What do Google, Microsoft, Facebook, Twitter, Visa and American Express all have in common? Over the last couple of months, they have all announced the vast majority of their respective work forces will be able to work remotely for the remainder of 2020.
That is big news – not only does it make sound business sense, it should also help attract the best and brightest, offer employees flexible working arrangements, and even benefit the environment by reducing rush-hour traffic. Although these companies are all well-capitalised businesses with diverse geographical footprints, not a single one of them creates a product that requires any employee to physically sell it to you.
The future of real estate in a post COVID-19 world is going to look very different, indeed.
Who are the losers?
Let’s start with the bad news: attractive returns from traditional office space is an endangered species. The events of the first quarter of 2020 that forced millions of people to work from home are starting to form habitual behaviours in the working population.
Owners of traditional office real estate are facing headwinds ranging from a shift in the corporate ‘working paradigm’ to an influx in supply – two factors that will present material downward pressure on rents over the medium-term. Repurposing assets via local authority planning processes might preserve or potentially enhance value, but could we also see a reversal of the great urbanisation movement? These are big questions for a ‘New Normal’.
Turning now to that other pariah, the high street has been experiencing a slow death for 20 years – initially from the emergence of large-format shopping centres (which now appear to be in rapid decline too, à la INTU), and from the explosive growth of online commerce in the last decade. This movement has only been exacerbated by the current global health crisis.
Disruptive real estate
But what about the real estate segment which more than 4.5 billion people across the globe use every day but never step foot in and is measured in megawatts rather than square feet? I am talking about digital real estate –namely data centres.
These centres are the invisible infrastructure pillars that keep the likes of Zoom, Microsoft Teams, Skype, Houseparty, Whatsapp, Netflix, Spotify, online banking, Deliveroo, Uber, Linkedin, Instagram, Slack, Google Docs, Revolut, Airbnb and LimeJump functioning. Service after service has been digitised and technology has enabled accessibility from anywhere via the cloud and 4G or 5G telecommunications.
Digital real estate assets are essential to the entire 21st century eco-system and they benefit from staggering growth-driven structural tailwinds. As an example, every minute Netflix delivers some 694,444 hours of video, Google processes 4.5 million searches, Uber accepts over 9,750 rides, and Amazon ships thousands of packages. Those numbers are staggering – and, by the time you read this, they are also already out of date!
Age is but a number
The other major areas of disruptive real estate that look attractive are telecommunications towers and distribution centres. Why? The former because the onward march of technology and the improvement in transmission rates are facilitating the growth of digital services. The transmission of this data is what telecoms towers are commercialising and the somewhat bloated balance sheets of mobile phone companies mean independent tower companies are thriving as a subset of the asset class.
Distribution centres are attractive meanwhile because the global health crisis has accelerated the movement to e-commerce across generational divides, with the Baby-Boomers, the most affluent segment, spending nearly 50 hours a week on their mobile phones on average – nearly twice as much as Generations Z and X, and almost four times more than Millennials. With more than 55% of online shopping taking place on a mobile phone, then, it is a win, win, win for the disruptive real estate play.
In short, the next great growth boom in real estate will be driven by technology, its network capacity and access to reliable power sources – replacing the old drivers such as proximity to urban populations and whether the car park has enough parking spaces!
Pietro Nicholls is the lead portfolio manager of the VT RM Alternative Income Fund and co-manager of the listed investment trust RM Secured Direct Lending