At JLL, we are confident that our city centres will remain the engine of growth. The urbanisation of recent decades will not reverse, but there will be significant changes, and we will see winners and losers emerge.
What will differentiate the best places are smart, progressive and coherent urban planning policies, and a genuine mix of uses in key locations.
City centre commercial real estate has long been dominated by the office and retail sectors. While we expect these to remain key components of our urban landscape, an element of rebalancing is required.
The retail sector has been severely impacted by structural changes in recent years, notably the shift online, and the pandemic has accentuated this. The result is that we now have a substantial surplus of retail stock. We believe that there is an excess of c.80,000 shops in the UK that will need to be removed or repurposed before the market reaches equilibrium, and we’re already around halfway there with c.40,000 vacant units. The pandemic is unlikely to change the overall equation significantly, but it has accelerated the process – around 20,000 shops were closed in 2020 alone – so we will arrive at this equilibrium sooner than previously expected.
While this creates huge challenges for owners of excess stock, it also creates an opportunity for many. Much of it will be repositioned or repurposed for alternative use, with the logistics, living and life science sectors likely to be among the main beneficiaries.
Logistics is the other side of the retail coin – the same behavioural changes that have challenged the retail sector in recent years have led to an explosion in demand for logistics space.
Smart urban logistics will become increasingly important to ensure that cities optimise their overall logistics performance and minimise associated adverse impacts such as congestion, noise, air pollution and carbon emissions. Urban logistics will also be critical for businesses as they roll-out additional local, and hyper-local, depots in support of more demanding customer service levels. This can also improve the sustainability of operations, for example via all-electric or manual delivery vehicles. In cities where supply of industrial space is extremely constrained as a result of historic loss of land to other uses, notably residential, the repurposing of excess retail stock may be one way to meet this growing demand for urban logistics. There are examples of this already happening in London, with Ravenside Retail Park in Edmonton purchased by Prologis last year to be repurposed into warehousing for online retailers, and Pentavia Retail Park in Mill Hill recently acquired by Amazon.
The living sectors – multifamily residential, student housing, later living and co-living – have been growing exponentially in recent years and these are mainly focussed in urban locations. Despite the impacts of the pandemic, urban living is expected to remain extremely popular, especially among the younger population. We estimate that there will be shortfall of more than 750,000 new homes across the UK over the next 5 years alone, and the majority of this shortfall will be in cities. We need long-term, large-scale solutions to the housing crisis, and repurposing of excess commercial space will contribute. We have already seen an increase in change of use, with many secondary office assets converted to residential under permitted development rights. New urban centres, such as London’s Canada Water, are being developed with a genuine mix of uses in mind, and some established urban centres will increasingly mirror this as the living sectors take greater prominence.
Another addition to our urban centres over the coming years will be life sciences. The UK is among the world leaders in life science research and development, and the ‘Golden Triangle’ of London, Oxford and Cambridge is the epicentre of this. Most life science buildings are in out-of-town campus environments, and predominantly in university or corporate ownership. However, there is increasing demand for urban life science space to meet the growing needs of the industry. While this is very much a nascent sector from a commercial property perspective, clusters are starting to emerge in London. These include White City around the Imperial West campus, King’s Cross with the Francis Crick Institute and direct rail links to Cambridge, and in Waterloo close to St. Thomas’ Hospital. Much of the space occupied will be traditional offices, but there will also be a high specification lab component which will require specialist development and operation.
While all these opportunities are considerable, the risks and the scale involved will demand collaboration on numerous fronts.
Partnerships between the public and private sectors will be essential. Land supply frequently lies with the public sector, and we have seen this increase with local authorities buying shopping centres and other commercial assets in recent years. There will be opportunities for patient capital to partner with public bodies to reinvent city areas and to secure stable, long-term returns in the process.
We will also see an increase in the already popular partnerships between international capital and local expertise, particularly in the sectors with a higher degree of operational exposure.
Finally, greater collaboration is needed between developers and occupiers to ensure our buildings better serve their end users. With the rise of home working and an expanded online retail and entertainment offer, our commercial buildings must improve to drive continued engagement. There is real demand for smart, sustainable and healthy buildings, and those that do not offer these attributes will fall behind and risk obsolescence. The upgrades of course come at a cost, and who should foot the bill remains an open question.
These challenges and opportunities will shape our urban environments of the future, defining the way in which people interact with them and their success as places.
Cameron Ramsey, UK Research & Strategy, Capital Markets at JLL