Date
20 August 2017
Autonomous trucks and delivery drones could affect the property market by allowing companies to consolidate their logistics operations into fewer but larger centers.  Photo: Daimler
Autonomous trucks and delivery drones could affect the property market by allowing companies to consolidate their logistics operations into fewer but larger centers. Photo: Daimler

How technology may change the real estate market

Real estate is the vehicle that supports economic activities, and as such, it is only natural that commercial real estate evolves with time.

Fifty years ago, when commercial real estate first consolidated into a distinct real estate class, office and retail assets were the only choices.

In the last 20 years, logistics has joined as the third major asset type, and in the last five to ten years, we see data centers gaining ground.

Industry players are evaluating how upcoming technological advances will once again change the real estate landscape.

In real estate, every round-trip investment can take five to ten years, and technology maturing in the next three to five years will affect an investor’s overall return.

Among technological advances, web-retailing is often seen as the first to have a material impact on the real estate sector as it offers a realistic alternative to physical retail shops.

In major economies such as the United States and Australia, web-retailing has captured most of the retail sales growth in the last ten years.

While retail sales growth for physical stores did not decline, the overall pie has stopped growing, leading to a sharp bifurcation.

Good mall operators continued to achieve sales growth, but less capable operators faced sales decline, which translates to much weaker rental growth.

On the other hand, web-retailing has created further demand for logistics centers.

Instead of servicing goods at the retail outlet, a web-retailer will need space to package orders before delivery.

Web-retailers also often take pride in themselves over the number of items available at their stores, and thus, a logistics system capable of organizing hundreds of thousands of items is necessary to keep an operation running smoothly.

A Hong Kong-based web-retailer, for example, ended up leasing three full floors of logistics space from a Singapore-listed logistics REIT to sustain its expanding business.

Thus, web-retailing ended up hurting less capable physical retailers but providing additional demand for logistics space.

Investors ignoring web-retailing in the last investment cycle are likely to see some rather unpleasant surprises.

Looking ahead, three other computer advances can once again change the sector.

The first one is the sharing economy, which includes apps such as Uber and AirBnb that allow individuals to share their resources for profit.

In many cases, any successful app will be deflationary as it allows previously underutilized resources to be used, and thus expanding supply in specific ways.

Uber, for example, will lower transportation cost for several years until the surplus supply is fully absorbed by the economy.

AirBnb will incrementally increase supply of travel accommodation, which will keep a lid on the growth of revenue per available room in markets where the app is competitive.

Since rental trends correlate with inflation, less inflation can lead to slower overall rental growth.

The second advance relates to logistics costs. Google has recently launched Waymo, a driverless car service, and several major retailers have started testing autonomous trucks and delivery drones in actual business.

In the next several years, computer-controlled transportation will start to have an impact on the real economy.

Running logistics centers requires a balance between two factors.

First, the more centralized an operation, the more efficient it is.

For example, having multiple logistics centers requires a company to keep multiple copies of the same goods to service different locations.

On the other hand, an operation that is too centralized will see transportation cost creep up.

In larger countries, the maximum service radius of a logistics center is the distance a truck can reach in a single shift.

Thus, driverless trucks will expand this radius, allowing companies to consolidate their logistics operations into fewer but larger centers.

This technological advance is likely to require all logistics REITs to review their existing portfolio to filter out the obsolete ones.

The last advance is artificial intelligence, which is emerging to augment many white collar jobs.

Watson, the IBM artificial intelligence system that won Jeopardy five years ago, has already helped over 2,000 cancer patients in the US in finding personalized treatments.

Even US President Barack Obama has guest-edited the November issue of the Wired magazine, discussing the societal and economic impact of these advanced systems.

We could see the nature of white-collar jobs transforming rapidly in the next decade.

Jobs that involve solving problems by pattern matching to existing knowledge, such as finding a new cancer treatment or the most appropriate case precedence in a court case, may be taken over by computers.

I do not think that this will massively reduce white-collar and professional jobs, as the human touch is still necessary in many professions, but the office requirements will be transformed.

Even traditional professions such as medicine and law will require heavy use of these new systems, placing even stronger demand on data centers and connectivity with office districts.

Established office hubs, such as our Central district, will need to accommodate these needs or will risk themselves being replaced by newer hubs.

Traditionally, physical infrastructure, such as roads and metro systems, determines the long-term prospects of office hubs.

 But in the future, IT connectivity may be as important as physical infrastructure.

– Contact us at [email protected]

RT/CG

Chief Investment Officer, Admiral Investment Ltd.

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