Commercial real estate is “seriously under threat” from a new generation of tenants seeking fundamentally different property than their predecessors, according to property experts at ULI’s Real Estate Trends conference in London last week.
Accustomed to e-commerce and challenged by diminished housing affordability, generation Y—those born between 1980 and 2000—are changing well-established patterns of living, shopping, and working. Developers need to “create a new regime that reflects new aspirations,” says Bill Hughes, managing director of Legal & General Property, the fourth-largest institutional property fund manager in the United Kingdom.
“I don’t see why I should invest in real estate like I used to. Conventional retail is in [decline]. Conventional offices—static, unimaginative buildings—will be in [decline]. Generation Y demands stimulating places that are versatile and challenging. We have to be brave, or we’ll become extinct like the dinosaurs,” he warned.
Legal & General Property has been investing in infrastructure, elderly-care homes, hospitals, student housing, and residential in the U.K. as it seeks to specialize in alternative asset classes in which government spending has been in retreat, and to preempt changing tenant needs.
The fund manager isn’t alone. This year, Investment Property Databank, the U.K.’s performance index and data company, reported that alternatives—health care, leisure, and student accommodation—had risen to the country’s third-largest investment class after office and retail, responding to changing demographics.
The panel highlighted influential behavioral changes on real estate displayed by generation Y, including a prioritization of leisure experiences over material goods and travel over homeownership. These new occupants also seek a flexible working environment that promotes a work/life balance.
“Young people don’t crave a corner office. We are living in cities and workplaces formed through an earlier period and aspirations of a different generation. When we think about creating cities and the built environment, cities, and houses, we have to think about the limitations because we are pushing against them,” said Christopher Choa, vice president of engineering design firm AECOM.
Panelist Alisa Zotimova, a self-described “generation Y entrepreneur” who founded property consultancy AZ Real Estate, confirmed that she and her peers “care more about intellectual challenge, free time, and balance in the workplace than money.
“We are socially engaged, tech-savvy, and budget-conscious,” Zotimova said. “We want interactive spaces so we can work from home, as well as a green and civic-minded public realm. We shop in store and online—it’s about both. The shopping mall appeals to us, but it has to be good.
“I may consider not putting down a deposit on a house and continue renting instead, especially if the rental stock is nice, and do something different with my money,” she added.
This desire for more upscale experiences is a concern, said Hughes, adding that this trend would affect shopping centers in particular: “If your real estate is not fit for purpose, don’t expect people to use it. Obsolescence will happen more quickly,” he predicted.
“Unless we can create versatile, flexible, appropriate real estate, we’ll have a flawed portfolio. That makes it tough for conventional property.”
Generation Y also has deep-seated concerns over its economic stability, particularly in relation to housing, revealed Ben Page, CEO of polling group Ipsos Mori.
Page presented findings of his firm’s 17-year-long research into postwar generational differences in the U.K., showing that its young workforce anticipates a poorer quality of life than its predecessors because it believes it will “never [be able to] afford to buy a home.”
“Generation Y is least likely to buy a house immediately and is deeply uncertain about affordability. I employ 1,000 in London and they live like I lived until I was 21.”
Property consultancy Savills reported in May that house prices in London were now ten times average incomes, predicting increases of 24.4 percent over the next five years.
These dynamics meant the time had “never been better” to create bespoke product for the U.K.’s immature private rented sector (PRS), according to Elliott Lipton, chief executive officer of private urban developer First Base, a firm that is a joint venture partner investing in affordable housing solutions at Stratford’s East Village, the former London 2012 athletes’ village.
“Despite the fact that many have an aspiration for homeownership [in the U.K.], there’s a huge shift towards rental,” he said.
“Learn what this user group wants, and understand it wants to be treated differently. Renters want a product delivered with them in mind and with a professional approach,” he said.
Lipton urged developers to take inspiration from rental apartments in New York City that provide smaller living spaces but more space for interaction. “Public space is critical, while shared spaces create revenue streams by serving as spaces that tenants can rent out to host dinner parties,” he said.
It is estimated by CBRE that £10 billion (approximately $17 billion) of overseas capital, from sources including the United States and Canada, was waiting to be invested in bespoke rental products not yet built. Currently, 25 percent of U.S. institutional property allocations go into the residential sector versus 2.5 percent in the U.K.
Hughes added that institutional capital would support developers in creating PRS product in the U.K. “Long-term capital will come in because the sector offers people like me stable incomes that allow us to make the economics work. The development industry needs to produce and offer appropriate specified rental assets in London, and these are on their way.”
An alternative view of generation Y was offered later that morning by André Gibbs, partner of Argent, which is developing the mixed-use 67-acre (27 ha) King’s Cross site in central London—one of the largest city-center development projects in Europe.
“We talk about generation Y, but people don’t change much. They want to eat, sleep, see friends, exchange ideas, and be loved—none of this has changed. Cities are about people.”
Even though the site is still under construction, rents for both office and residential space there have outperformed expectations so far, with office tenants paying around £60, or $102, per square foot. Housing sales started at £700, or $1,190, per square foot, and this rate has almost doubled since the outset.
Gibbs said that good urban planning was about underpinning good connections of streets and squares. “So people can always understand where they are and can move around comfortably. Good master plans create and mix and enliven.”
He added that heritage was also crucial. “Think about what you’ve got in terms of heritage and whether you can hang onto it. It de-risks a development and creates emotional connections during the stages when people can’t see the overall vision.”
Forty percent of King’s Cross is public space, which includes parks, squares, and other green spaces. There also are more than 1,000 water fountains that can be played in on a hot summer’s day. “Public realm should be very public and create a genuine sense of ownership. Private ownership should just ensure that it is of a high standard and that the quality of it underpins the value of the assets around it.”