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The coming Commercial Real Estate apocalypse – and why we should cheer for it

The next 10 years are likely to be terrible for commercial real estate. You’re going to have fewer people wanting to be in an office for five days per week and fewer companies demanding it, which all means a drop-off in demand for the traditional office. It’s not looking too great in retail either, where the rise of online shopping made it all the way to the luxury segment during the lockdowns and shows itself to be quite happy there. 

One of the recurring images of the pandemic was that of the empty city centre. From people cycling down the middle of barren main roads, to the junction in front of St Paul’s in the City of London, empty even of Mary Poppin’s pigeon-food seller. 

For those used to frequenting the City before the pandemic, it could just as easily have been any weekend, because poor town planning has meant that offices have replaced any residential in the area, stripping it of life. Having seen this played out around the world, we can now see how damaging this is and building offices should, in the future, be seen as ecologically immoral and economically undesirable.  

Mixed use keeps communities active and lively and the revolution that is coming to real estate is that it’s not the actual assets that are attractive, it’s the people that are in those assets and how you can maintain a relationship with them. And this could stretch throughout their lives, from how to help them live, work and play down to more prosaic offerings, such as how you help them onto the property ladder.  

We’re already starting to see the shift happen. The growth of Airbnb has meant that you now have rental developments which contain a sharing element where you might only pay for 300 nights per year and your apartment is rented out for the rest. The sharing economy has meant that the residential market is now learning about distribution in the same way that hotels are still trying to grasp. What brings the two asset classes together is the search for yield and investors are seeing that yield can be helped along the way by being flexible.  

This flexibility is also coming into business models, which give people a new way to look at their relationship with assets. CitizenM launched a subscription model, with an eye on the corporate market moving to hub and spoke offices. The hotel group appreciated that executives travelling in to their meeting or to do their few days in the office would need somewhere to stay, having moved somewhere which wasn’t so tethered to the corporate hub.  

At the moment hotels have a binary system; a room is occupied or not or paid for or not. There may be some cancellations, there may be some allotments that they have, but fundamentally, it’s a binary system. A subscription model, one which could cover all of your living, lifestyle and office needs, how much would you pay for that? 

Looking further ahead, could you sell these subscriptions on? Could you make a product out of it? The pandemic saw Hilton and Marriott International able to raise money on the back of their loyalty programmes, something airlines have been doing for years. 

So where is your hedge now? Your new hedge is flexibility and no asset is better suited to that than the hotel; if you look at it afresh.  

Investors need to think less about which asset class they’re investing in and more about whether they are investing in flexibility. What you are moving towards here is the ultimate property management system. And we can help with that.


By Richard Valtr, founder of Mews.

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