Waiting in a café to meet a research counterpart recently, I was struck by just how much work-related activity my fellow coffee aficionados were conducting. Several were typing away furiously on laptops, one was talking business (rather too loudly) on the phone and a number of meetings were in progress. I couldn’t spot a single customer who was not obviously engaged in some form of work.
Real estate uses are blurring
Traditionally buildings have been divided into distinct sectors, such as retail, industrial, offices or hotels. However, in some instances it is becoming increasingly difficult to categorise buildings. Take my café experience for example. A traditional view would classify this as a ‘retail’ asset but, as my visit shows, the role of city centre cafes is more akin to an office. The fact that it sells coffee is secondary to its primary function as a place to get business done.
Examples abound in other areas too. The sole purpose of shops used to be to make sales but they are increasingly cultivating in-store experiences instead, whether that be through interactive displays, a pop-up food stand or a make-up studio. More and more gyms are offering food and beverage options and apparel as well as fitness classes. Are these a leisure asset, or a retail asset?
The geographical independence of many of todays’ office workers, brought about by the advancements in mobile technology, has resulted in the home becoming a quasi-office and offices evolving beyond being just a workplace. Modern offices are part meeting space for transient workers, part social space for employees. This is reflected in the broad array of non-office uses that modern offices provide – everything from restaurants to fitness studios to medical suites.
Even logistics is not immune. Parcels are no longer dispatched only from warehouses on industrial parks. Retail warehouse units and shops are being used to fulfil online orders. Real estate uses are blurring everywhere.
Single use locations are becoming outdated
As assets become more mixed in use, so do locations and the concept of an area being an office location, a retail location or an industrial location is becoming outdated. The primary driver of this change is consumers’ demand for living, working and amenity space to be provided in as close proximity as possible for their own convenience. This expectation reflects the blurring of concepts such as ‘work’ time, ‘home’ time and ‘shopping’ time which have been eroded by technological change.
This trend is illustrated in the emergence of ‘sheds and beds’ – urban logistics co-located with residential uses – as seen at Segro’s scheme at the former Nestle site in West London. London’s Kings Cross submarket is a case study of urban regeneration underpinned by the delivery of a broad mix of uses, while the Shard exemplifies vertically integrated mixed-use containing offices, hotels, retail, leisure and residential under one roof.
Future proofing investments
Real estate investors must consider the extent to which buildings provide a mix of uses, or their ability to do so in the future. This can create capital growth opportunities. For example, adding a ground floor café within an office lobby could both provide an additional income stream and make the property more attractive to occupiers.
More broadly, the blurring of uses means the importance of a micro location has increased. Assets must be viewed in the context of other uses in the wider locality. Those buildings or locations which are not or cannot align to the blurring of uses will increasingly underperform. Divergence of returns is thus likely to be long-term trend.
Analysing real estate performance will become more challenging as assets are harder to characterise and benchmark. As a result, at Mayfair Capital we recognise the need to apply new strategies in order to capture real estate outperformance in a more polarised world, and are responding through the adoption of our thematic investment approach.
Senior Analyst – Investment Strategy and Risk