Ten years ago, as one observer of the sector recently noted, the idea of self-driving cars was something out of science fiction, but the advances in such technology by Tesla and others have come so fast that a world of autonomous vehicles (AVs) is, in fact, swimming into focus—and that world will have a tremendous impact on the built environment of cities and suburbs.
In many ways, the future is (almost) already here. Some suggest four likely market scenarios for widespread AV uptake going to scale—and in some of these scenarios, the shared economy will be a driver of change.
For example, an Uber/Lyft scenario sees autonomous cars functioning like any other kind of public utility, like water “on tap,” as it were, especially in cities, where people won’t own self-driving cars but will simply use them on demand.50 A second co-op scenario sees urban multifamily apartment buildings and/or suburban communities pooling the sunk costs of selfdriving car ownership, insurance, and maintenance as shared community expenses. A third ownership scenario will resemble what we see today— people purchasing their own cars—with the exception being that the cars of the near future will drive themselves. Tesla favors this market model, for instance, which will likely proliferate in the suburbs and with the rise of an aging population of seniors with vision or mobility problems. In a fourth market scenario, one that looks much deeper into the future, self-driving cars will combine with advanced artificial intelligence systems so that the cars, in effect, will own, manage, and charge themselves, take themselves to be repaired, and even sell themselves to other AV fleets.
Much of this may not be as Futurama-esque as it seems. The National Highway Traffic Safety Administration is already on the case, establishing definitions for five different degrees or levels of driverless autonomy for the automobile sector. Some of these levels you’ve already seen in car commercials—the Level 1 sorts of “advanced driver aids” that give cars electronic stability control and that use automatic sensors to help anticipate crashes. Level 2 features include the automation of at least two control functions that work together—such as setting the distance for the car ahead and staying centered in a lane. Levels 3 and above are where cars begin to become self-driving. To date, no self-driving cars are currently available at Level 3 or above—at Level 5, say, where you tell your car where to go and then curl up and sleep, or work, or otherwise entertain yourself under any conditions until you arrive at your destination.
“We’ve seen a lot of money chasing the very good assets in core markets that everybody wants, and I think that search—the search of capital moving outward a little bit—is going to intersect with the advent of the driverless car.”
We’re not there yet, of course. Tesla’s Model S Autopilot software enables Level 2 functionality—and drivers are strongly encouraged to keep their hands on the wheel. Within five years, however, cars that start to make driving decisions for you will appear. Ford has announced that it will roll out a Level 4 autonomous vehicle in 2021, but other companies are promising Level 4 to 5 sooner—by 2019.51 Indeed, people with their eyes on AV technology are already planning their first purchase. Nearly two-thirds of electric and/or green car aficionados recently polled on Twitter by Green Car Reports, for instance, said that they planned to purchase their first selfdriving car by no later than 2025—just eight years from now.52
Eight years, of course, is nothing in the world of commercial real estate planning and development. And that world is being rapidly shaped by a confluence of fiscal deregulatory policy (the likely unwinding of Dodd- Frank, for example) and an increase in capital availability, which is moving development projects away from urban cores and outward into areas that will be important to users of autonomous vehicles: the urbanlike suburbs. “We’ve seen a lot of money chasing the very good assets in core markets that everybody wants,” says Akerman’s Carol Faber, “and I think that search—the search of capital moving outward a little bit—is going to intersect with the advent of the driverless car.”
Indeed, the arrival of self-driving cars will change the footprint of most real estate development, according to Autonomous Vehicles and Commercial Real Estate , a recent Cornell University study on the topic, changing the way roads are used, altering land values as parking spaces are converted into retail, office, mixed-use, or green spaces, and allowing for more-compact and productive use of space.53 In short, massive parking lots in the suburbs and underground or covered parking in central business district areas will become readapted space, say the authors of the report. Loading and unloading areas will, instead, become a larger, more prominent feature of office buildings and multifamily housing. “In Los Angeles,” observes Akerman’s Jane Hinton, “where everybody drives, people are already reassessing their real estate needs, asking the kinds of questions about real estate that driverless cars bring to the fore: ‘Do we need as much parking? Can we use an app to summon a driverless car, which, after it’s used, will go park itself somewhere outside of downtown L.A.—where it’s much cheaper to park than the $300/month we now pay in the office garage?’”
“Investment and redevelopment opportunities will abound in cities and suburbs, especially as transit patterns migrate toward autonomous travel.”
Questions like those will create winners and losers. The tenancies of automobile-related companies, for instance, will likely be disrupted, according to the Cornell study, and auto parts stores, auto retailers, body shops, truck stops catering to human drivers, and even office space for personal injury attorneys will be negatively affected. On the other hand, investment and redevelopment opportunities will abound in cities and suburbs—especially as transit patterns migrate toward autonomous travel—and these changes will likely be felt soonest in changes to parking requirements for developers. In one hypothetical office development in Chicago, according to the Cornell study, a 42-story, 600,000-square-foot building, requires developers to build 12 floors of parking—at a cost of $17 million, just to provide parking. But in a world of AV technology, say the authors, the same building would need 40 percent less parking—and this would increase the value of the building by $66 million.54 Similar gains are expected in suburban areas, where reimagined use of parking space will allow developers to “unlock more value from every project site.”55
At its widest circumference, the value of real estate in cities and suburbs of the future will be only as good as the transportation systems that will get people from A to B—and there will be a big need for improved transport systems, with about $4 trillion of annual investment globally until 2025 just to meet the growing demand for infrastructure, much of it transportation related, according to the World Economic Forum.56 The average speed of vehicles in London’s city center is just over eight miles per hour; in Moscow, it’s about four mph. One-third of this bogged-down congestion in cities is simply other people looking for a place to park.57 A traffic jam in São Paulo, Brazil—with cars backed up for more than 100 miles—is not uncommon. In America, because most (76.4 percent) who drive to work drive alone, commuters spend an estimated 463 hours—or 19 days annually—inside their cars, 38 hours of which, on average (almost an entire workweek), are spent either stalled or creeping along in traffic.58
The solution for this, according to Wanis Kabbaj, director of global strategy for healthcare logistics at UPS, is to take a lesson about efficiency from the human circulatory system. “Blood is both a collective and an individual form of transportation,” Kabbaj observed at a recent TED conference. “The reason our circulatory system is so efficient is that our red blood cells are not dedicated to specific organs and tissues. They’re shared—by all the cells of our body, so that each one of our 37 trillion cells gets its own delivery of oxygen, precisely when it needs it.”59 This vision of a shared economy of vastly more efficient transport, where one shared car replaces five to seven vehicles on the road, imagines future cities of autonomous vehicles—many of them flying in the air—all guided by massive traffic management systems. “It doesn’t make sense that we’ve built higher and higher buildings to create density but our transportation is still mostly flat,” says Kabbaj, who notes that Airbus is working on a flying urban taxi and other companies are developing drones that can transport people. Some of this is happening already (not the flying part) with autonomous pods transporting people in Singapore and Dubai, and all of it will affect the value of real estate in the future. The Cornell study estimates that widespread adaptation will increase the value of urban and especially suburban areas that are more than a half mile from existing subway or light-rail stations. Other observers indicate that a build-out of light rail and autonomous train service, for example, will help usher in an era in which the stations of the future will become “destinations in their own right,” served by a new generation of trains, traveling at near supersonic speeds in special low-pressure underground tubes.60 Such trains will quicken the pace of connectivity between megacities and megaregions—and the lonely parking lots once filled with empty station cars from the suburban past will be replaced by vibrant station hubs with extensive business and leisure facilities.61 In short, the oncoming reality of AV technology should probably become part of any real estate development and investment portfolio conversation, because the disruptive power of AV, when widely adopted, will likely become one of the most profound changes we’ve ever forecast for commercial real estate.
Virtual Reality, Drones, and Tech Platforms Are Upending Commercial Real Estate
In 2012, David Eisenberg, Dustin Byrne, and Judy He launched a company that produced virtual, 3-D office floorplans for the real estate sector. In early January 2017, their company, Floored, was purchased by commercial real estate behemoth CBRE in a development that seemed to foreshadow the significant role that technology will increasingly play in the real estate sector.62 Indeed, the physical, structural, tactile, steel, brick, and glass qualities of real estate that seem to have long kept the digital revolution at bay are fundamentally giving way—a movement that Akerman Survey respondents identified as the third-most-significant trend that will affect U.S. real estate development in the next three years.
“The physical, structural, tactile, steel, brick, and glass qualities of real estate that seem to have long kept the digital revolution at bay are fundamentally giving way.”
Virtual reality, for one thing, will improve efficiencies in marketing, as more owners give potential office tenants virtual tours, and potential home buyers get their walk through of a prospective house or apartment by peering at a computer screen—perhaps from the comfort of their own bed. New technology companies like 42Floors and TheSquareFoot have user platforms that help prospective tenants more efficiently find the right commercial space for their needs. Such platforms, which do many other things, such as helping guide tenants through the leasing process, are fundamentally changing the tenant/broker relationship.63 “Technology already has had an effect on real estate,” said one broker and Akerman Survey respondent who listed technology as the single-most-significant feature for real estate in the next three years. “It changes consumer behavior more than any aspect and affects how we do our business. The easy access to information that people now have has by far had the most impact of anything in my lifetime.”
And that buzzing sound you’ll increasingly hear in the air? Drone technology. Costs of drones have dropped, and recent changes in FAA regulations no longer require drone operators to have commercial licenses. For the real estate sector, in which location is so often important, drones offer a unique marketing ability to showcase the lay of the land for “view properties,” for instance, or to give potential commercial-building tenants a quick sense of the neighborhood where employees will spend their workdays.
It’s all part of the new real estate landscape, in which up to 80 percent of recently surveyed commercial real estate tenants and investors say they get their commercial real estate information online.64 The real estate sector is swiftly bending toward the digital space and thereby finding marketing efficiencies, as so many other industries have. In the blogosphere, for instance, real estate companies are utilizing websites optimized for mobile devices, using writers to actively blog about company expertise and to expand client reach, producing videos and market reports, and ensuring search engine optimization for guest content editorials. And multiple-listing services like Zillow, Upstream, Broker Public Portal, and Coldwell Banker’s Zap portal are helping connect agents with home buyers. “Everything points to the internet,” said one real estate office manager and Akerman Survey respondent. “People are selecting their purchases on the internet.”
The internet may be one example of a giant technology and connectivity platform, but new start-ups offering the real estate sector real-time portfolio, financial, and marketplace analytics may be the true next wave. At the touch of a notepad or mobile phone, for example, leasing and management platforms from VTS, for instance, offer instantaneous, real-time analysis of portfolio performance. Other new platforms help investors find capital seekers, a boon to tech-enabled commercial real estate investors who use crowdfunding, for instance, a market that grew to $3.5 billion in 2016.65 Still other platforms enable granular comparisons of commercial lease comparables. These new kinds of technology tools, according to one real estate executive and Akerman Survey respondent, “capture all aspects of finance, of demographics, and of housing trends.” And some real estate portfolio platforms have been designed to work with smart-building technologies to help improve operating efficiencies and reduce operating expenses. Taken as a whole, new technology platforms, in addition to improving op-ex numbers, will likely reshape real estate markets, according to another broker and Akerman Survey respondent, and will continue to affect “the way you search for properties, the way you look up property history, the way you negotiate, and the way you plan.”
In the Emerging, Experience-Based Economy, Real Estate Sectors Offer Amenities to Differentiate
Real estate sectors hoping to differentiate themselves have been recently redoubling their efforts in a realm that was charted out long ago by Alvin Toffler in his 1970 best-seller Future Shock. Back then, Toffler predicted the emergence of what he called “the experiential industry,” in which markets that sold consumers “experiences” rather than “things” would emerge. In the early 1980s, researchers Morris Holbrook and Elizabeth Hirschman began spotting in consumer behavior a trend that became the title of their groundbreaking study, The Experiential Aspects of Consumption. Then came author Joe Pine, who charted the economic development of the U.S. economy from its agrarian beginnings to its burst of industrial output, to the advent of the service economy, and, finally, to its most recent iteration, which became the title of Pine’s 1999 book on the subject, The Experience Economy.
The contours of an emerging experience-based economy are well under way—“every trend and every research report points to the fact that people want to live experientially,” San Francisco-based entrepreneur Trevor Traina observed recently. His company, IfOnly, offers experiences for sale—from $20 bike rides to $5-million ballooning expeditions over Mount Everest, that, according to Traina, come with a singularly bracing proviso: a 70 percent chance of surviving the experience.66 In real estate, it’s not surprising that the hotel sector has begun to robustly embrace this experiential trend. After all, amenities of various sorts have long been that sector’s main stock in trade. But some hotels and luxury spas are charting out extraordinary new territory for amenities, and these will eventually filter more broadly into other real estate sectors, which is why we’re featuring amenities as an important Forecast topic this year. But first, let’s dip our toes into the waters of a new amenities trend in hospitality.
By one estimate, the wellness tourism market is projected this year to reach $678 billion, so it’s no surprise that hotels are equipping themselves with a new generation of amenities to capture part of that market.67 The Carillon in Miami Beach, for instance, offers a wellness amenity on the cool side: three minutes inside a cryotherapy tank which temperatures drop to minus 240 degrees Fahrenheit. At the Dolder Grand in Zurich, you can get a brisk rubdown in the Snow Paradise Room. Other hotels now offer amenities that help guests conquer that bane of long-distance travel—jet lag—with complimentary zero-gravity nap pods, oxygen rooms, or lighting schemes that change throughout the day to help guests reset their circadian rhythms. Still others offer intravenous “hangover treatments.”68
Wellness, for many travelers, now also means mindfulness—and so hotels have adapted their amenities offerings to mindfulness experiences quite beyond the standard yoga mat. L’Auberge de Sedona, in Arizona, for instance, offers guests a chance to experience the Japanese practice of Shinrin-Yoku, a form of movement meditation that roughly translates as “Forest Bathing”—a metaphorical sort of emersion as one walks mindfully through a beautiful outdoor setting.69 And where hotels may have once offered eucalyptus-infused steam baths as an amenity, the experiential trend now presents hotels and resorts that feature, among other things, shamanguided cleansing sweat-lodge experiences in the Yucatán, Mexico, Tibetan healing therapies in the Himalayan foothills, and, in Phuket, Thailand, retreats that focus on ancient Indian subcontinental Ayurvedic practices: meditation and breathing exercises, but also sweating, oil pulling, tongue scraping, laughing out loud, and silent eating.
Not that everybody’s next business trip will now necessarily involve a session of vigorous tongue scraping, of course. Rather, as Akerman’s Steven Polivy points out, the shift in thinking about amenities in the hotel space has “moved from providing a palatial room to providing a unique experience”; that is, outfitting hotels with digital concierges—for instance, branded smartphone platforms that enable guests to get outside and experience the city with a hotel app that provides local knowledge of all the best places to visit, out-and-about activities, and to utilize in-house community networks that help fellow like-minded guests enjoy these unique experiences with other travelers.
Other real estate sectors can’t hope to compete with sweat lodges, snow rubs, and intravenous hangover treatments—at least not yet, anyway— but owners and developers are paying much more attention these days to improving the employee and tenant experience of being in the built environment. In the office sector, wellness amenities for office tenants have moved far beyond providing a weight room with a few stationary bikes or the occasional yoga class. Today’s employees, many of whom like to bicycle to work, now expect bicycle storage facilities, clean showers, and locker rooms for changing into and out of work clothes. Indeed, it’s now becoming standard practice for building owners to provide an entire office floor of amenities for tenants, in addition to other expensive features like car-charging stations, which are also becoming an expected amenity for e-car commuters. And a new generation of smart-building technology and sustainable design has emerged in the past 10 years that actually helps employees and tenants feel better about where they work. Natural light, open indoor green spaces, and informational or interactive methods of letting tenants know just how much energy and water their building is saving—these sustainable features have not historically been considered amenities in the traditional sense, but that is changing. Such improvements don’t come cheap, however: a class A or B office tower retrofit might require an eight-figure budget, according to one estimate, but the ROI for smart-building technology has shrunk, in many cases from 20 years to three to five years, and the op-ex gains are substantial—among them, higher rents, improved tenant retention, higher-quality tenants, and higher listing prices.70
“Owners and developers are paying much more attention these days to improving the employee and tenant experience.”
With multifamily rents softening in many regions, a veritable amenities war has been going on in which amenities have become key differentiators for owners—many of whom now feature rooftop lounge and socializing areas, dog-grooming or -walking services, cooking classes, child care facilities, dry cleaning, and hotel-like doorman/concierge service in the lobby. Elsewhere, in the senior living sector, some amenities such as large common areas, multiple dining rooms, planned events, movie theaters, game rooms, and full-service bars, beauty salons, and spas have all become part of what seniors now expect as standard fare.71 New senior communities are being built in anticipation of baby boomers, who will expect more by way of amenities—from multipurpose spaces for community meetings and special events, to predinner bar experiences. Retirement communities are less about golf these days and more about a kind of community resort experience. Indeed, in an observation about floor design, one builder of senior communities recently noted that baby-booming seniors “want sweeping terraces and outdoor porches for entertaining, each space spilling into the next, an experience at every turn”—a turn of phrase that seems to capture the essence of the experience economy trend.72
“Retirement communities are less about golf these days and more about a kind of community resort experience.”
And in the luxury residential sector—where home prices can range from $5 million to $25 million, and often much more, in which buyers constitute a sophisticated set with a broad range of experience and cultural reference and where it may not be too much of a stretch to assume that many, in fact, already actually own a little bit of everything—what, in this rarefied realm, might conceivably count as an amenity? One trend in this sector is the private, in-home art gallery. Original works of art, according to a Sonoma County, California, luxury real estate agent, have become an important way to demand the prices that are being asked of luxury properties. Some have called this “the curated lifestyle,” a way of appealing to the superrich who may not have the time to keep up with aesthetic trends but want, nonetheless, to live with and among works of art. In Los Angeles, for example, developer Bruce Makowsky has built a 38,000-square-foot estate in Bel Air with amenities that include a $30 million auto gallery and 130 unique art installations. “Every inch of the house is curated with the ultimate toys, entertainment, stone, wine, artwork, everything,” says Makowsky. “It’s all about the feeling and experience you get when you’re in the house.”73 With the number and wealth of the world’s billionaires growing (it’s now at more than 2,000), the ultra-high-end real estate market will need to keep up with a growing appetite for residences that do more than make a single palatial “statement,” and art amenities will fill that role. Creating the experience of a private, carefully curated, one-of-a-kind show does more than set one fabulous property apart from another, it seems. It becomes the gesture by which the sellers and the buyers of such properties recognize themselves.74