Español

Thinking 2020

Written by Pablo González and Pedro Nonay trying to understand Covid 19’s consequences.

Entry 9 – Covid 19

May 13, 2020

Before continuing with the story, I am going to make some comments based on observations made by some of the readers of these entries. I have found them relevant, or enlightening. That is why I put them here. They are the following:

I will now pick up where I left off in entry 8. That is, I will deal first with cryptocurrency predictions, and then with real estate. I will do this by trying to maintain consistency with what I have been saying in each entry, but I caution that this is easier said than done.

20. Cryptocurrencies.

I already said, in prediction 4, that the dollar and the euro have only a few years to live. 

Their substitutes will be cryptocurrencies. They will also be useful to “cover up” the bankruptcy of the old currencies with the excuse of a change to modernity. But they will not be of the Bitcoin type. I think the following things will happen:

21. the real estate sector.

As the section I am going to deal with now is long, I will deal with it in different subsections.

The first comment, valid for all subpoints, is what I said in entry 1 about the root cause of the changes: Covid 19 is only the trigger (very sad in health), but the real cause is the post-internet technological revolution.

It is also very important to realize an essential characteristic of the real estate sector: its product (buildings) has a useful life of between 50 and 100 years. Of course there are exceptions (the pyramids, as an extreme case), but they are just that, exceptions. Any average building needs a complete reformation (if not demolition) before it reaches 100 years of life.

You have to mix what was said in the previous paragraph with the huge amount of money needed to build those buildings. The fact is that estimates of the value of all the buildings in the world are $217 trillion, which is something in the same range as the entire world debt.

With the above two paragraphs we find that the natural rate of replacement of the existing housing stock, due to “aging”, is 1 or 2 % per year, and that alone requires a lot of money. But, in addition to the concept of natural aging, there is the concept of “change of model”.

Therefore, the great change brought about by the technological revolution, and accelerated by Covid 19, requires a much faster replacement of the fleet, and the consequent huge investment.

Someone will say: “Why does the technological revolution make my house obsolete? And I answer with examples:

I think we are at one of those moments. I say that because the existing buildings do not fit well with the new needs. It’s one thing for us to make do, in a bad way, until we can move house, and it’s another for the model to fit the future. 

Examples of poor fit are:

There are many more examples. And not only for housing. And not only for building, but also for city design (urban planning). But these sayings are enough for me to state the matter.

I can’t resist putting here the link to a blog I wrote in 2014. The trend was already clear. http://real-estatefuture.blogspot.com/2014/09/r.html

In addition to the above, of course, the great economic crisis that we are beginning to face has a great impact. But, again, I remind you that the useful life of our product is 100 years. The crisis will not last more than a small part of them. 

If the need to change the entire housing stock ahead of time, due to obsolescence, accelerates the conventional construction process (probably more than doubling, on average). And, if the crisis delays it for a few years (perhaps by half). The fat number says that the volume will not fall much during the years of the crisis, and will rise sharply afterwards.

Therefore, I do see a future in the sector, but only in product adapted to the new times. The other product can only be looked at to buy at a good price the “location”, and demolish it soon to make it new. In other words, bad for the existing portfolios, and good for the development land (although I recognize that here I may be biased by what suits me, but the reasoning convinces me). 

21.1. Drivers.

It is a classic in the real estate industry to talk about “location, location, location”. And it’s no lie. But you have to look at it through today’s glasses. 

The fundamental driver of real estate has always been (and will always be) demographics.

It is true that there are secondary drivers, such as purchasing power (closely linked to GDP per capita and the unemployment rate), the average number of inhabitants of households, … 

The existing housing stock is also very important.

All of this must be seen through the double lens of current circumstances. That of the technological revolution (which is the long-term one), and that of the Covid crisis (which is the short-term one, short in the 100-year real estate cycle).

In this section I talk about the long term (I will deal with Covid in the next section).

A first approach to the classic “location” is the existence of infrastructure. The clear example is being close to a subway station, or a highway, or within an attractive city with a large airport. It is clear that infrastructures increase the value of the location.

Another way to approach “location” is demographics. But demography in the sense of growth of the city, not size of the city today. Nor vegetative growth by procreation of today’s inhabitants. Here it matters a lot if the city attracts new inhabitants (because of the technological revolution). The basic word is immigration.

The city that (for whatever reasons) is able to attract new inhabitants, will be a city that needs to create housing for them. And the one that decreases, will have to go to demolition or abandonment (case of Detroit in recent years). I also wrote about this years ago in http://real-estatefuture.blogspot.com/2014/10/the-future-of-citys-size.html

Of course, although I have said that the life of a building is 100 years. I also say that the life of a city (of its street layout and style) is a thousand years. The clear example is that the streets of ancient Rome are still the same as in the time of Julius Caesar. And it is necessary to look closely at the ability of each city to adapt to changing times. Because, if it does not have the capacity to adapt, the investment in changing everything is so great that it is more interesting to do it from scratch in another place. That is the great point to consider when facing the change we are facing: Do we do it from scratch, or do we take advantage of the existing large investments

It must be taken into account that the current technological revolution allows for a great deal of mobility (immigration, as we used to say). This means, from the city’s point of view, that what is important is not the birth rate (which is also very slow to make the city grow), but the capacity of attraction. An example of this is today’s large American cities, which were very small in the mid-nineteenth century, and which did not become what they are because their female inhabitants had 20 children each.

Cities that are able to attract new inhabitants have a great future. The rest do not.

In the face of this, the question must be asked: which cities can attract these inhabitants, and why? History gives us infinite causes, but some common denominator. 

In the past, decisions were made by politicians, or by businessmen. For example, if someone decided to set up a car factory in Valladolid, the workers had to go there. Today, if you work at Microsoft, you have no need to live in Seattle. If you are a good worker, you can live in any part of the world you like. The big change is that the power of decision making has changed. It’s gone from the top down. Now it’s the individuals who make the choice, as technology now gives them the choice of where to live. And what I have just said is much more important than it seems.

In short: In the past, the impetus for the growth of cities was a political or investment decision. Today it is the quality of life of the citizens who want to live there.

Cities that offer quality of life have a future. The others do not. Quality of life is very subjective. Each city has to look for its target public (note: Spain does not have bad cards for quality of life, or did not have them before our current government). 

The other point to consider is the existing housing stock. 

In a world with little change, and remembering that buildings have a useful life of 100 years, if the city has a vegetative growth, the building stock should be renewed at a rate of 1 or 2% per year. But in today’s world, where the existing stock must be considered similar to that of huts, which is tending to disappear (I know I am exaggerating, but not that much), the entire stock will have to be renovated very quickly (if the city attracts inhabitants). 

I remind you again, as an example, that in 1840, New York City had less than 400,000 inhabitants, and in what is now Central Park, there were shantytowns for workers. And there were no buildings of more than 4 floors. But they knew how to adapt to the new times. Not a single one of those buildings remains (the layout of the streets remains). In 1870, New York had 1.5 million inhabitants (more than three times as many in 30 years). Today it has more than 8.5 million. And the housing stock has nothing to do with the initial one.

We can summarize that the famous “location” is investments in existing infrastructures. And that it is necessary to demolish almost all the old buildings in the few cities that know how to adapt to the new world. As well as the fact that the stock must be renovated at an immense speed. All of this is full of infinite nuances.

The current technological revolution was making the city:

I am quoting here the new buzzwords in the industry. They are “proptech” and “REEAS”. 

Proptech is nothing more than the name given to a subsector to make it “cooler”. It is said that a business is proptech when it focuses on using new technologies to improve real estate. This includes everything from autocad, to Idealista, to Aib&B, and countless other things.

REAAS is an acronym for “Real Estate as a Service”. It has a lot of conceptual background. It seeks to orient real estate towards being a service (not the classic investment in bricks). The idea is that there will be “users” of the sector (the inhabitants of the property) who will pay for the service (rent, but much more, as is the operation of all the technological services of the property). And there will be “service providers”, which will be the intermediary companies between the owner investor (the investment funds) and the user. This company will be in charge of having a repair and assistance network, so that the entire property constantly provides the service that the inhabitant demands. This company will also be in charge of everything that is needed to develop the building (the investment fund provides the money, but they are in charge of the projects, licenses, marketing, and continuous service in operation). Therefore, a concept that is tending to (slowly) disappear is the mortgage. The bank will no longer be the driver. Nor was it the owner of the money. 

21.2. the virus

The virus has somewhat changed the trend. But we have to be very careful with this. 

It is true that the virus will change the decisions of many people in the short term. But it is also true that the virus will pass in one or two years. Even if it will affect subconscious decisions for more years, I remind once again, that the lifespan of buildings is in the range of 100 years. Therefore, the influence of the virus on the city will be small in the long term, but large in the short term.

The influence that will be felt is that of the post-virus economic crisis. Cities that have to grow in these cash-strapped times will do so with weak infrastructures. And they will stay that way. This is the example of the cities of the former communist countries.

Meanwhile, there are “subverted” trends, such as densification. The virus has encouraged many people to live in houses with gardens, in order to be able to walk in future confinements. There is a market for that, but it will be very temporary, because it goes against the main trend.

21.3. Offices

The technological revolution already made it possible to work without going to the office. The only thing that kept them active was the inertia of the previous industrial revolution, in which bosses wanted to see their “chicks” constantly.

The virus has accelerated this. Under the name of teleworking.

Now, workers have found that they spend less time in traffic jams, and manage their time at home better.

Bosses have realized that their employees are more productive, and happier at home. In addition, they have to invest less in office rent.

The offices we know are dead. This does not mean that they will disappear, but it does mean that they will be greatly reduced and that the concept will change.

The only use of offices in the future is to encourage social contact between employees. What they call “team building”. In other words, employees will go there once a week to chat with colleagues. Offices will disappear, and everything will be contact rooms, with the excuse of conferences, or whatever. Basically, it will be almost like a club, but only for colleagues.

Of course, the change has to go hand in hand with the change in housing. Employees who do not have space at home to work in privacy will take longer to adapt.

An intermediate option will be coworking spaces. The worker will not work at home (because he does not have adequate space), but he will not spend an hour of traffic jam to go to the central office (where there is no one). What he will do is to look for a place near his home where he will work paying the “table hourly rent” with some vouchers that his boss will give him (which saves the rent of the old office in expensive places).

However, urban planning regulations must also be changed to allow these adaptations. In theory, today’s standard prohibits teleworking, because it is forbidden to use the areas defined as housing for offices. Absurd, but true. In addition, the occupational risk prevention people will also talk nonsense, who will insist on saying that a house does not meet the standards to work safely (ridiculous, but they will say it).

The change of regulations is the first step that a city has to take in its attempt to adapt to the new world. What used to be called “spotty urban planning” (yellow zone housing, blue zone offices, …. ) must come to an end. If they do not do it, the investor will have doubts, and will be forced to do something with little future.

21.4. Housing

The trends are:

21.5. Retail

It is deader than the offices. 

There will be times and styles of “deadliness”, but purchases are going to be made online.

The only way out is the showroom concept. That is, the place where people go to touch the product, or try on the clothes. But then buy online, and receive it at home without having to carry bags.

They will be something like an additional marketing or customer service cost for the brands. They will not charge for selling (the sale will be done through Amazon or equivalent). They will charge from the brand, not from the customer. They will do it for “exposing”.

That will not provide work for all the current commercial premises. Many will have to change their use to housing, bars, or other things.

Of course, what will not make any sense is the space that almost all current commercial premises have for product storage. Only the exhibition space will do.

21.6. Logistics

It is the big winner. 

As everything will be bought online (after touching it in the showroom), it will be necessary to have many large logistics spaces on the outskirts of the city (where large trucks arrive with products from the factories, and from which small trucks leave for the “last mile” logistics centers). And other last mile logistics spaces, inside the city (where the small trucks arrive, and from which delivery vans or drones leave).

Most likely, last-mile logistics centers will be installed in old parking lots, which will have lost utility with the other general trend, which is to eliminate car ownership in favor of car sharing or public transportation (of course, when the virus passes, because until then, car ownership will regain weight).

21.7. Hotels

They were already dead before Covid. Airb&b style things were wiping them out.

Covid is going to give them a break. Because they offer more guarantees of cleanliness than Airb&b. But it will be a short respite.

Only those offering a highly personalized lifestyle will be able to operate. 

21.8 Restaurants & pubs.

This will change very little. For the reason that it is the real estate sector most adapted to the new times, of all.

They have always offered a roof and heat, but have never asked for a check-in process. And the table “contract” has always been by the hour. High efficiency and adaptability to the client.

21.7. Urban Planning

I have already said that buildings last 100 years, and street layouts last thousands of years.

There will be some old cities that can adapt their offer to modern times, taking advantage of their existing infrastructures.

Others will be built from scratch. With very heavy investments in infrastructure.

The change of way of life is going to be so big, that there is a good niche for new projects. But only for the well thought-out ones.

In this, it is essential that the City Council understands the process. That it adapts its General Plan. That it finds and promotes the characteristics that make the inhabitant find there the quality of life of his taste. And that it identifies some major investments that will act as a driving force. 

————————————————————–



Much more could be said (and better said). But this is what I have come up with in confinement. 

Based on these ideas I am preparing my personal adaptation to the future world. Including the launch of some real estate initiatives, directly, and also the launch of technological platforms to support the sector (some very nice, but we will have to see if I am able to convince the sector, and investors, as well as to do it well).

I say goodbye, and I thank all the readers who have put up with me, and have contributed lines of thought. 

A big hug, and good luck to all of you in the great experience of living in a new world and participating in its development.

If you have any feedback or comments on what I’ve written, feel free to send me an email at pgr@pablogonzalez.org.

You are allowed to use part of these writings. There’s no property rights. Please do it mentioning this websitte.

You can read another writings of Pablo here:

Esta web utiliza cookies propias y de terceros para su correcto funcionamiento y para fines analíticos. Contiene enlaces a sitios web de terceros con políticas de privacidad ajenas que podrás aceptar o no cuando accedas a ellos. Al hacer clic en el botón Aceptar, acepta el uso de estas tecnologías y el procesamiento de tus datos para estos propósitos.
Privacidad