected to high–speed broadband without

major upheaval.

4.1 BE ACTIVE IN A NEW ERA OF INVESTMENT

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The notion that a city’s size

dictates its capacity for growth

is being challenged. Smaller

cities (such as Stockholm, Berlin,

Boston and Melbourne) will add

to the competition of the

established ‘Big Six’.

Evidence

The link between innovation and the dynamics in the

real estate market are largely anecdotal. Nonetheless,

JLL research points to patterns which suggest that, since

the Global Financial Crisis, the established pecking order

of cities has been evolving and the notion that a city’s

size dictates its capacity for growth is being challenged.

Smaller cities (such as Stockholm, Berlin, Boston and

Melbourne) will add to the competition of the established

‘Big Six’ - London, Paris, New York, Tokyo, Singapore

and Hong Kong - as globalisation, urbanisation and the

proliferation of technology challenge this hierarchy.

In emerging markets, innovative concept cities, such

as China’s ‘built–from–scratch’ Tianjin Eco City, are

challenging the established metropolises for capital

- both human and financial. There is sufficient belief

among city authorities that nurturing innovation offers

net benefit. Cities with a capacity to innovate can,

in many cases, command significantly higher rental

premiums, with a noticeable variation from region–to–

region and even from city–to–city.

Impact

Locations that foster innovation through their mix

of fundamental economic strengths, high levels of

transparency, ease of doing business, green credentials

and connectivity, will rise to prominence and investors

must adapt their strategies to include these locations

as part of a global portfolio. Investors must also pay

greater attention to the quality of city leadership, their

ability to create the right environment for business

and, increasingly, their ability to analyse and use data

sources to improve productivity, the environment and

sustainability. These will be the true Smart Cities, where

tech is an enabler.

Disconnect between cities that can adapt and those that cannot


In low–growth environments, investors should anticipate a growing disconnect between cities, and even specific urban areas within cities, that have the capacity for reinvention and the ability to harness the opportunities that arise from technology, and those that don’t.

20

Source: JLL


JLL’s Investment Intensity Index compares the volume of direct real estate

investment in a city over a three-year period relative to the city’s

current economic size. It reveals the increasing attractiveness

of ‘New World Cities’: transparent, innovation-oriented

cities which account for a growing share of global

commercial real estate investment,

with 16 of the top 20 ranking

falling into this category.

European cities account for half of

the Top 20 markets, while vibrant

research and technology hubs in the

U.S. continue to attract a large share

of real estate capital.

“New World Cities”

dominate the top 20

Investors are increasingly

targeting innovation–oriented small

to medium–sized cities in open,

transparent economies.

“Established World Cities”

continue to generate

strong demand

Investor demand for prime assets

in the world’s most globalised urban

economies continues to be strong,

with London, New York, Paris and

Sydney all featuring in the Top 20.

1. London

2. Oslo

3. Munich

4. Sydney

5. Honolulu

6. Copenhagen

7. Auckland

8. Frankfurt

9. Silicon Valley

10. Melbourne

11. New York

12. Stockholm

13. Paris

14. Boston

15. Dublin

16. San Francisco

17. Austin

18. Edinburgh

19. Brisbane

20. Berlin

Cities punching above their weight

21

14 Various authors. 2014. World Economic Forum: The Competitiveness of Cities. Available at: http://www3.weforum.org/docs/GAC/2014/WEF_GAC_CompetitivenessOfCities_Report_2014.pdf

15 Rodrigues, J. Wired Score in the Wall Street Journal. Available at: http://blog.wiredscore.com/2015/07/28/wiredscore-in-the-wall-street-journal/

16 Company case study. WiredScore.com, East End Capital Case Study. Available at: http://cdn2.hubspot.net/hubfs/2472771/WiredScore_CaseStudy_EastEndCap_Email.pdf?t=1475102258515

In an environment where cross–border investment and the trade in goods and services is becoming increasingly global, the question of connectivity is highly relevant.

Evidence

Hard connectivity

The cities that have succeeded the best in terms

of ‘hard connectivity’ are those that rely on a mix

of planned and organic growth. Hong Kong and

Singapore are good examples of cities with intelligent

choices in infrastructure, which have contributed

to their attractiveness as investment destinations.

Innovations such as Singapore’s electronic road pricing

system - automated gantries that collect road tolls - and

Hong Kong’s mass transit system, add greatly to their

overall appeal.

In real estate, owners who invest in improving the

technical infrastructure of their sites will find them easier

to let. When Caspi Development acquired 161 Bowery

building in New York, they invested in wiring fibre

connections from the outside plant to every floor in the

building15. Not long after the renovations were complete,

tenants flocked to the newly WiredScore–certified

building. WiredScore is a firm that rates office buildings

according to the speed and reliability of their Internet

connections. It now provides ratings for buildings in 50

cities globally. Another New York–based firm, East End

Capital, reconfigured an aging historic building with new,

tech infrastructure, increasing occupancy rates from 72

percent to 98 percent and rent per square foot from

US$34 into the low US$50s.

Soft connectivity

In a paper from Stephen Sheppard, Kay Oehler and

Blair Benjamin from the Centre for Creative Community

Development, the authors note that few detailed studies

offer insights into the attractiveness of cities relative

to the density of cultural amenities as so much of the

evidence is anecdotal16. In New York and London, for

example, urban areas such as Williamsburg, Soho or

Shoreditch, which have traditionally been considered

as underdeveloped and less desirable investment

destinations, have seen an exponential growth in

popularity and, therefore, pricing in recent years. It’s

difficult to isolate whether this is because of these areas

burgeoning reputations as hubs for artistic expression or

because of a natural process of gentrification in the cities

in general, which has seen higher pricing spread into the

city peripheries. Nonetheless, there is a broad assumption

that a relationship exists between real estate prices and

cultural vitality.

Capital will chase connectivity

Technological infrastructure will prove a major

factor in location decisions. In a recent paper on the

competitiveness of cities, the World Economic Forum

rightly suggests that investors will choose assets in

cities that combine so called ‘hard connectivity’ (which

relates to physical infrastructure) with ‘soft connectivity’

(which relates to social capital, such as digital adoption,

education and quality of life, as well as cultural

amenities)14. Master–planned developments that provide

mixed–use areas can engineer ‘collisions’ between

different types of people. Developers who can provide

mixed–use estates at scale, with the right amenities,

technologies and mix of businesses, are in a unique

position to benefit from a new science of real estate.


22

Source: JLL


Impact

Cities that have addressed ‘hard connectivity’ have been

the most successful. Those that can address the issue

of ‘soft connectivity’ in the 21st century will stand out

as destinations not just for human capital but also for

investors. Young professionals will be drawn to the social

aspects of cities. Retirees, who have more time on their

hands, will also be drawn to cities that have a deeper

cultural offering. Dubai is a good example of a city that

has, in a short period of time, excelled at

‘hard connectivity’ and now seeks to address

‘soft connectivity’ issues. The impact is most likely

to be seen in rising house prices as well as office

rents. Moreover, offices must adapt to service

a multi–generational workforce as working

lives extend as a result of ageing populations.

London submarkets see strong rental growth

Prime rental growth in each London submarket since end 2012

ShoreditchFitzroviaVauxhall

ClerkenwellAldgate

HammersmithWaterloo

King’s CrossCamden

BloomsburyBattersea

SohoSouthbank

SouthernKensington & Chelsea

MayfairBelgravia & Knightsbridge

WesternNorthern

VictoriaCanary WharfCity Midtown

CentralEastern

Covent GardenNorth of Oxford Street

Paddington

0% 10% 20% 30% 40% 50% 60% 70% 80%

23


5.0 A new market dynamic

A new market dynamic

The question remains around what all of this technology,

and the resulting flexibility and mobility of tenants,

does to the development and investment process

and, ultimately, values. A world of short leases implies

shorter income streams, less predictability and perhaps

less security as fewer companies will have

a solid credit track record.

5.1 A NEW MARKET DYNAMIC

24

Will these drivers of change dampen demand for office property as an investment class overall? Based on current

market conditions and investor mindset, the answer is no. While the notion of an office is being challenged,

office use is rising and demand for workspace is set to increase, albeit in different ways:

I. Polarisation between places and prices: A tiered

market will emerge with new office sub–classes to

satisfy investors with varying appetites for risk. Some

investors will target ‘platinum prime’ space because

of the stable long–term yield on offer; this will mirror

a bond–style investment and it will serve corporates

searching for premium space in the best locations,

which will become inherently scarce, resulting in price

premium among these assets. At the other end of the

spectrum, experienced investors will look for more

volatile assets that offer capital growth, not dissimilar

to investing in private equity.

II. A new emerging sub–class: A new office sub–class

will emerge to bridge the gap between institutional

leasing and co–working. Often, this will be facilitated

through partnerships, which will marry equity with

the expertise to actively manage what will become a

more fluid use of space. Shorter leases will come at

even more of a premium as companies become more

willing to pay for the right space, in the right location,

for the right duration.

III. Portfolios will become ‘hub and spoke’: In addition

to the core, traditional space, the notion of an office

will be challenged, forcing investors to explore

alternative sectors in order to access flexible

working trend. Hotels, residential and transport

hubs, for example, could be key beneficiaries of

this changing tide as the rising amount of capital

targeting property chases changing work patterns.

IV. Data will result in a more rational market: More data

means greater transparency, which allows occupiers,

investors and regulators to understand market

risks better. Therefore, in times of market volatility,

proactive policies can be implemented earlier,

and the aftermath is likely to be resolved more

quickly. More data about asset quality will lead to

more informed investment decisions and, overall, this

will promote a more rational market. Furthermore,

the arrival of blockchain in financial markets will

eventually drive further transparency and efficiency

in global real estate investment transactions.

2525

Riding this wave of disruption will require a shift

in mindset and an evolution in skillsets among

real estate investors, owners and developers.

They must:

1.Change mindset and strategy

They must recognise that buildings are becoming smarter and adapt their

acquisition, design and build strategies to ensure assets are adaptable and

‘tech-ready’. This will have a material impact on managing operational costs

and driving occupational efficiency.

2.Invest in expertise

They must understand occupiers are becoming more sophisticated

in their use of real estate. The emphasis on collaboration, both internally

and externally, is driving demand for greater flexibility in spaces

and leases. Investing in skillsets and appropriate application of data

analytics will support this and drive efficiency and productivity

as well as investment strategies.

3.Think beyond

Change is here. They must look at new markets and investment

models, accept and mitigate increased risks and harness opportunities

in new forms of buildings, submarkets and cities.



26

While cynics will argue that

certain trends pertaining to flexible

working and corporate growth

cycles point to similar patterns

displayed in the nineties during

the dotcom boom, and subsequent

bust, it would be naive to dismiss

these factors as a ‘flash in the pan’.

After all, the trends identified

in that decade have come

to pass - albeit after the usual

cycle of overconfidence

and creative destruction.

Market corrections are inevitable in the short to medium

term; excessive supply in co–working, incubator and

accelerator–style space will put pressure on prices and,

perhaps, the business models of these providers. And

contrary reactions are to be expected; some providers

will resist the shift towards more flexible real estate by

increasing desk space and shunning certain technologies.

But we can learn from what we have seen in retail;

the fundamental drivers of change and increased pace

of change are here to stay. Buildings and cities are

becoming smarter; people and businesses are more

sophisticated in their use of space; and the traditional

realms of real estate, in terms of location and asset type,

are being challenged by an increasingly complex,

and technology–led market. We are entering a new

era driven by the end users’ changing requirements,

and real estate is rapidly becoming more technology

and data driven. Applying an active, analytical and

digitally aware approach to real estate investment

strategy will ultimately help investors and occupiers

at the building, neighbourhood and the city level.

© 2016 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed

reliable; however, no representation or warranty is made to the accuracy thereof.

For more information please contact:

ABOUT JLL CAPITAL MARKETS

JLL Capital Markets is an independent leader in

commercial real estate investment advice. Over 1200

professionals work with clients of all types, to go beyond

the property transaction, and to shape the services

they need to gain The Edge in their investments.

In our experience, having a different perspective reveals

new opportunities. JLL combines financial expertise

with access to global capital and deep property insight

to give our clients the confidence to see the world

differently. That’s The Edge.

theedge.jll.com

Alex Colpaert

Director

Head of EMEA Offices Research

[email protected]

Tom Mundy

Director

Capital Markets Research, EMEA

[email protected]

Jon Neale

Director

Head of UK Research

[email protected]

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