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Cities & Buildings: 6 Things to Watch in 2021

Dror Poleg
. 6 min read
Cities & Buildings: 6 Things to Watch in 2021

In February, I was in London to launch my new book. It was weeks before a pandemic overwhelmed the West. My keynote at the launch focused on contagion of a different sort — a contagion of abundance.

I contended that the world was on the cusp of a new era where many physical constraints would lose their powers. Geography would still matter, but it would matter far less. As a result, the obvious symptoms of the “retail apocalypse” would soon become visible in all other property types — offices, homes, hotels, warehouses, and cities. Consumers would face an abundance of choice.

A few weeks later, Covid drove the point home. We suddenly realized that we have much more choice than we assumed — a choice of where to live, work, learn, socialize, exercise, and access (some) medical services.

In my talk, I also highlighted another form of abundance — an abundance of capital. Back then, the common view was that the venture capital “binge” of the 2010s was over and that investors would now be more prudent. Big bets like Softbank’s multi-billion WeWork adventure were something we all “learned a lesson” from.

Not so, I said. The world was awash with money — interest rates will likely remain low indefinitely, and institutional investors need to move up the risk curve to meet their return targets. As a result, investors would continue to back bigger and bolder bets.

I expected many of these bets to target the built world and seek to reshape how we work, live, and travel. And indeed, in 2020, WeWork itself raised more than $1 billion, as did Airbnb and a variety of other public and private companies. The party was just getting started.

In short, my message was that an abundance of capital was funding technologies and ventures that sought to undermine the constraints of geography. As a result, humans will face an abundance of choices of where to live and work.

This abundance would not trigger a mass migration of people. But it would force places to compete for customers like never before. It would force buildings and cities to become consumer businesses, to think strategically about their purpose and their customer’s specific needs, values, and aspirations. My book offers a roadmap on how to translate these ideas into a practical plan.

What happens next?

Below are six things I expect to see in 2021.

1. Office as a Consumer Product

Alfred Taubman was a pioneer of American shopping mall development. In his autobiography, Taubman explained the difference between retail and office development:

“Major mall development is an operating business... the developer provides the environment — physical, locational, promotional, operational — to optimize the marchant's performance. It's a long-term commitment that, if all goes well, yields long-term rewards and continues to add value for both merchant and developer.
Office buildings, by contrast, are commodities business. Price is usually more important in determining the success of a property than other factors such as location, design, and access....
“If you are an employee in a major corporation, chances are you will show up for work at the office Monday morning despite the highway gridlock, lousy parking, and uninspiring views. Try adding those inconveniences and turnoffs to a retail location, and you're looking at bankruptcy."

Being a commodity, a product with little differentiation, is what made office buildings attractive to investors. In 2021, it will become evident that offices are no longer commodities. They are businesses and need to be branded, packaged, serviced, and delivered to customers in a new way. This has always been true for a sliver of the office market, but this dynamic will overwhelm all major markets in the next 24 months.

2. The return of WeWork

Love or hate it, WeWork is the archetype of what it means to turn offices into consumer products. This does not mean that all offices need to look like a WeWork. It means the market will fragment into multiple brands that appeal to different customer segments. By brands, I do not mean “Tishman Speyer” or “Durst”; I mean consumer brands.

WeWork is still in the best position to be the world’s leading office brand. Not just in a good position, in the best position. Now that many office landlords are on their knees, it would be interesting to see how WeWork would capitalize on the opportunity to shape the post-Covid world.

3. Rise of the Mayor-fluencer

If people can move anywhere, how will they decide where to move? The same way they choose any other product: by spending time on social media. Cities have toyed with branding for decades. But now, it’s becoming personal. Over the past few weeks, the mayor of Miami has been spending his days on Twitter, interacting with investors and entrepreneurs that are contemplating a move to the sunshine state.

Cities are subject to network effects. Every new resident makes the city as a whole more (or less) valuable to all other residents. Encouraging a critical mass of investors and entrepreneurs to move within a short period can have a snowball effect. Of course, mayors cannot speak to every individual person, but the fact that this process doesn’t scale does not mean it’s wrong. Quite the opposite, some of the greatest businesses are built on initially doing things that don’t scale. Cities are no exception.

4. Rise of the 10X Class

Working remotely or breaking up corporate HQs into smaller regional hubs will not just move people around. It will change the number of employees required to produce the same amount of work. The ability to access the ideal talent wherever it is would enable companies to become more productive.

By “ideal,” I mean the person most suitable for a specific job — not the most intelligent, most diligent, or most [any other general quality]. In creative and knowledge work, the most suitable person can easily be 10-times more productive than a comparable employee with the same training and experience level.

A bigger labor market (bigger than the biggest city) means better matching employees to their jobs. That means unleashing the full potential of many more people.

As a result, we will see the emergence of a new class of working professionals, which I call the 10X Class. These people are not founders of giant companies; they are not billionaires. They are employees or contractors that can produce and earn much more than the average person in the same field.

These are the types of people that cities like Miami would fight over.

5. A New Urban Contract

Some say it’s immoral for wealthier people to move out of the cities that helped them become successful. According to this view, people who complain about, say, San Francisco’s crime level and failing infrastructure should get involved in politics and help turn things around.

In a land-based and central-office-based economy, there was a strong dependence between economic power and location. As the economy becomes less dependent on physical inputs, entrepreneurs and members of the 10X Class become less dependent on their cities. Appealing to their moral duty or sense of kindness will not work.

But this does not mean that civic society is doomed. This is not the first time in history in which land's role went through a dramatic change. In the middle ages, a new class of merchants and artisans became economically significant. These people relied on trade and manufacturing. They were unlike the aristocrats and peasants/serfs who derived the income from working or owning agricultural land.

This new middle class did not escape from cities; it escaped to cities. Cities provided this new class with unique legal protections, tax relief, and other institutions that enabled it to prosper and push back against other powerful groups.

The same thing will happen in the 21st Century. Cities no longer have a monopoly on jobs. But they can create a new alliance with an emerging class of people.

6. Logistics Upheaval

Industrial real estate — warehouses, fulfillment centers — was a bright spot in 2020 and over the past decade. Online deliveries rely on industrial real estate. Investors assume that what’s bad for traditional retail is good for warehouses.

That’s not true. Or, not true indefinitely. This is the same logic that thought that the internet is bad for bookshops but good for apparel stores. When it became clear that people buy apparel online, the logic was that they’d never buy groceries online. When they started buying groceries online, the logic was that all retail was doomed, but that offices and apartments are safe. When offices and apartments got a jolt from Covid (and Zoom), everyone poured more money into warehouses — because online commerce will keep growing.

Online commerce will keep growing. But the way things move around is about to change dramatically — courtesy of drones, autonomous vehicles, and a variety of other inventions. People who assume that little sheds next to highways are inherently and indefinitely valuable are deluding themselves.

Warehouses will likely continue to rise in value in 2021, but the signs of a major change in that market will become clearer.

There’s plenty more to say, but I’ll stop here. We have plenty of time. For now, I wish you a happy, healthy, and prosperous 2021. Thank you for reading.

Dror