Affordable housing efforts are under added pressure amid the pandemic. Issues such as increasingly unreasonable home prices for potential buyers, high rents and unsatisfactory living conditions for renters, and the unavailability of social housing for people in need have become critical. COVID-19 has only worsened housing disparity, by disproportionately impacting the most vulnerable.
Research has shown that in general, people whose housing costs are more than one-third of their household income experience a deterioration in mental health that goes beyond mere financial stress. Ultimately, shortages of social housing can result in increasing homelessness. This dynamic has worsened during the pandemic despite government pledges to protect tenants - for example, a study published in December 2020 warned that that more than 200,000 households in England would experience the worst forms of homelessness that Christmas, including sleeping on the streets.
Many lower-income workers have lost jobs where remote work was not possible, and while pressure has been applied to governments to respond with programs and resources, they face fiscal challenges. Unaffordable housing has profound social consequences beyond the immediate economic drawbacks; decent and affordable housing should be an essential social resource that provides a bedrock of stability.
While its degree of severity may be location-dependent, the link between housing disparity and racial inequality is inescapable. Despite efforts to prevent residential segregation in US housing markets, for example, in much of the country working class African Americans continue to live in segregated enclaves - and to often find themselves at a relative disadvantage (along with other ethnic minorities) when applying for home loans.
In this way housing affordability, while it can affect everyone in a society, remains particularly relevant for minorities - and this, too, has only worsened during the pandemic. While there are many governments that have a strong political will to tackle the housing crisis, a lack of new housing supply is a lingering problem.
When there is a sizeable discrepancy between current and target building levels, it is important to consider the financial aspects of proposed government solutions - to examine the full requirement of additional new construction, and where the necessary funding will originate. Institutional investors such as pension funds, insurance companies, and sovereign wealth funds could become more prominent sources of financing for housing, given their preference for stable revenue and long-term commitments.
Smart Buildings
The technology-based platforms at the heart of smart buildings facilitate the operation of real estate assets - from single property units to entire cities. They can provide the fundamental building blocks of more sustainable cities. These platforms may simply provide information about a building’s performance or its immediate surroundings, or they might directly facilitate or control building services.
Amid both a global climate emergency and a global housing shortage, any increase in efficiency should be welcomed. Smart buildings can therefore become the building blocks of smart cities, as the means to drive not only greater environmental stability but also greater social stability in the form of wellness, productivity and satisfaction.
While smart building development has been driven by green initiatives, a distinction should be made between “green” buildings designed to drive environmental sustainability and smart buildings that can now enhance the quality of life (and work) - while at the same time helping to bolster the utilization of otherwise-wasted space.
The technology used in the construction industry is increasingly important in this regard; advances in construction technology (“ConTech”) will have big impacts on the ways we finance, sell, and occupy real estate. ConTech has therefore increasingly become an attractive investment opportunity for venture capital firms.
Some of the more prominent aspects of the sector have focused on greater data-driven efficiency during the construction process - by more accurately recording and benchmarking productivity, facilitating the exchange of information between contractors and subcontractors, helping to share planning activity, and by simply replacing traditional, paper-based reporting.
The most fundamental requirements of any smart building are high energy efficiency and the provision of a healthy living and working environment. Regardless of the distinction between “green” and smart buildings, environmental factors such as poor air quality in many cities, in addition to related social factors (not least wellness, in a pandemic era), have increasingly meshed the two concepts.
Ultimately, a smart building can help drive faster rates of decarbonization in energy systems by building up energy storage capabilities for more flexible use, empower owners and occupants by lending them more direct control over energy use, and better recognize and react to occupants’ needs in terms of comfort, indoor air quality, and safety - as well as their operational requirements.
Real Estate and the Environment
Amid growing pressure both from and on policy-makers to do more to protect the environment, the real estate sector has a central role to play - particularly given its impact on global emissions. Energy-hungry buildings generate roughly one-third of global emissions.
This global shift towards emissions reduction has increased the attractiveness of infrastructure and buildings that are as self-sufficient as possible. Many governments have by now set net zero emissions targets (some more ambitious than others), and there is a growing awareness that the sector can and must contribute more to achieving them. In this context, “green” and smart buildings have created myriad opportunities to innovate in the name of greater sustainability, in ways that sync environmental awareness, decarbonization, and technological creativity.
One major stimulus for what has been dubbed the smart building revolution has been the need to reduce the considerable carbon footprint of the existing built environment - primarily by reducing the wasteful consumption of electricity. Globally, the largest source of greenhouse gas emissions is energy consumption, and 40% of this energy is consumed within buildings - which in turn contribute roughly one-third of the world’s total emissions, a greater amount than what is generated by both industry and transportation.
Even a relatively small decrease in the energy consumption of buildings could have a big environmental impact. The combined heating, ventilation, air conditioning, and lighting systems in a typical office building account for roughly 70% of that building’s energy consumption; it is therefore no surprise that many property technology (“PropTech”) companies are attempting to increase the efficiency of commercial building energy management systems.
Increasingly-connected sensor technology is propelling significant change in the real estate sector, and breakthroughs will be made possible by artificial intelligence that can automatically make sense of building data as it is collected. In most cases, current commercial building HVAC systems run on fixed schedules, and do not employ controls based on detailed occupancy information. This leads to the “over-conditioning” of rooms by assuming maximum occupancy rather than adjusting according to usage, and to the waste of significant amounts of energy.
AI-powered, smart Building Management Systems will be able to perform autonomous tasks and increase energy efficiency - particularly in situations where occupants are not directly responsible for associated costs (as is often the case in commercial buildings), and therefore cannot necessarily be trusted to demonstrate energy-conscious behavior.
Real Estate and Fintech
Recent years have seen a dramatic increase in the use of financial technology in real estate, from the Automated Valuation Model for calculating a property’s worth to “instant mortgages” than can be funded almost immediately. The growth of financial technology has big implications for transparency and transaction costs.
“Fintech” can improve transparency and reduce transaction costs in a sector traditionally characterized by opacity, fragmentation, and localization. This can in turn translate into improved accessibility, as digital platforms can provide information for prospective buyers and sellers, or more directly facilitate (or effect) transactions. The global real estate market constitutes more than half the value of all mainstream assets in the world - but it is illiquid.
The factors that make something liquid (or not) include the time it takes to sell it, but also the probability of a sale and related costs. Meanwhile an efficient transfer of ownership requires transparency, so that market participants can access the information necessary to make the best possible decision and minimize adverse factors. Still, real estate transactions mostly continue to occur within highly opaque information systems, and often without relevant information being publicly distributed through official sources.
As a result, not only are transactions inefficient, but this information asymmetry also potentially enables market actors to participate in insider trading - creating a mere façade of market equilibrium. Amid a global shift to greater reliance on digital technologies, more opportunities are being created to overcome these issues of asymmetric information in the real estate market, and to reduce illiquidity.
As the fintech sector has progressively grown and increasingly planted roots in the real estate world, the need for market transparency has been most prominently satisfied (in both residential and commercial sectors) through emerging, real estate-focused digital data providers such as Zillow, Rightmove, and CoStar.
The coupling of a burgeoning fintech ecosystem with an ever-growing pool of digitalized, residential and commercial real estate information has lowered the barrier to market entry for many potential players. These property portals (or platforms) not only ensure that more factors can now be considered as part of any amateur investment decision, but also, by providing information in a digitalized format, enable machine learning programmes to execute investment decisions with greater accuracy.
Real Estate and COVID-19
Social distancing measures implemented to protect people from the spread of COVID-19 disrupted the concept of a traditional workplace based on daily commutes to centralized locations, and face-to-face interaction. The staying power of staying home to work will have a significant impact on office space.
In the past, we have seen a shift away from discrete offices to open-plan workspaces designed to facilitate collaboration. We might expect that in a post-COVID-19 world, this focus on interaction and collaboration will become even stronger, alongside a greater emphasis on amenities (partly driven by the evident recent success of co-working space providers).
These changes are likely to impact the future of many types of work even after the pandemic recedes, including the demand for traditional office space in central locations. They also spurred a more widespread adoption of technologies necessary to effectively coordinate remote working - such as videoconferencing and cloud-based platforms.
Remote working has proven that employees can perform most duties from home, so time at the office could become even more dedicated to knowledge exchange and interaction with colleagues - potentially turning the office into a more unique experience that offers aspects unavailable back at home, and making it a destination with purpose.
Decentralization is a particularly important concept for the future workplace. Because the notion that a centralized headquarters is necessary has been successfully challenged during the pandemic, the rise of smaller satellite offices in suburban (or even rural) areas is now likely. This could enable shorter commutes and have a positive impact on employee well-being.
Technological innovation will play a vital role in the transformation of these offices into dedicated collaboration spaces, able to facilitate healthy levels of in-person communication. Digital technologies could have an incredibly positive impact on employee productivity and, ultimately, employee satisfaction - and are deeply connected to challenges related to attracting and retaining talent.
Sensors and digital devices, for example, can enable the more efficient design and management of workplaces, not least when it comes to temperature control and useful apps. More widespread adoption of such technologies will likely lead to further related innovation, which could ultimately impact other segments of the economy.
In addition, this new construct of flexible office-as-co-working-space will require accurate and responsive capacity control, booking systems, and smartphone apps to properly allocate workplaces.
Real Estate and the Sharing Economy
Collaborative consumption is distinguished from standard, commercial means by the cost of purchasing goods or services not being borne individually - and instead being dispersed before it is ultimately recouped by a single owner through rent or exchange. The social evolution of real estate has spawned more co-working space and new economic models.
The sharing (or “shared”) economy is a way of distributing goods and services that differs from traditional models, whether in terms of hiring, manufacturing, or selling products. The corporate poster children for this model include Airbnb and WeWork, and the business model generally relies on an ability to identify and exploit spare capacity - in addition to reducing the costs related to searching for deals, bargaining, and enforcing the terms of a transaction, in ways that facilitate a more efficient allocation of unused space.
As blockchain technology is increasingly used to transparently and efficiently record transactions, including micropayments, it is possible that in the near future we may see space-as-a-service offerings extend into the digital realm - creating a sort of Shared Economy 3.0. However, while the sharing economy has drawn increased public attention in recent years, not least in terms of shared office space, the workspace-as-a-service concept was actually pioneered in the 1990s.
The original model was based on providing space for self-employed workers, and for the relatively small number of employees who might be traveling or working remotely at any given time. However, the proliferation of technology has since enabled a new, sometimes more aggressive approach to this concept; WeWork, for example, reported having 774 locations in 38 countries as of March 2021, and 490,000 “memberships” (members signing up online pay a monthly fee for things like the use of conference rooms and access to events).
While sharing economy business models have generally suffered due to the impact of COVID-19, pandemic-related work-from-home policies have also provided fresh opportunities to facilitate remote work spaces for those without access to a home office, and to help decentralize staff for safety reasons.
Co-working has been associated with reduced vacancy rates in the US, likely driven by more efficient employment of spare capacity, and general demand for space-as-a-service has been driven by a desire for the flexibility required by small companies in particular - as they seek to scale up or outsource, and seek out the collaboration related to intangible assets like skills, expertise, and innovation that shared spaces facilitate.
REAL ESTATE
Our physical environment is being shaped by the evolving challenges of a growing, connected society. The way we live and work is in flux and this continues to play out in real estate values and investment returns.
The real estate sector can provide a window into important social issues. While rising home prices have triggered debate about troubling levels of wealth inequality, barriers to obtaining property can point to fundamental problems with racial and ethnic marginalization.
The real estate market can be a source of instability, as in the case of housing bubbles, though environmentally-sustainable planning and the focused use of technological innovation can help foster healthier urban living, more responsible modes of transportation, and reduced emissions.
The need to get our response right has never been greater. And returns are more than just financial. They are also about delivering enduring benefits to the built environment, our economy and society.