Whatever the future holds …..
Impression, Sunrise - Claude Monet - 1872 - Musée Marmottan Monet, Paris
Flexibility and resilience are two words we need to take to heart in real estate. If the Covid experience has taught business anything it is that we need to be flexible and we need much more resilience.
We are rapidly heading into a 1970’s era of ‘Stagflation’ mostly because the global supply chain system has proven to be so lean that when it breaks it breaks bad, and hard though it is to believe we are seeing a resurgence of tank and artillery warfare on the European continent.
In the future we need to think much harder about ‘Whatever the future holds …..’
Charles Darwin’s ‘The Origin of Species’ is often spoken of, wrongly, as being about the survival of the fittest. But what he actually said was that it is ‘Nor the strongest, but those most able to adapt’ that win the evolutionary wars. Adaptability and flexibility are close cousins.
There is much ‘Sturm und Drang’ at the moment in the battle between employers and employees as to who has to return to the office, and for how long. We have companies ranging from saying ‘no need to ever come back’, to those saying, or mandating, 2 or 3 days or week, to those on the other end of the spectrum saying everyone back, five days a week.
In reality the arguments are irrelevant, because it is a certainty that talent will win this battle. Companies may be able to force some of their employees to do as they say, but the employees that really matter (speaking commercially), that they want to attract and retain, now have what economists call ‘optionality’. They have choice and agency over where they work. And it is 100% certain that they will be looking for flexibility, across three axis:
First they will want flexibility of time, so that they can work the hours that suit them best, that enable them to maximise their productivity.
Secondly they will want flexibility of location, so that they can work wherever makes sense for them.
And thirdly, they will want flexibility of space, so that they can work in a physical environment that is best suited for their ‘job to be done’. Different tasks are best undertaken in different spaces.
And every individual, team or company is going to require a different mix of the above. There is no generic office answer anymore. Anyone telling you that ‘return to the office’ will mean X, Y and Z is a fool. The fundamental reason why flexibility is such a valuable thing is exactly because everyone will have different needs.
The Greek philosopher Heraclitus talked about ‘all is flux’. He wrote that “No man ever steps in the same river twice. For it’s not the same river and he’s not the same man.” We need to start planning our real estate for this reality. Whatever was fixed needs to become flexible. We need to think of interiors, workflows and business models as emergent, as things that are constantly developing, iterating, changing.
Nicholas Nassim Taleb has written about things that are ‘anti-fragile’, that ‘thrive and grow when exposed to volatility, randomness, disorder, and stressors’. Well, in real estate it is increasingly hard to know what will be required in 2, 5 or 10 years, so we need to build spaces and places that are not over optimised for specific uses but that are designed for adaptive re-use.
In Paris it is becoming mandatory when submitting a planning application for new offices to demonstrate how the building could be converted to residential. That really is planning for emergence.
Much of our ability to be more flexible is going to come from a growing ‘circular economy’ mindset. Where we start with how something is designed, the materials used, and the construction methodologies and ensure that everything can be easily deconstructed, re-used or recycled. Increasingly the supply side is developing products and services that fit this mould, from partitions that are simply moved, from areas within a floor plate that change use from day to evening, and from furniture ‘as a service’ models where it’s easy to swap in or out, chairs, desks or whatever, according to evolving needs.
This is the essence of ‘Space as a Service’ - spaces that provide the services needed for any particular task, whenever and wherever.
It is from this flexibility that resilience flows. And it applies across all asset classes. Where are the points of weakness, where are the bottlenecks, where are the over optimised areas? What is solid, what is permeable. What is fixed, what can shape shift?
Historically the real estate industry has considered flexibility and resilience, but never as deeply as is needed in the future. It is clear that the pandemic has generated second and third order consequences that are far more disruptive than we have been used to. And these are on top of the seismic implications of ever more powerful technologies that are upending industry after industry.
Here are seven drivers of change (as borrowed from an excellent research report on the future of logistics*) that we must pay attention to, and become resilient in the face of.
Covid and/or a new virus. Perhaps we have just experienced a once in a century pandemic. But, in reality, there is little reason to think that is the case. We need to be ready for the next one, and grateful if we have over reacted.
Climate change. We know we are liable for more regular, more extreme weather events. These may hit us directly, or indirectly. The Butterfly effect is real; how resilient are your assets to climate change, near or afar?
Sustainability. This is an obsolescence game. We’re almost at the stage where owning assets with poor sustainability characteristics is a slam dunk way to destroy value. You cannot really be resilient in the face of sustainability, you simply have to be sustainable.
Geopolitical uncertainty. As Covid retreated we thought the ‘good times’ were about to resume. How wrong we were. War in Ukraine has broken the global energy markets and is leading to a remodelled European consensus. Is this period of geopolitical uncertainty going to end soon? I wouldn’t bank on it. As such we all need to look at our assets and figure out what they might be impacted by. Energy price hikes is the obvious one, but there will be others.
Technological development. This is a big one for manufacturing and logistics, as the cost of a robot is the same in Shanghai as it is in Swindon. And as ‘machines’ do more and more, repatriating manufacturing and other processes, to lessen long supply chain risk, is highly likely. Within offices and retail, new technologies enable people to work and shop without visiting physical offices or shops. What can your office or retail assets offer that is resilient to customers going elsewhere? It’ll need to be good, and better every year that passes.
Retreat from globalisation. An urge to be less reliant on others is going to make Western countries in particular, retreat from globalisation. At least to an extent. Trade in digital services could become more globalised but for physical goods the trend looks likely to be the reverse. Either way, who needs what real estate could be set for quite some change. Resilience will come from having what the market needs. Do you?
Inflation. Just in time manufacturing works excellently in a low inflation world. Buy what you need in two months, in two months. In a high inflation world that model looks less desirable. Buy what you need in two months now, because in two months it’ll be more expensive. This though is not how we’ve thought for a very long time. At the least we need to be thinking about what do we use or need that might be in an inflationary spiral? Do we buy it now? If so where do we store it, and how does this impact on our cash flows. Resilience in the face of inflation is a new skill we need to learn, and fast.
So in conclusion, in order to design our businesses for flexibility and resilience we need to be considering new form factors, workflows and operating procedures. It sounds like an easy thing to do, but in reality this could mean an almost complete re-engineering of how your business works. Every input and every output needs to be analysed. Everything fixed, or fragile, needs to be inspected and appraised for transformation. Anything that cannot be made flexible and resilient needs to be assiduously monitored and profiled for knock on risk.
It is very easy to say ‘we are flexible and resilient’, but executing on actually being so most certainly isn’t.
*’Supply chain adaptation will boost European occupier demand’
Tom Duncan, Head of Research, Cromwell Property Group.