Liquid Living, Immovable Cities, and Institutional Appetites
This week, I was planning to write a series of short and unrelated takes. Somehow, the various takes ended up connecting and became a short essay. You can nibble each one separately or read them in order. They include seeds of a longer essay that will be added to my series about Cities in the Age of Abundance in the coming weeks.
You can also listen! An audio version of is available below and on Spotify, Apple Podcasts, Overcast, and other popular apps (if you can't see the latest episode, check again in a few hours).
Another week, another survey about the future of work. Deloitte analyzed responses from over 27,000 Millennials and Gen Zers and found that:
- 67% of Millennials (63% for Gen Z) believe remote work enables a healthier work/life balance;
- 64%(60%) would like to have the option to work from a remote location more frequently once Covid is over; and
- 56% (56%) would choose to live outside of a major city if given the opportunity to work remotely.
The survey highlights an important misconception in the current discussion about "the office" vs. "home". Most people will not work from home once Covid is over. But many will not go back to their previous office either, at least not every day. People will work from near home or from temporary travel destinations.
Netflix for Homes
Last week I mentioned Airbnb CEO's comment that "work from home also means work from any home", with people spending weeks or months at a time in different locations. In my book, I predicted that the boundaries between "homes" and "hotels" will continue to blur. Indeed, the word "hotel" was used to describe both apartments buildings and short-term lodgings up until the early 20th Century.
And life as a whole used to be much more flexible. As Robert Fishman wrote about the 1880s in Philadelphia:
The ideal upper middle-class life at this time possessed a surprising amount of mobility. With servants to do the packing, it was possible for a wealthy family to move each spring from a townhouse in Rittenhouse Square to the Wissahickon Inn, then to a New Jersey shore resort in the summer, back to the Wissahickon Inn in the autumn, and finally to Rittenhouse Square for the winter season.
Note that Fishman is writing about the middle class, not the upper class. Of course, the middle class was much smaller in the 1880s. In the U.S., its share of the population peaked around 1970 and has been declining ever since. Is the world of constant physical mobility coming back?
Following last week's article, a friend from Japan sent me the web site of a local company that allows people to pay a fixed monthly fee and access a network of bedrooms located in private houses across the country. Each house has good wifi, a working area (in the living room) and a local "host" that can recommend activities and provide support.
Even though the rooms are in private houses, each of them has the same brand of mattress, the same brand of towels and amenities, and even the same Panasonic steam iron.
For most people, moving constantly is not convenient. The seasonal rotation of the 1880s seems extreme for today's middle class. Still, it is clear that the information revolution will reshape the way we live. The question is how.
One popular thesis comes from Professor Richard Florida. In 2002, Florida masterfully described The Rise of the Creative Class, a class that flocked to large, diverse, and liberal cities — from New York and San Francisco to Shanghai and London. The thesis was supported by Professor Ed Glaeser's Triumph of the City, an excellent book about why urbanization is good for the economy and the planet and why knowledge work depends on the "agglomeration" of people from related industries.
These two theses did a great job describing (and predicting) the first 15 years of the 21st Century. The best and brightest did move to cities, and large cities enjoyed a renaissance of sorts. But there are reasons to believe that the concentration of creative people in a handful of large, diverse cities may have been the swan song of the industrial era rather than a harbinger of the post-industrial one.
Rise of the Creative Class was published in 2002, describing a world with barely 500 million internet users, in which the iPhone, Uber, Tinder, YouTube, Airbnb, or mobile 4G were yet to be invented.
In 2020, more than 4.6 billion people are connected to the internet. A single AirPod earphone has more processing power than a fancy 2002 Pentium PC. Geography already plays a very different role in the way people learn, work, and socialize. And God knows how this role will evolve and intensify over the next decade.
I suspect that the truly dominant class of the 21st Century is only starting to emerge. And as it emerges, it will create a whole new way of living, different from anything we've seen before. I believe that the defining characteristic of this class will not be where it lives, but its ability to live anywhere it wants.
As Fishman points out, the first middle class suburbs to emerge in England in the 19th Century showed "the power of a class with the resources and the self-confidence to reorder the material world to suit its needs." The merchants and industrialists of the 19th Century used their growing wealth to move their residences out of urban areas. Previously, this privilege was reserved only for landed aristocrats who lived off of agricultural rents and did not have to spend time in the dirty, unwholesome cities.
How will the new class of location-independent workers express its growing power? France offers a hint.
15 minutes of fame
Last week, Anne Hidalgo won reelection as the mayor of Paris. Hidalgo ran on a promise to limit the use of cars, expand the use of bicycles, and make public transport better and (sometimes) free. Her goal is create a city where everything important can be reached within a 15-minute walk.
This suggest one way in which the new class of location-independent professionals will use their power: They will not leave the city, but they will reshape it to suit their needs.
One could ask: If it is so simple to reshape a city, why didn't they do it before? The answer is simple: In the past, people who wanted access to the best jobs and services had to be in the city. They had to adapt themselves to their environment. Today, people have a choice, and that choice means that cities that won't lend themselves to be reshaped will be abandoned.
Which brings us to New York.
Cities in the way
How can cities lend themselves to be reshaped? The biggest barrier to change is land-use regulation and zoning ordinances.
My friend Cindy McLaughlin, CEO of Envelope.City, recently published a thoughtful article about how changes to New York City's zoning laws can help it become a "15 minute city", in Parisian style. Specifically, NYC should:
- "Encourage a redistribution of workspaces, allowing satellite offices to flow into the neighborhoods."
- Amend zoning in residential areas to expand the allowance for "retail, office, and other commercial uses at the base of buildings" along primary streets.
- Reduce street parking in order to "free up curb space for cargo delivery, trash receptacles, outdoor cafe seating, and other activity that may result from new commercial spaces."
- Amend zoning in commercial areas to make it easier "to repurpose existing office buildings to residential, light manufacturing or makerspace, vertical farming, R+D hubs, medical facilities, or other uses more relevant for the moment."
- Generally, make it easier to convert commercial (office) buildings into residential buildings, and vice versa.
While Cindy's recommendations are specific to New York, they are relevant for most other large cities. NYC is in a better position to evolve because it is already made up of many small "villages", but it also has powerful lobbies that protect core office areas and push back against attempts to increase density and diversity in residential areas.
Looking beyond New York, the future of cities in general will include the following: Buildings in many traditional employment districts will have to compete more fiercely and many of them will ultimately have to be repurposed. Meanwhile, buildings in residential neighborhoods will have to accommodate more daytime workers.
Many other assets, such as hotels and street retail will change their use. More retail will turn into office or community space. And the boundaries between hotels and homes will continue to blur.
We're already seeing suburban malls being converted into apartments, offices, and fulfillment centers. The next step is for urban retail to open up to new uses. Demand for this has been clear, but the asking rents for most street retail make other uses impossible to "pencil" (make sense financially). Covid will force many retail landlords to stop pretending and adjust their expectations. Once retail asking rents finally drop to a reasonable level, it would be possible to adapt them to other uses.
Even if cities allow this new level of dynamism, who will pay for all these conversions?
Remember the 1950s? Neither do I. But I hear that once upon a time, people had stable jobs and a reasonable pension to retire on.
Pension funds still exist, and they are among the world's largest real estate investors. But pension funds haven't been doing too well. A recent piece in the Financial Times shows that pension systems are on track to fail to deliver on their promises to their members.
In other words, people are not going to get as much as they need to retire with dignity. The reasons for this are multiple:
- People live longer, which means they spend more years in retirement, which means they have to save more of their income during their working years.
- The past decade had historically-low interest rates, pushing down the average returns on bonds and other financial assets that pension funds park most of their money in. Pension funds that expected to make, say, 5% on their investment ended up making only 2% a year over the past decade. As a result, such funds have not grown as quickly as they expected to — meaning they have less money to pay out to their members.
- Covid compounded the above problems by pushing people to retire early and/or liquidate some of their retirement plans ahead of schedule. This means that pension funds must make more payments today, instead of letting the money compound and grow for a few more years.
How can pension funds catch up? How to make up for the shortfall of capital?
The simple solution is to take more risk. Higher risk means a higher return. Traditionally, pension funds and other institutional investors invested only in safe, stable real estate assets such as office buildings in the center of large cities.
But now, they are forced to become more open minded and invest in riskier assets and riskier operating strategies. This includes investment in repurposing old buildings and allowing more flexible leases and additional services within existing office and apartment buildings.
The downside is the upside
But commercial real estate investors don't need to invest in new assets in order to increase their risk. They can also keep the buildings they already have and do nothing. A recent report from Goldman Sachs estimates that "aggregate occupier demand for office could be ~20% lower" in the coming years (looks like my talk at Goldman made an impact!).
In other words, many trophy office buildings are becoming much riskier. Of course, those who will own them and do nothing will end up losing a lot of money. But those who will invest in new services and embrace the risk of shorter leases can make a lot of money.
Put differently, large investors are already taking on much more risk than before by simply doing nothing. In order to give themselves a chance to earn a higher return, they will have to take on more risk and do something.
What can they do? First step, read my book. Second step, take the Future-Proof Office course. Third step, keep reading the newsletter!