Why we need to encourage innovation and holistic solutions to the challenges facing real estate
“Silo busters unite!” is becoming a slogan here at the Real Estate Institute. We contest that few, if any, of the major problems that face real estate in the 21st century can be tackled from a single standpoint; whether that be the perspective of a single location, use class, ideology or professional capacity. This applies nowhere more powerfully than to the problem of climate change and sustainability. 21st century solutions to this problem have to be global, multi-sector, inclusive and multi-disciplinary.
Much has been discussed about the bottom-line benefits of green infrastructure but planting trees, building rain gardens or using porous paving alone are not enough to create sustainable real estate. To be truly sustainable, green infrastructure must add value, enhance the occupier experience and be flexible enough to adapt and respond to changing social, economic and technological conditions.
To achieve this, green infrastructure and the industry response cannot be separated from the considerable disruption on other areas of real estate that we are seeing in the 21st century, characterised by fundamental changes in the nature of capitalism and money. The need for long-term income streams has completely changed investment criteria and aims.
In the latter half of the 20th century the nature of money changed. The post-war baby boomer generation in advanced economies were wealthier than previous generations and funded new investing institutions like pension funds and insurance companies. The name of the investment game in the 20th century was capital growth as these investors had to deploy large chunks of capital quickly in high-value assets.
These assets included real estate and this money helped to shape the form that our towns and cities took: big buildings in single asset classes on big grids. The investing institution’s job to provide capital growth was aided by the construction of large schemes and high-rise buildings. Modernist architecture and planning systems across the world were subverted by capital to achieve this. Public infrastructure provision, particularly highways, opened up land for development and investment. Transport and energy systems, schools and hospitals not only facilitated such development but were often also concurrent with, or even reliant, on this type of real estate development.
The result of this approach meant investing institutions got the ‘commodity’ they needed to invest in at the time but it hasn’t always left ordinary people, the inhabitants and occupiers, with neighbourhoods they love, nor has it always created the most environmentally-sustainable places.
This could change again. Not only is there now increasing pressure from communities and environmentalists to seek alternative ways of building and managing places, but the nature of global money and investment has changed and this could make for some very different built landscapes in future.
I am not the only person to contest that the economic conditions of the late 20th century were exceptional and that the era of high inflation and high interest rates has now ended. The baby boomer generation is now drawing their pensions so the demand for fixed income assets has soared and is unlikely to abate anytime soon. Little surprise then that global interest rates have fallen and are likely to remain low. Meanwhile inflation has also abated with rising global supply. Even real estate assets are now under pressure to create income streams (so institutions can pay the pensions) rather than just grow in value.
If we have entered a world where interest rates are low and stable, as they were for at least two centuries preceding WWII, then the era we have just experienced and come to expect, of huge capital growth, is at an end; there can be no capital growth without rental growth. All of this alters investor motives and puts the emphasis very firmly on creating long-term income-streams. The focus has to be much more on what people want (and will pay rent for) rather than what capital investors need.
Today, the rising costs of energy and maintenance are eroding returns. There has also been the realisation that other forms of infrastructure, such as green and blue, will become fundamental to the success of real estate.