The most connected part of global cities could be of even greater value despite an increase in remote working.
The Covid-19 pandemic has accelerated our digital future with remote working set to become the norm for many people. But although fewer people will be travelling into cities each day to work in the knowledge economy, the interactions they have with colleagues and clients in the city’s urban core – the most connected part of the city – will be of greater importance. So, rather than diminishing the power of global cities, these changes will potentially make them even more valuable.
Cities will still be important, despite an increase in remote working
Technology has allowed huge numbers of people to work from home during the current lockdown, supplanting the need to be in an office on a daily basis. At Schroders, 98% of the workforce is now working remotely. This would not have been possible 20 years ago. The current pandemic has accelerated our digital future and going forward many people may choose to continue to work from home.
As such, we envisage that there will be fewer people who work in the knowledge economy travelling into city centres each day. However, when people do come into the city, and particularly the urban core (the most connected part of the city), they will have a greater number of interactions, making them more important to the worker and the city’s economy. Cities nurture and monetise ideas.
Before the Covid-19 pandemic, demand for real assets in cities was increasingly derived from the digital economy. Data centres and warehouses were the prime beneficiaries, while shopping centres were being shuttered. Demand for office space was already weakening as people worked more flexibly and utilised the services of flex office companies. This trend has accelerated.
Buildings will be repurposed
The way we use buildings in global cities will change. However, this is nothing new. In London, for example, old warehouses by the side of the Thames that were once used for storing commodities brought to the city’s port by ship, have been repurposed as high-end luxury housing.
The urban core will still be vital to the effective running of a global city’s economy. For example, life-science buildings near universities are hubs for biomedical research. These assets contain specialist equipment used by researchers. Boston, which is arguably the world’s leading city for medical research, will become even more important, given the emphasis on healthcare and research.
Data centres and warehouses have already replaced the need for shopping malls. The reality is warehouses are beginning to physically replace retail parks; the value of warehouses close to large, affluent populations is now greater than the value of retail outlets. Transactions by large internet companies reflect their need to be able to distribute from where people use to shop from. This is a profound shift in land use.
The need for social distancing is a key factor that will hasten our digital future. Offices will suffer a collapse in demand, already witnessed by retail assets, in all but the most interconnected locations. Office buildings in secondary locations, outside of the urban core, will be the most at risk of being repurposed. With higher numbers of people working from home, it will make no sense for businesses to maintain these type of offices.
Most companies will prioritise their offices in the most connected locations or use flex office alternatives. This was already happening as flexible working ensured only the best connected offices remained relevant. This is bad news for office owners: less aggregate demand and customers controlled by flex office providers will reduce pricing power even further.
Excess office space will need to be re-purposed in the future, unless it is in a city’s urban core (the most essential part). Demand for higher and better use will, in all likelihood, see office assets converted in the way retail assets are now being converted.
Urbanisation remains a long-term trend
Urbanisation is a long-term trend which has been accelerating since the earliest days of the industrial revolution. we believe Covid-19 is not going to derail that. Economic activity is not going to move back to rural areas and the strongest cities, such as London and New York, will continue to create economic opportunities. We believe cities remain the most efficient way for humans to live and work.
One of the main advantages of global cities is the ability for industries to cluster together, boosting efficiency by sharing knowledge and expertise. This attracts external capital (venture capital) creating a self-fulfilling prophecy of investment and returns.
In fact, some global cities’ expertise may become more concentrated, such as finance, media and technology: as people travel less, the need to be centred in the recognised hub of your professional field will increase. This would be Los Angeles for entertainment or London for insurance. Again, it is about maximising the interactions.
From an economic perspective, global cities have huge buying power, often referred to as mass points of consumption. Post Covid-19, global cities will continue to be the drivers of GDP for the country and region they are located in. However, we see the demand for asset types changing, particularly in office buildings, and the need to be located in physical hubs that excel in specific fields accelerating.
Important Information: The views and opinions contained herein are of those named in the article and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The sectors and securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. This communication is marketing material.
This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. Issued by Schroder Investment Management Limited, 1 London Wall Place, London, EC2Y 5AU. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.