The built environment industry, which in the UK alone accounts for c.7% of national GDP & 10.5% of total employment, has long been insulated from the disruption that has taken place in virtually every other industry with the advent of digital technologies and digital mindsets. The real estate industry has been lucky during a decade or more in which giants in others sectors have been disrupted by those who have been able to think more creatively - and so create exponential value in ways that fit what people really want in the Digital Age. Think Netflix, Instagram, Uber, Airbnb, Tesla, Amazon and many more.
The real estate industry has been protected from disruption because of its structural dynamics: the capital costs to buy and and build are huge; and the inherent ‘physicality’ of both land and buildings limits the ways in which digitization and digital thinking can disrupt. This has led the industry to invest extra-ordinarily little in innovation, spending on average around 0.25% of turnover on R&D. The global mean for companies is c.4%. Google spends 13% of turnover on R&D. Intel spends 20%, a full 80x what a typical real estate company spends.
But all this is changing. And it must.
We are witnessing a perfect storm of social and economic factors that are about to test the Industrial Revolution era business model of real estate. The industry must fit the emerging future. Or many will fail. In this post I will focus on three key drivers that threaten to make the old business model redundant, especially in residential property. (I won’t make any more mention of other major drivers on the horizon like the shift away from retail centers to online shopping; and the fact that trillions of dollars of real estate wealth is tied up in property by or near water. Rising sea levels could make such property uninsurable - meaning it will suddenly have no ‘official’ value at all. Economist say this could be a way larger economic shock than the meltdown of 2008).
First there is growing awareness by those under 40 that the cities they are living in are indeed unlivable. This in itself is a major social issue driving people to take desperate measures. Nurses, teachers, carers, social workers and a whole host of other professionals that we need most to make cities work are finding it very hard to afford to live near their workplaces. In addition, with people living longer and having to pay for social care with capital from their homes, many young people with either not inherit much or inherit too late to help them in their formative years as adults working in cities.
This issue is a fundamental threat to the knowledge economy (and so commercial real estate and leasing) as much as it is to civil society in general because employees won’t be able to live near enough to work to make life worth living. So companies will no longer be able to attract and retain the best young talent if they expect them to show up 5 days a week in a central location. What happens to the commercial property market when big companies don’t want showcase HQs or large office spaces in cities because the brains they need to thrive have drained to towns where the quality of live is livable? The creaking and groaning in this system can be heard everywhere from San Francisco and New York to London and Paris.
Secondly, isolation and loneliness in cities is at record levels, fueling stress, anxiety, depression and suicide. And anxious and stressed employees find it hard to be creative in our fast-changing world. They have low resilience and are far less productive (boosting productivity is the major long-term economic concern for the UK). Research has shown that loneliness is as dangerous as smoking and more dangerous than obesity.
Overwhelmed and stressed knowledge workers drawn to the big cities for excitement are demanding from their employers what we call the 3Ms: Mastery and autonomy at work. Meaning and purpose in their work. And membership: a real sense of community. This had led to a major interest in co-working type experiences in companies but also to a desire for real community at home and at play.
But our rapidly-gentrifying cities are failing to provide the nourishing communities that people say make life worth living. And overwhelmed employees don’t have the time and energy after commuting across town for 10 hour working days to invest much in making their local communities work. So people live in up-and-coming pockets of cities that they can afford but don’t have deep connections to the non-gentry, causing tensions on both sides.
Finally, public frustration with real estate developers that are given contracts to regenerate cities by local government is rising fast. It is only a matter of time before this starts to costs developers the approval and funding they need to win lucrative billion-dollar deals. The biggest PR problem big developers have is that citizens perceive that they (and local councils) are not delivering on their ‘affordable housing’ promises.
According to non-profit Shelter, affordable means homes that cost no more than 35% of net income. But in government contracts with developers, ‘affordable’ is not defined in relationship to what people are paid but as a percentage of market rates (often 80% of market rates, although some progressive developers - like LendLease in Elephant & Castle - are wisely making units really affordable by capping rent at 50% of market). This means that if market rates are wildly inflated, as they are in London, Los Angeles and many other big cities, ‘affordable housing’ is totally unaffordable to all but a few. So local redevelopment - the potentially most important economic investment in communities for decades - appears to locals to be geared towards boosting profits for investors rather than generating homes for ordinary people on normal wages.
In one landmark South London regeneration scheme, public outrage has cascaded across the internet after media outlet Vice claimed that ’every flat has been sold to foreign investors’, forcing the leader of the local council to post a rebuttal. This kind of citizen backlash can only grow in noise and impact. Plus, as overseas investors hoover up property, ‘ghost towns’ are created within formerly thriving urban areas. Many new owners, attracted to property in major cities as ‘safe havens’ for their capital, don’t inhabit their places for more than a few weeks a year. This causes local shops and services to fail and the community to crumble still further.
People are understandably frustrated. This is having major impacts on everything from global politics to local violence. Simply put, there aren’t enough homes, making homes too expensive for most people. This pushes up the price of land, one of the core assets of both wealthy citizens and property companies. This is creating what the Joseph Rowntree Foundation calls ‘housing-cost-induced poverty’, causing many people to leave the cities for places where they can thrive, taking their brains and brilliance with them.
This ‘Bright Flight’ is a major sign that the system is at breaking point - and one that government and business alike should heed. I myself moved out of London to raise my young family in a spacious home within a thriving ‘rurban’ community because the offering available in cities didn’t fit my needs. The data show that thirty- and forty-somethings are leaving cities like London and Chicago in record numbers just at the point where talent and experience combine to forge high-impact creative leaders. This has an impact on business, society and of course both commercial and residential real estate. But currently few are listening to these not-so-weak signals alerting us to a crisis. In our work (and in the original Greek), a crisis simply means a ‘turning point’: An opportunity for a breakthrough.
As with all ‘problems’, these three inter-related threats to Business-As-Usual in the real estate market will have breakthrough solutions. Perhaps the most interesting - and the one with the most potential - is the concept of co-living. According to Ryan Fix, the founder of Pure House, who ran some of the earliest co-living sites in New York City, co-living is: “A new class of real estate asset which integrates residential, commercial and retail with a service layer focused on community and collaboration”.
Existing small-scale co-living spaces show that living together in community like this can create much-needed unity, creative outcomes and a better way of life. There is also good money to be made. Co-living can generate more value per square foot than traditional models can. And by sharing some elements of their home, people can have a richer and deeper experience but with less need for space. Occupancy rates can be much higher, making the yield on space more lucrative. This disruption is in full swing in the more developed sector of co-working. For example, by understanding the spirit as much as the yield per square foot of co-working, WeWork have built an $20 billion business in just 7 years, making them way more valuable than many of their conventional rivals with massive legacy operations.
But the problem is that many people are jumping onto the co-living bandwagon as they would any other real estate venture. Lots of existing co-living projects, like WeWork’s WeLive concept, have been sharply criticized for being massively over-priced (although the value is in the experience not just the often-tiny living space); and focused on a relatively wealthy cultural elite rather than being a truly affordable solution to the failing housing marketing. Anyone can buy or throw up a building and say its a co-living space (or co-working for that matter). But as many have found out, including high-profile Silicon Valley investors and London entrepreneurs, adding a shared living room or gym service to an apartment building does not make it a thriving, sustainable co-living experience.
Co-living is not just ‘resi with a bit of sharing’. Its not just ‘co-working with bedrooms’. Co-living is an intimate, deeply human lifestyle choice that needs to be nourished as much as harnessed for profit. Everyone on a co-living project - from the tenant to the project lead - must have highly-tuned collaboration and co-creation skills and qualities, something we call Collaboration IQ. You cannot take existing business models and mindsets and expect real co-living communities to grow around them.
Although scientists believe we are born collaborative, we have been trained to be isolated, atomized and self-centered. Its hard to share; and its hardest to share in the intimate spaces where we live and play (as well as cry about our boss, fight with lovers, engage in Bumble hook ups and host our tricksy parents). So if, and when, major developers try to create co-living spaces that have authentic community - by using their existing profit-driven, 20th Century mindset - they will fail to capitalize on this seismic shift in the real estate market that can return both profit and social impact in equal measure. This will be a loss to both their investors and all of us who want cities to work. This is because it is only the major corporations (and government when it is being bold) that can deliver big, breakthrough innovation at the scale needed to make a real dent in our social problems.
This is why we at Switch On have joined forces with Pure House. We are working together to help companies leverage the massive business opportunity of co-living in cities in the right way: so that it delivers both profit and purpose in equal measure. We want to turn co-living from a cute, small-scale phenomenon to a scaleable disruption in the industry that makes cities livable and thriving homes genuinely affordable; ensures talent of all types can live and work around the organizations they want to work for; fights the loneliness epidemic by providing a real and nourishing community; and helps developers proactively deal with their PR problems and so win more future regeneration contracts because show they genuinely care about how people in cities live.
We believe co-living spaces and communities created at scale can be designed to transform, empower and unleash human potential so people within them thrive; and our companies and cities thrive because of them... whilst allowing the bold to disrupt the real-estate market and win a huge slice of a billion-dollar opportunity.