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The BID

Shaping the cities of the future

Esta semana presentamos a Ben Young, director de Bienes Raíces de EE.UU. de BlackRock

Las ciudades, desde metrópolis como Nueva York hasta urbes emergentes como Denver y Seattle, crecen y se desarrollan minuto a minuto. Los establecimientos físicos están siendo reemplazados por el comercio electrónico, las compañías de comercio electrónico están inaugurando establecimientos físicos, y los espacios de cotrabajo y covivienda se están convirtiendo en la norma general.

En este episodio de The BID, Ben Young, director de Bienes Raíces de EE.UU., analiza los tres principales elementos disruptivos para los bienes raíces y el significado que tienen para nuestra manera de vivir y trabajar.

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    Oscar Pulido: Picture this: you wake up in the morning to a grueling iPhone alarm, roll out of bed, and put together breakfast. As you walk to the gym, you dodge scaffolding and turn up your music to wash out the sounds of construction. After the workout, you head to the nearest WeWork to start a day of work.

    In just a couple of hours, you’ve interacted with just a few of the many ways real estate is changing. Cities from New York to new players like Denver and Seattle are growing and developing by the second. Brick and mortar stores are being replaced by e-commerce; e-commerce are actually opening brick and mortar locations. And co-working and co-living spaces are becoming the norm.

    So what will the cities of the future look like? On this episode of The BID, we’ll speak to Ben Young, Head of BlackRock’s U.S. Real Estate Business. We’ll talk about how real estate has been and will continue to be disrupted and what that means for how we live and work. I’m your host Oscar Pulido, we hope you enjoy.

    Ben, thank you so much for joining us today on The BID.

    Ben Young: Thank you for having me Oscar, happy to be here.

    Oscar Pulido: So let’s start with the basics on real estate. I’m thinking about a personal residence when I say the word, or the term, real estate, but it’s really much more than that I think.

    Ben Young: It is. And it’s a very good question. When we’re talking about real estate, what we’re really talking about is the building blocks of society actually. It’s the land and the buildings on it that are utilized to support the normal functions of the economy. It’s the four main categories we call the four main food groups. And the types of commercial real estate are office, apartment, retail and industrial. Together, these sectors actually account for trillions of dollars in U.S. property value. With millions of people employed in the investment and management of these properties.

    Oscar Pulido: And my suspicion is that the real estate industry like virtually every industry in the world these days is being disrupted. So when you think about what is disrupting the real estate industry, any themes that we should be aware of?

    Ben Young: Absolutely. What I would start with and say is look, the needs of people and businesses are constantly changing and the real estate environment’s needs tend to adapt. But most changes are gradual. Adding dog walks to apartment buildings or moving heaters away from the base building office walls to increase window height, but they are also major long term disruptions to real estate. I think the first that comes to mind, to myself, and probably everyone else is e-commerce. E-commerce is the main disruptor. But you can’t forget about a couple of more and those are the sharing economy and 5G.

    Oscar Pulido: So start with e-commerce, because you’re right, I probably have an Amazon package at home I have to pick up, so I’m guessing that’s where you’re headed with this.

    Ben Young: Exactly. We’re all aware of how easy it is to order something from Amazon as you just noted, and how the internet has made price discovery as simple as a few clicks on your cellphone or your iPhone. But what is interesting is consumers prioritize speed and convenience when shopping. Thirty-nine percent of consumers rank speed as the largest factor when choosing purchases online. Versus 23 percent actually say price was its determining factor. So this makes e-commerce competitive actually with traditional stores, allowing online sales growth to be actually quite rapid. This in turn is actually creating more what we call demand for industrial or logistical space around the United States to warehouse all of these products. Consumers are quickly being accommodated to ordering things and arriving really quickly. My daughter thinks if it’s not arriving there in two hours, there’s a problem.

    Oscar Pulido: For sure. We absolutely all need next-day delivery, so what are the demands on space that are required in order to be able to fulfill what your daughter wants?

    Ben Young: We’ve done some estimations and actually we think we’re going to need 28 football fields per week—think about that. 28 football fields per week of new industrial logistical space to be leased by 2021. It’s phenomenal. This is clearly resulting in healthy rent growth and price appreciation for the warehouse and industrial space. At the same time – and it’s important to complement this – that we’re not calling for the death of the shopping center. Centers anchored by grocery stores which are less susceptible to online competition. And experiential retailors such as restaurants and gyms are actually performing much better than malls or the large power centers that I used to visit and my daughter doesn’t visit these days. My daughter constantly reminds me that, dad, you can’t get your hair or nails done over the internet. So there is a place for retail, business models are a bit more defensive of this in this e-commerce economy. But one last component which is really interesting and puts a twist on retail: there is a new demand coming from an unlikely place, I’m going to come back to e-commerce. E-commerce companies are actually looking for storefronts. Companies such as Bonobos, Warby Parker, and even Amazon have opened up retail locations. So the goal is not just to have more store sales but to improve their customer loyalty, and then in turn, drive more online sales.

    Oscar Pulido: So you’ve done a nice job covering e-commerce, now let’s go to the sharing economy which you touched on earlier. And this is a relative new term really when we think about it. I was reading that by the year 2021, it’s estimated that 86 and a half million Americans – that’s almost a third of our population – will be using the sharing economy. So what are we talking about exactly when we use that term?

    Ben Young: The disruption of the sharing economy is absolutely happening in real estate. I would call this thing a unit, or as I would coin it, it’s a unitization of everything. And what do I mean by that? Think back to Apple, what they did and how they utilized technology. They figured out how to sell a single song from an album. It was revolutionary to break down the whole into its parts and meet consumer demands and even charge a premium on this unit basis. Today there are 35,000 flexible workplaces in the world. WeWork alone now accounts, believe it or not, to be the largest private lease holder markets, like New York, Boston, and Washington DC. And these flexible workspaces have broken down the office lease into these smaller units. In other words, you can rent an office space for a week, a day, or even hours. That was unheard of before. And a consumer, again, as I said, is willing to pay a premium for this individual unit to have that flexibility and experience, not unlike that individual song from Apple. But the office market is not the only space being disrupted by this sharing economy. There are companies that provide shared conference room space. There is even a company that is starting to unitize retail space, believe it or not. What does that mean? The asset class that many people thought is dead or is dying is being unitized where companies can lease space for a year, a month, a week, a day, or even an hour like the office space. And what is really fascinating as I sort of alluded to before, is that these e-commerce companies are starting to leverage this technology to lease physical space on a short term basis to improve their own sales. Go figure. E-commerce is helping physical retail.

    Oscar Pulido: And so you mentioned WeWork and I imagine AirBnB lives in this category as well, unitization. But there is also companies like Uber and Lyft that are conducting some form of unitization as you used that term before. How does Uber and Lyft affect the real estate market or does it?

    Ben Young: It does. But I would say on a longer term shift than rather a near term disruption on real estate. It’s an interesting statistic. If you think about it, less than 20 percent, believe it or not, of U.S. adults have ever used a ride sharing service.

    Oscar Pulido: Right.

    Ben Young: So being in New York, you think 100 percent uses it, but if you think about the economy, less than 20 percent uses that. So the rate of adaptation is clearly becoming shorter and shorter, so that will increase the size. But it’s still a long term asset class; it will take time to affect real estate. But ride sharing and the prospect of driver-less cars, meaning we need less parking, not more, this means space can be redeveloped into higher and better use. We were just talking about malls. Mall owners have real estate that is dedicated to parking. So you have to think about repurposing that. How can you reincorporate it and make it flexible? Think about parking decks. They’re typically slanted or inclined on every floor. Well what about making them flat and just having a ramp at the end to repurpose the space, altering parking decks to make better use out of that? And I think if you step back and think about cities, this is really an interesting statistic, is that cities in general, 20 to 35 percent of their land, is devoted to parking in general. Thinking about that massive redevelopment opportunity is pretty exciting from a real estate perspective.

    Oscar Pulido: I feel like my whole life I’ve felt like I wished I owned parking lots, because it just seems like a lucrative business but you’re making me think that maybe that’s not the way of the future. You also touched on 5G, by the way, as another disruptor. What did you mean by that as it affects real estate?

    Ben Young: Global urgency to deploy this 5G is heightening competition between governments, companies, and investors to achieve 5G leadership and capture a multitude of new market opportunities. Advances in technology such as these driver-less cars and even battery storage will have material implications for real estate, real assets in urban areas. And as I relate it to real estate from my perspective, we see it particularly in the construction industry where the use of drones, of how to figure out developing, taking pictures, how is an architecture design for how a real estate building is going to be designed is leveraging this 5G technology. Believe it or not, wearable technology is all transforming the way we construct buildings.

    Oscar Pulido: Ben, let’s switch gears here and talk about cities. It’s estimated that two-thirds of the world’s population will live in cities by 2050, which would be double the percentage of what it was in 1950. Personally, I’m actually raising a family in a city and I don’t feel like that’s odd anymore, so what is actually driving this move into cities and away from maybe the more rural or suburban areas?

    Ben Young: So am I in the city and I don’t feel either. This is clearly indeed a phenomenon that is going around not only in the U.S. but around the world. Cities have been leading the areas for job and wealth creation, Oscar. This is largely a function of where talent is choosing to reside. Young educated workforces have been drawn to this what we call, live, work, play environment. And it’s areas like New York City but it’s even areas like Japan. The overall population that I think a lot of people know is declining in Japan overall given the ageing population, but what people don’t necessarily realize is in cities like Tokyo, the population is increasing and increasing at a rapid rate. So it’s that desire to be in those major urban cities to have that live/work/play. But what is really important to remember is cities are going to need to adapt and be smart. They’re going to need to continue this technology and infrastructural improvements and the connectivity between this real estate in infrastructure.

    Oscar Pulido: And cities therefore, the landscape is changing. You and I both work in New York and anybody who has visited New York recently will not have missed the Hudson Yards project on the west side of Manhattan where there was previously I think just barren land, and now it’s sort of a city within a city. So do you see more of these micro-cities developing in the likes of New York and maybe Tokyo?

    Ben Young: No doubt, Oscar, no doubt. Hudson Yards is an example of a creative economic development. If you think about, Hudson Yards is essentially being built on newfound land in Manhattan. They basically are placing large plates above railyards that park many of the trains we use on a daily basis in the city. But the developers have been able to build on top of this. And what they’re really creating, to your point, is this micro-city within a city. We’ve seen even a similar development in Boston. You think about the build-out of the Seaport area and that Seaport District from an area of older industrial sites, to one of new offices, retail and apartments.

    Oscar Pulido: And speaking of apartments, recently in New York, there was some legislation that came across about rent affordability, and this have implications both for people who are looking to rent but then also implications for the landlords. So talk to us a little bit about what that legislation was and your view on it, and are we going to see more of this in other parts of the world?

    Ben Young: No doubt, and it’s an interesting question Oscar, as you talked about it from both an owner and renter perspective. Homeownership in many markets has declined for the last decade. This has happened for a couple of reasons: delayed family formation, high student debt — I’m facing that, my daughter going off to college, so I’m living and breathing that — and job growth occurring at higher rates in urban areas that I just talked about. So a key measure that we actually follow to understand how all these factors interplay with apartment demand is what we call rent affordability. Simply, a rent can only rise so high until the tradeoff between home purchase with a mortgage makes more sense. But in most markets, we see a favorable backdrop for apartment investors and renters; high tenant demand, rising incomes, but as mentioned, rent levels attractive relative to the cost of home ownership. Now in New York, to your specific question, it really has come into play. There was legislation passed I believe on June 14th and what it was called was Housing Stability and Tenant Protection. And the bill passed key reforms that really put much more stronger controls in place for rent stabilized or rent controlled multi-family units, and makes that deregulation from an owner’s perspective, whether it be for high income earners or improvements made to the unit, uncertain, right. So it looks like more rent stabilized units will stay there for longer. And it has affected, Oscar, over a million units in New York City. And look, while we expect there might be some modest hits to value from an owner’s perspective, we don’t expect market distress from an owner’s perspective because many are well-capitalized and low-leveraged. But demographically, the emergence of the millennial generation in the workforce has been a large lever of multi-family demand, and these millennials, highly educated with the jobs that we talked about, commanding strong incomes, are choosing to work in the cities. Housing costs are high but they’re able to afford it, they’re delaying it because of the student debt, they’re delaying family formation so that demand for these rents in these big cities are continuing. So it’s meeting both landlord and renter demand.

    Oscar Pulido: I was going to ask about millennials and they seem to be less interested in owning a home as opposed to prior generations. Is that a permanent trend, or will the millennials when they’re turning 40, 45, as opposed to the ages that they’re at now, we will see the homeownership rates increase?

    Ben Young: It’s an important cohort to talk about, but I’m also going to mention other cohorts because we need to put this in perspective. It’s interesting to see the decisions made by what we call Gen Y, which is the millennials, I’m actually Gen X, can’t believe it, but I am. And what the millennials are doing, they definitely show a preference for this live/work/play, no doubt about it, but it’s also important to understand where they came from, Oscar. If you think about their growth, they grew up in one of the great economic boom times of their generation when they grew up under their parents, and off to college, and now. But on the other hand, I think about my daughter’s generation, which is now going to be called the Gen Z. She’s 18 years old. And she grew up in families that experienced the Great Recession. Right, so think about putting that generation into that perspective, how are they going to view real estate and life given that backdrop? Will they be more conservative, will they think about the silent generation before the baby boomers and how they reacted to the economy? It’s all very interesting. Do I have the answer of how they’re going to affect real estate? No, but I’m absolutely confident about one thing. They’re going to embrace technology, and it’ll be a critical part of their lives.

    Oscar Pulido: It seems like the younger generations also care a lot about sustainability, we talk about ESG or environmental social and governance considerations. So, how does that affect real estate? I’ve seen buildings that say they’re green buildings: is that the way to think about it, or is there more to it?

    Ben Young: Yes, a bit, I’m glad you said that because they’re literally not green.

    Oscar Pulido: Right.

    Ben Young: But they’re involved in what we call environmental, social and governance, or ESG. And I think what is important to note is look, real estate provides a central services and tangible benefits to society, but the same time, as we talked about, they are physical structures occupying space in the communities that they serve. So naturally, they’re going to have an impact on the needs of society through this environmental and economic impact. The best thing I would say and to give you a description is, let me give you an example. We own a 1.8 million square foot office building in the Port of LA or the Port of Los Angeles. It’s a boring industrial asset if someone looks at it. But, what was really exciting given our intertwining with our real assets and infrastructure, we were able to look at the real estate value and say, how do we create value, not just as an owner but for the community and employees around? And long story short what we were able to do was to connect with one of the largest solar panel developers in the city of Los Angeles. And we leased out our roof to the solar panel developer and they installed over 50 acres of solar panels. It was the largest solar panel installation in the world until Apple’s headquarters came by, so now we’re the second-largest. So what did it do for us? It gave us a 3 and a half million dollar free new roof, it gave us income for ten years. But what else did it do? It created enough power to power 5,000 homes with renewable power, in the City of LA. That’s powerful. But it’s not enough. That renewable power mitigated 500,000 tons of what we call GHG or greenhouse gas emissions. If you put that in perspective, it’s approximately taking off 100,000 cars off the road in one year. Just as importantly, the rooftop was also installed by U.S. veterans who are now skilled in solar panel installation. Oscar, I call that a win, win, win, right? It’s a win for the investors, it’s a win for the residents, but just as importantly, it’s a win for the community.

    Oscar Pulido: It’s a great story of multiple facets of sustainability, and somebody in LA listening to this is hoping they heard that you actually physically took 100,000 cars off the highway, it would massively improve their traffic situation. But Ben, to think about your career in real estate, you’ve been doing this for over 30 years. What’s the one thing that has surprised you about the market and how it’s changed?

    Ben Young: First of all, thank you for dating myself, Oscar, I really appreciate that. But the one thing that I would say – and I think this is true for real estate but everything else is – the only think that remains the same is change. And it’s interesting. I recently read an article about the Koch brothers or the Koch family, for those who may not know of them, they’ve made a fortune on old school industries like oil and gas. But what they recently said about embracing technology is amazing. They said, do it, or you’ll end up in the dumpster. Totally shocking coming from that group. Billionaires who made a fortune by traditional means recognize that technology will disrupt every part of their life, and yes, what I would like to say, unitize everything.

    Oscar Pulido: And you’ve alluded to a lot of the things that are already changing in real estate, but if you had to look forward another ten years or so, what else do you see evolving in this sector?

    Ben Young: No doubt it’s technology. If you really think back, it wasn’t really until 2007 when the iPhone came out. That’s 12 years. Think about what technology has happened in those 12 years. All aspects of real estate are changing due to technology. New demand drivers, new threats, new tenant models, even new technologies to underwrite and analyze the management of properties. There has never been a time of more technological change in real estate than now.

    Oscar Pulido: Well thanks, Ben, I’m going to end with a rapid fire round, and in the spirit of looking ahead, I’m going to ask you tell me if you think the following things will happen in five, ten, thirty years or never, so are you ready for this?

    Ben Young: Sure, let’s go.

    Oscar Pulido: Brick and mortar is replaced with 100 percent online shopping.

    Ben Young: I’m going to go with never, Oscar. But it’s not in the not-so-distant-future that the share of e-commerce to total sales will be much higher. We think that is going to increase at a rapid rate. There will always be a place for physical retail, but the utilization of that physical space is going to be evolving like I mentioned before. More defensive retail, experiential, all will continue to support physical retail demand.

    Oscar Pulido: Autonomous vehicles surpass traditional vehicles?

    Ben Young: It’s a more difficult question. I’ll get to the timeframe at the end of my thought here, but the advances in technology are definitely accelerating in this space. Large investment is being made by automakers as well as governments that are trying to create new ways to connect and smarten the infrastructure. So really regulations may need some time to catch up to how quickly technology is going, but it’s funny. Back to your original timeframe. I think autonomous vehicles will be a significant part of our life in five years. But my daughter doesn’t think so. So who is embracing technology now?

    Oscar Pulido: Exactly. Scooters supplement traditional public transportation.

    Ben Young: I was actually recently on vacation back in July with my family in Paris, and we were just taking a tour down the River Seine and it was interesting. And so many people including myself used scooters to do some sightseeing down by the river. Within a couple of minutes, I figured out how to download the Lime App, how to sync it with the scooter and use it. So there is a place. I recently went on a property tour in Los Angeles, and Downtown Los Angeles there were scooters not only every corner, but every block, scattered all over the place. That’s a whole other question of how we fix that, but I do believe they will support public transportation. It will change over time, but it’s really in the near future; it’s this year and next year where it’s starting to support public transportation.

    Oscar Pulido: Well, and I can relate because the town that I live in has just had a whole army of these scooters unleashed on it recently, so I’m seeing the pros and cons to it. The last one for you is hyper-loops or what we know as high-speed trains between cities, come to fruition, again, five, ten, thirty years or never?

    Ben Young: Good question. The hyper-loop system is one piece of technology that has a real potential to disrupt a lot of key locations and bring cities together that either have high car volume traffic or even high air traffic, right. But while it’s an uncertainty and innovation that I think is going to occur, over the next century to give you a timeframe, Oscar, high-speed trains are an area where the U.S. definitely could see some benefits. But you’re going to need private and public stakeholders who are engaging this together, and the price tags are really steep. So it’s not just about technology; U.S. infrastructure needs a fair amount of improvement and a lot of money to bring the scalability to market. In 30 years, maybe.

    Oscar Pulido: Ben, this has been incredibly insightful. You mentioned your daughter a number of times, I think you said she was 18, which if I’m doing the math, means you’re going to be paying tuition and housing costs for a couple of years. So your real estate background is going to come in handy here. Thanks for joining us on The BID today.

    Ben Young: Thank you very much Oscar, and I think that I’m going to need another 30 years of experience for that.