Real estate reflects people’s lives. They show us how buildings are used, what kind of spaces we need and how we live, work and play. Anticipating the changes in our needs and proactively meeting new requirements – this is the key to real estate investments that promise above-average value potential. Of the myriad real estate market trends that we keep a close eye on, we believe three are critical to the future development of real estate.
Technological progress
There is hardly anyone nowadays who does not have a mobile phone or does not use the internet. According to big data statistics, we produce 2.5 quintillion bytes of data every day. Why is this relevant to real estate? The digital infrastructure required to transmit this data resides in real estate. Even if data providers store their data “in the cloud”, it is actually a physical location and the exponential growth of data volumes and smart technologies favors data centers and cell towers. Although the sector is still relatively small in terms of the number of properties that can be directly invested in, it is growing rapidly. In the US, public data center operators are already a large, well-established market and we expect similar markets to develop in other regions.
And what regarding all the goods that are bought online? The products are shipped, stored and delivered across the country using industrial and logistical infrastructures. These include regional distribution centers, transhipment points on the outskirts of town or delivery depots for the last mile in the heart of large and small cities. With the number of smartphone owners expected to grow exponentially in the future, the demand for e-commerce related real estate is likely to continue.
Demographic change
Numerous recent statistics underscore the gradual aging of global society. In addition, today’s seniors have a different lifestyle than previous generations.
Why is this relevant to real estate? The demand for real estate for senior housing and assisted living has already increased. The background to this is the desire for more health and life science facilities that take account of the aging society, especially with regard to longer life expectancy and health problems that increase with age. In addition, people in the post-parental phase of life, whose children are grown and out of the house, want a lively urban environment and a sense of community. Against this background, more and more retirement homes are being built.
In addition, innovative real estate owners are adapting their portfolio to the needs of older people. In shopping malls, for example, this includes wider aisles for mobility aids, lower tables and more seating. In this way, it is possible to win and retain seniors as customers.
Other demographic developments are also affecting the housing sector. More and more people want to start a family and move into larger apartments, but the supply just isn’t enough. Reasons for this are the limited housing construction in the last ten years and that older people are no longer looking to downsize their homes, especially in larger cities. In addition, many people simply cannot afford to own their own home due to increased house prices or feel that the quality of rental properties is higher. For younger generations, renting is often also a question of lifestyle. Millennials and Generation Y, for example, like flexibility and are more likely to rent. This increases the importance of privately rented residential real estate as an investment opportunity for real estate investors.
Long-term developments are crucial for understanding future trends in the real estate sector
sustainability
Of the long-term trends, risks from climate change and/or CO2 emissions are likely to have the greatest impact on the real estate sector. Whether or not a building is sustainable and how well its value performs will depend on how “green” it is.
There is a clear trend towards sustainability in the real estate industry. Surcharges are already being charged for more upscale, more sustainable properties. In addition, the risk of vacancies is probably lower for these properties, they can be brokered more quickly and achieve higher rents. In contrast, buildings with less good environmental ratings are at risk of falling values, obsolescence and falling tenant demand – a downward spiral that might lead to total defaults in some cases.
In view of the increasingly noticeable effects of climate change and ever stricter regulatory requirements in this area, the issue of sustainability will be with us for some time to come.
What does all this mean for real estate investors?
Long-term developments are crucial for understanding future trends in the real estate sector. Experience has shown that trends that directly affect the way we live, shop and work have significant value potential. They provide a tailwind in the entire sector.
The three developments described here are likely to have a decisive impact on what is happening on the real estate market in the future. Properly positioned, investors will benefit from the favorable impact of these trends on the performance and long-term returns of their investments.
By Simon Kinnie, Head of Real Estate Forecasting at abrdn
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