Real estate
New ways of living and working are shaping real estate markets
5 min read 22 Mar 23
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The future for real estate is intertwined with the prospects and culture of younger people, or Generation Z. Real estate is a long-term business so these are the tenants and workers that asset owners and managers need to channel, especially as senior employees retire from the workforce.
Tomorrow’s tenants
Today, young adults are likely to be at a financial disadvantage compared to baby boomers, for example, that benefited from substantial house price growth. They tend to graduate with more student debt, and face difficulty buying a home without financial support from their parents.
The digital revolution also means the way Gen Z interact, and potentially make a living, is different. An explosion of social media influencers epitomises this, typically entrepreneurial in nature and highly mobile. This cultural shift is mirrored by increasing focus on wellbeing and work/life balance. The ability to work remotely aligns with these priorities.
Changing working patterns have been accelerated by the pandemic. Employees have proven their ability to work productively from home, while employers are showing increasing recognition of people’s wider universe; key life events; and responsibilities. Unquestionably, hybrid working is here to stay, reinforced by the rise of digitally-connected future generations.
“New ways of living and working look set to accelerate the expansion of urban areas and new housing tenures, and concentrate demand for best-in-class offices.”
Living solutions
In today’s landscape, out-of-reach house prices and rising rents amount to affordability constraints in major global cities. Governments are stepping in, either through incentives for developers or rent controls to support tenants. We believe the ultimate solution lies in increasing the amount of affordable housing. This means creating more housing supply across the spectrum, including new housing tenures such as Shared Ownership in the UK, which can offer an affordable step on the housing ladder through a reduced deposit requirement. Ongoing costs also look attractive when compared against other home ownership routes.
Hybrid working is another part of the solution to the housing affordability problem. With the ability to work from home more often, young families in particular could move further out of cities to more affordable locations.
Venturing into 90 to 120 minute commute cities could become realistic in places like Spain, for example, where high speed rail infrastructure provides the ability to access more affordable housing, and easily travel to major employment hubs for work two or three days per week. The expansion of urban areas as a result, is likely to increase the need for private rented homes as well subsidised rented housing types like Shared Ownership in well-connected suburban locations.
The future of offices
A shift in lifestyles is reflected by a flight towards best-in-class offices as corporates recalibrate their requirements. The bifurcation between prime and secondary buildings is widening, driven by more stringent environmental targets and tenants’ increasing prioritisation of space with the ability to attract and inspire talent, and foster a company’s culture.
M&G’s development of 40 Leadenhall in London’s financial district taps into modern occupier demands, targeting a BREEAM Excellent rating with carbon emissions 30% below current regulatory requirements. Designed to set the standard for iconic offices of the future, recycled gas pipes flank the building’s entrance, while amenities include a Peloton studio and 30-seat cinema, as well as a publicly available Changing Places facility to help support people with disabilities.
With the rise of the ‘super prime’ office, we believe tenants are likely to rationalise their space requirements, while committing to an increased cost per square meter. In Manhattan last year, double the amount of high-end office space was signed by tenants relative to 20211, with amenities including childcare, pet sitting and dry cleaning.
As revaluations play out across real estate markets as a consequence of high interest rates, offices that fall short of modern occupier requirements could offer an opportunity for conversion to other uses, including residential, student accommodation or hotels. This is likely to be a gradual process, however.
Meeting modern requirements
New ways of living and working look set to shape real estate markets in the 2020s and 30s, accelerating the expansion of urban areas and new housing tenures, and concentrating demand for best-in-class offices.
Housing affordability remains a key long-term challenge for future generations, driving the need for more private rented and subsidised housing in both cities and suburban locations. The ability to create new homes that meet the requirements of hybrid workers provides an additional opportunity for investors. Equally, providing office buildings that offer an environment and amenities that cannot be replicated at home, reflects an attractive investment prospect.
1 Economist, “The rise of the uber-luxurious office”, January 2023.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.