Envisioning the possibilities: the future of real estate resides in flexibility

The future of real estate resides in flexibility

Key takeaways

  • In a rapidly moving world spurred by changes in consumer demand and technological advancements, real estate investment management needs to evolve to continue to generate strong performance for investors.
  • While real estate isn’t traditionally considered a flexible asset class, lucrative opportunities exist for those who can creatively adapt existing assets.
  • Investors interested in tapping into these redevelopment possibilities are partnering up with leading real estate developers to unlock embedded options to create new return-generating opportunities.

The evolving face of real estate

How does real estate stay relevant in a world of changing needs? It changes with it. Real estate should be considered with flexibility in mind—an asset that can be redeveloped as urbanization, technological change, and unexpected forces shape the world around us.

“This flexibility of what real estate could be can be thought of as an embedded option that can be exercised to create additional value from existing assets.”

Real estate isn’t just built to meet the demands of today; it should, at the same time, be envisioned to fit the demands of tomorrow while being ready for the unexpected through redevelopment opportunities. This flexibility of what real estate could be can be thought of as an embedded option that can be exercised to create additional value from existing assets. 

 

Surface parking lots of yesterday are today’s live, work, play centers

Real estate flexibility isn’t a new concept; in fact, it can be spotted across North America with the boom, in recent years, of mixed-use developments on newly rezoned lands. Many of these projects saw the conversion of surface parking lots that were once built as part of an older office complex into new income-generating assets.

This optimization of real estate through parking lot conversions accelerated in the mid-2010s when parking lot sales spiked to new highs. With demand and rental revenue increasing, real estate developers searching for new value creation opportunities realized that urban surface parking lots could be better repurposed as high-density multifamily developments.1

U.S. parking lot sales
This chart shows parking lot sales in U.S. urban areas from 2006 to 2019. In 2018, parking lot sales reached a historical high of approximately $520,000,000.
Source: CoStar, December 31, 2019.

Several years ago, in the suburbs of Atlanta, Georgia, we transformed an existing surface parking lot that was part of an owned office complex into a multifamily development that unlocked significant long-term economic and social benefits for the local community. From an investment standpoint, this development created value through densification. It drove net operating income higher by mixing up the use of space, diversified risk by mixing up the sources of demand (for office and residential), and offered better protection against single-market risks. While rezoning for such uses often comes with challenges, working with local government to achieve a common goal often proves helpful if creating an ecosystem beneficial to the community. In Atlanta, for example, this project alleviated pent-up housing demand the city had been experiencing.

 

Enhancing investment value can come from operational improvements

Optimizing properties for best use often comes by first asking the question, “What else can be done to increase value?” Our real estate management team answers this by first looking within existing portfolios to identify opportunities. From the installation of a state-of-the-art battery system built by Tesla to save on energy at a property in California2 to the system upgrades carried out in Asia properties to create sustainable, energy efficient, intelligent buildings, these cost-saving redevelopments create operational improvements while driving positive economic, social, and environmental change.

In new developments, looking within may entail enhancing the way things are typically done; for example, the switch to the usage of geothermal heating and cooling systems in new projects, while costlier up front, should reduce carbon dioxide emissions by 75% to 85%, relative to the traditional installation of gas and oil products.3

 

The Amazon effect is creating new business models and opportunities

After looking within, the next step in optimizing assets for best use comes from analyzing external market dynamics and identifying forces shaping the world. Today, with the rapid growth of e-commerce, the real estate industry is undergoing a seismic shift. What started as a relatively gradual adoption of online shopping years ago began accelerating during the COVID-19 pandemic, which brought e-commerce growth forward by 10 years,4 and with it, a rapid change of the urban landscape that’s creating new opportunities. 

 

Unlocking new value in obsolete properties while challenging traditional design concepts

The adoption of Amazon by the masses isn’t only changing consumer shopping habits, but also consumer expectations of how quickly goods arrive at the doorstep. The desire for quick delivery has created a boon for industrial property, specifically for last-mile facilities near major urban centers. 

“With the United States facing an aging warehouse inventory that no longer meets the needs of logistics tenants, the obsolescence is creating redevelopment opportunities ...”

This Amazon effect is turning once obsolete physical space into cutting-edge warehouse distribution centers that are challenging traditional industrial warehouse concepts. These aren’t the warehouses built in the past, and demand has outpaced the supply of state-of-the-art industrial properties on the market today. With the United States facing an aging warehouse inventory that no longer meets the needs of logistics tenants,5 the obsolescence is creating redevelopment opportunities for those who can capitalize on a cutting-edge trend.

 

Share of U.S. warehouse inventory by building age
This chart shows the share of U.S. warehouse inventory by building age. More than 75% of existing inventory is more than 20 years old.
Source: CBRE Research, Q4 2020.

For example, in partnership with real estate developer Broccolini, we recently completed a one million square foot distribution facility for Amazon in Scarborough, Ontario. This modern build-to-core facility, which replaced several obsolete parking lots and buildings, implemented smart integrations across systems and used advanced planning tools to support sustainability and enhance the customer experience.6 Not only should this development help facilitate quicker delivery times, it also created 700 new employment opportunities for the local community.7

The malls of yesterday are a blank canvas sitting on prime real estate

With Amazon driving the change in consumer preferences toward online shopping, malls are becoming less relevant, or completely outdated, in some cases. In February 2020, foot traffic at Canadian malls was already down 40% relative to the prior year, a trend only exacerbated by the COVID-19 pandemic.8 Landlords, tied to the traditional retail business model, find themselves at a crossroads: How to get customers to return to malls?

Perhaps the answer lies in looking at malls as blank canvases, in reimagining the space for maximum value. In many urban centers, malls sit on prime real estate. Some developers, aware of the potential the physical space affords, have already started taking advantage by planning to redevelop existing malls into mixed-use developments.9 Other, less traditional opportunities also represent a way forward. Shopping malls often sit in dense population centers and have an array of shipping docks and ample parking. With that in mind, malls can be redeveloped to suit an array of new rising demands, including:

  •  Last-touch neighborhood facilities that speed up delivery times to a new level
  • Industrial co-sharing spaces for the new retail landscape
  • Pure entertainment centers with millennials valuing experiences over things

 

Data storage facilities at the center of the global digital transformation

While the growth of e-commerce is creating significant opportunities, it also highlights how the digital transformation is shaping the world. Social media, video streaming, cloud computing, and e-commerce aren’t only changing daily lives, they’re also placing strains on data infrastructure that doesn’t adapt. By 2025, it’s estimated that 463 billion new gigabytes of data will be generated each day globally.10

As the digital transformation continues to grow, so does the demand for data storage, and with it, the demand for state-of-the-art facilities—vast, climate-controlled centers that house data servers and the auxiliary equipment necessary to keep the infrastructure secure, safe, and running reliably. Data centers require significant real estate investment, and the development of new land and redevelopment of existing assets will be crucial for a sector that offers attractive long-term investor return.

While demand for data centers is being seen worldwide, Asia-Pacific presents especially lucrative opportunities—a trend our colleagues in that region are taking notice of. Not only is greater Asia expected to represent the fastest-growing economy worldwide, according to a report from Cisco, it houses nearly half of all of global data servers.11

 

Next-generation real estate demand is driven by megatrends shaping the world

The last several months have also revealed another trend shaping the world more rapidly than ever anticipated. Not only has the COVID-19 pandemic accelerated demand for life sciences real estate in the United States, it's highlighted the importance of the sector given the global aging population and importance of personalized medicine.12 It’s a megatrend capturing more and more attention, and one that can’t support work from home.

Top 10 countries for life sciences research in 2019
This chart shows the top 10 countries for life science research in 2019 based on counts of high-quality research journal outputs. The United States is in the top position, followed by China and the United Kingdom.

Source: https://www.natureindex.com/annual-tables/2020/country/life-sciences. Based on data from January 1, 2019, to December 31, 2019.

The life sciences sector is one with unique needs for unique spaces. It requires everything from office space to dry laboratories to temperature-controlled storage facilities.13 It also typically attracts highly educated and well-paid professionals accustomed to top-tier amenities, including restaurants, entertainment, and luxury stores. New York City, for example, believes it can step up to the plate to deliver everything the sector requires. Local government policies are offering biotech start-ups support for the costly redevelopment of existing spaces.14

While the life sciences real estate sector is in the early stages, the opportunities for growth, innovation, and redevelopment it presents are alluring. Trends that may appear niche today may become lucrative and mainstream one day soon.

As much as real estate doesn’t change, it does—with the right approach

While real estate isn’t traditionally considered a flexible asset, history shows that it can embrace change by those who approach it with flexibility in mind. By continuously uncovering new options within portfolios—some that are evident from the start and others that transpire along the way—those with expertise are creating new value opportunities from existing assets. Urbanization, the need for a sustainable future, evolution of consumer needs and lifestyles, and healthcare are just a few examples of trends that are changing the world at breakneck speed. While such trends create obsolete industries, the adaptability they demand from real estate creates opportunities for investors who partner up with real estate managers that have a history of success and an agile mindset.

With the future of real estate laying in adapting to new trends, it begs the question: What are the parking lots of yesterday that can be optimized to meet the forces shaping the world beyond tomorrow?

Investors See Value in Urban Parking Lots—as Future Multifamily Buildings,” National Real Estate Investor, February 13, 2020. manulifeim.com/realestate/en/sustainability/our-views, 2020. Environmental Benefits of Geothermal Heat Pumps,” Dandelion Energy, February 21, 2020. 4 COVID-19 pandemic accelerated shift to e-commerce by 5 years, new reports says," techcrunch.com, August 24, 2020. Old US Warehouses Not Meeting Current Needs," Material Handling & Logistics, April 8, 2018. 6 Modern warehouses adapt to the new reality of e-commerce,” supplychaindive.com, January 8, 2019. Manulife Investment Management Announces the Completion of Amazon’s Newest Fulfillment Center,” Manulife Investment Management, December 8, 2020. 8The future of the mall: Building a new kind of destination for the post-pandemic world,” Deloitte, January 2020. 9 Two High-Rise Residential Towers Coming To SmartCentres Thornhill,” Urban Toronto, August 4, 2020. 10 How much data is generated each day?” World Economic Forum, April 17, 2019. 11 Playing defense: Investors looking to data centres,” JLL, June 10, 2020. 12 Covid drives historic demand for life sciences real estate and these REITs, report says,” cnbc.com, October 9, 2020. 13 Thriving Life Sciences Sector Demands Strategic Real Estate,” lifescienceleader.com, July 27, 2020. 14 In a Battered New York Office Market, Life Science Is Flourishing,” New York Times, October 27, 2020.

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Michael J. McNamara

Michael J. McNamara, 

Global Head of Real Estate Investments

Manulife Investment Management

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