The coronavirus crisis has accelerated certain trends in the real estate market, turning assets that were perfectly viable in the past into liabilities. For property companies, it's time to take stock and rebalance their portfolios in order to protect themselves against and prepare for any potential outside shocks in the future.
By Klaus Hirt, Partner Drees & Sommer
There was a time when real estate prices in Germany were only going in one direction – upwards. As demand increased more and more, investors, mutual funds and property companies saw their range of options becoming squeezed. This resulted in many of them making concessions in terms of the location, condition or price of their real estate investments. At the same time, the long property boom was leading to bottlenecks in terms of capacity and rising prices in the construction sector as a whole.
And then along came the coronavirus pandemic, triggering a severe economic crisis and catching the industry – which had not been expecting an external shock – completely unprepared. It's too early to say how serious the impact of the crisis will be on the real estate market, but the impact will certainly be felt. With the pandemic acting as a catalyst that has accelerated certain trends in the property market, properties that were perfectly rentable assets in the past are now doomed to vacancy. And although some companies will come out of it relatively unscathed, others will be bitterly regretting some of the dud investments they made in boom times.
For property companies, it's time to take stock and make the right decisions – time to reinvent themselves, adapt and galvanize themselves against any future shocks like the coronavirus pandemic. To do that, they need to align short and medium-term priorities, make sure they can react quickly and invest in future-proof technologies and sustainability.
Moreover, it means that even in boom times, every investor, developer or proprietor should be asking themselves how future-proof and attractive their building projects and existing properties are. Only then can they guarantee full occupancy of properties and ensure that their properties are equipped with sufficient digital technology to meet the needs of renters. At the same time, it's worth keeping an eye open for any other potential revenue streams that can help offset income lost due to political and social developments such as the Berlin rent freeze.
The future belongs to intelligent, eco-friendly buildings and districts
Looking at the medium to long term, it's already clear that real estate will need to be intelligent, eco-friendly and sustainable in order to meet the needs of users. The future belongs to the digital natives, a generation that is becoming ever more climate-conscious. The categories of 'life' and 'work' will become ever more closely intermeshed, and we can see signs of that already in terms of how work, life and home life are becoming connected. With space being at a premium in urban districts, mixed-use high-rise developments will become more and more widespread.
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Companies whose main business is real estate will not be able to rely on rent yield categories exclusively, but will instead have to become platform operators and service providers in their own right. As they ride the tide of digital transformation, they can exploit technology for their own core business and to develop digital business models of their own.
The winners in the real estate market of the future will be those property companies or mutual funds that diversify out of renting and selling office space and start providing services for property users; and who are capable of evaluating data analytics, artificial intelligence, usage and capacity data generated by users of buildings. Besides usage data, operating and environmental data will need to be gathered and evaluated to gain insights and extract value. Here, the objective will be to compare the occupancy, capacity and usage of space of individual buildings and then generate recommendations on how they should best be managed.
Property owners, asset and portfolio managers already have a wealth of information at their disposal – such as data on buildings, the surrounding area around them, the way they are used, their energy consumption, and client invoicing or market developments. However, the data is often only available in isolation. The tricky thing is to be able to join up the dots. Any investors, proprietors or management companies that want to generate income from these data streams need to be able to gather all the information onto a property platform and process it strategically, so as to extrapolate bespoke solutions from individual buildings and their users and exploit these insights across the entire property portfolio. In this way, the property company of the future will be a kind of full-service provider, both renting office space and providing new services.
A spotlight on the property user and their needs
The challenge for property companies is to focus more on the property user of the future so that they are not so dependent on the rental and capital markets. Instead, renters can be locked in with additional services that can also earn higher profits at the same time. One example of this is having flexible, space-as-a-service models instead of long-term rental contracts. The renter(s) can move in instantly and get working straight away without worrying about anything. They can book office furniture, IT, a network connection, a cleaning service and an office drinks service for a specific period of time – but there is total flexibility. This provides attractive add-on revenue streams for investors and property management companies, and if the renter's company needs to grow, they can simply book additional office space. The knock-on effect of this will be that long-term rental contracts of 10 years or more and needing to rent additional office space in advance will go extinct. Flexibility will be the name of the game and property companies will need to adapt accordingly.
And how is it possible to allow for that level of flexibility? By employing data to optimize for every need, including property and facility management requirements. If data can be used to eliminate inefficiencies, the cost saving is potentially huge. The fact that many software companies have flocked to the property market with their solutions and expertise is a clear sign that a big opportunity exists.
Lastly, we need to address sustainability, and not least because we know that the European Commission is eyeing up a "Green Deal" to make the entire European continent carbon neutral by 2050 – with the biggest capital investment being made in the construction sector. It is therefore well worth beginning to think about the environment and sustainability-focused investments. And since we're on the subject of sustainability, the abbreviation ESG is becoming more and more prevalent in the real estate sector. It stands for the three pillars of Environmental, Social and Governance standards that companies will have to meet. As such, new business models like space-as-a-service and innovative mobility concepts will have a clear role to play in the near future. And so, finally, we return to our theme: the office building of the future is much more than just a building with desks in it. It is a place where people can meet in person, and where the services are completely tailored to the needs of users.
Klaus Hirt, Partner Drees & Sommer
Klaus Hirt joined Drees & Sommer in 2007 after finishing his studies in civil engineering at the Darmstadt Technical University and at WU Vienna. Based at the company’s Frankfurt offices, he advises German and international clients on projects around the entire property life cycle. His expertise includes developing property and portfolio strategies, creating feasibility studies and renovation surveys, and doing due diligence on properties, all the way through to transactional consulting and technical/commercial project controlling.
The corona pandemic has suddenly brought us face to face with issues – such as digitization and sustainability – that the construction sector would have had to address sooner or later anyway. Whilst it's clear that the office itself is still relevant, what will it actually look like? What will characterize the offices of the future, which aspects will be important for the workplace in the future and for everyone connected with it, is the subject of numerous articles and interviews in our dossier "The Workplace Reloaded"