Midmarket hotels, traditional office space, and even high street retail are among the forms of real estate that will have the “lowest possible value in the future” because of shifting tastes and land-use patterns, according to the chief executive officer of a leading think tank.
Thomas Sevcik, cofounder and CEO of Arthesia, recently told attendees at the ULI Real Estate Trends Conference 2015 that physical space is becoming a “function of the digital” space and that bricks-and-mortar will account for a “small element” of occupiers’ digital strategies in the future.
The rise of coworking means that office space will lose value, he told attendees. In addition, the digitalization of travel through firms such as Airbnb will hurt the midmarket hotel sector, and many retailers will increasingly opt for showrooms rather than stores to “help people physically attach” to a brand.
Copanelist Chris Choa, principal at AECOM, said the millennial generation’s interest in experiences means that the appeal of living in apartments—such as those promoted by Airbnb—is another threat to the traditional hotel market.
“This will be a huge change in our world,” Sevcik said.
“In my discussions with retailers in Hong Kong, it seems they see the future as a digital world and the physical world as a function of it,” said Sevcik, who undertakes strategic consulting for large organizations, companies, cities, regions, and countries.
“One example is that the physical space will be a strategically positioned element of a digital value-creation position,” he said, adding, “I see new types of leasing agreements as a result.”
Not all retailers, however, will turn their backs on bricks-and-mortar, Sevcik explained. He said that luxury brands will embrace “a lot of physicality,” while the convenience of local supermarkets means they will “never go away.”
“On the luxury level, there is a need for physical space and experience. But the whole midmarket will be difficult because the experiences [of those stores] aren’t that great. The price is such that consumers will buy online,” he said.
Sevcik identified real estate asset classes that he believes will have higher value in the future, such as vanity storage (which he defined as storage or showrooms for art or classic cars), urban agriculture, high-touch manufacturing, brand experiences, and local distribution spaces.
The impact of these changing priorities will result in a “huge battlefield of reorganization” within cities, he said, adding: “Which cities would be brave enough to knock stuff down and start again in order to find [the] right balance between physical and digital?”
Planners and developers will therefore make major changes in their approach to location of assets as “proximity” becomes redefined, he argued.
Sevcik explained that since cellphones can influence where you socialize, shop or stay, promote offers, and attract footfall, it will be possible for real estate developers to cite good assets close to “bad addresses” in the future.
He explained: “Ancient cities were always built on the idea that merchant A is located next to merchant B. But if proximity is contained in the smartphone, then in theory you could locate Prada next door to a drug dealer; Prada doesn’t need to be next to Gucci.
“This is an extreme theory, but proximity—which we all take for granted—will come under pressure.”
Digital influences, he said, affect people’s impulse to visit a place before they hit the street.
“The smartphone says, ‘Go to this restaurant’ or ‘Go to this hotel.’ So impulses will totally move from the physical street to the smartphone,” he said.
One implication for cities, Sevcik predicted, is that a wider range of functions will now be possible in mixed-use districts than the traditional model, which divides places into retail, residential, and commercial uses.
But he emphasized that public space and connectivity will remain fundamental to helping places function.
Sevcik said that zoning has historically been based on separating acceptable from nonacceptable uses, but that this is set to change.
“One hundred years ago, you didn’t want to live near a factory, but now we will have the option of placing manufacturing next to senior living homes,” he said.
Manufacturing will return to cities, he predicted, owing to the movement toward zero carbon emissions.
Referring to a new report by Arup, which explores how the introduction of new technologies will result in cleaner, more efficient production, Sevcik said these initiatives will result in a “Rubik’s cube of cities” that allow for multiple combinations of uses.
“This will allow us to have a total mix of uses in a surprising way. Official zoning laws say that people shouldn’t live in proximity to factories; we should now ask if this is correct. Therefore, we need a huge discussion about zoning laws. All these questions will lead to questions about valuation and the way we see buildings.”
