To stay competitive, real estate leaders must offer new services that address the evolving needs and desires of individuals, companies, and communities, such as flexibility or sustainability.
July 12, 2018//-The major global trend toward urban expansion shows no sign of slowing. Over half the world’s population now lives in cities, and European dwellers appear ahead of the curve, with the proportion of urban inhabitants reaching as high as 75 percent (from about 60 percent in the 1960s).
At the same time, these cities are experiencing unprecedented levels of connectivity, the rise of the sharing economy, and demographic changes such as shrinking households or aging populations. All these urban trends are having profound consequences for players in the real-estate sector.
Innovative thinking
Such socioeconomic changes trigger innovative thinking and, as acknowledged hubs for business concentration and creative density, big cities are the natural centers for this innovation. As a consequence, large cities’ real-estate profiles are evolving in response to a number of fundamental drivers:
- Flexibility. Customers are seeking new levels of flexibility as exemplified by temporary, movable, or on-demand phenomena. These include coworking spaces, temporary pop-up hotels, or kitchen-only restaurants.
- Wellness. People’s greater attention to well-being is fueling the success of several facilities where physical activity and personal care meet urban culture. Examples range from playgrounds and outdoor fitness equipment to exclusive health clubs and high-end urban spas.
- Experiences. The search for unique visiting or purchasing experiences is also driving innovation with some venues exploiting the appeal of height and panoramas, such as temporary rooftop restaurants or the new generation of observation towers. Other venues focus on exclusive entertainment, including exotic, event-only locations. Entrepreneurs and operators are also rethinking retail experiences: for instance, the emergence of in-hotel malls, “24/7” farmers’ markets, or stores with no checkout stations.
- Sense of community. Many of these formats or business models are focused on the creation of a sense of community—often a core demand expressed by people living in, or travelling to, big cities around the world. Residential real estate has responded with co-living buildings and networks that offer all-inclusive services, fine interior designs, and attractive social events. Some players are targeting specific segments such as students, and offering above-average apartments and common spaces while promoting social connections. Equally, office real estate can offer professional networking via an integrated membership system.
- Sustainability. Worldwide demand for sustainable services has, for example, prompted improvements in properties such as parking assets, with underground automated garages increasingly offering services for bike storage or charging stations for electric vehicles—thus contributing to new, eco-friendly mobility.
- As these complex forces play out, there is growing pressure on rigid business models: real-estate functions are becoming unified and new spaces are blurring the boundaries between retail and residential, public and private, and temporary and permanent assets. Moreover, today’s urban trends don’t simply concern quantity alone, in the form of population, GDP, growth, or size. Instead, they anticipate the growing demand for quality-based solutions.
Seven tips for real-estate players
What does this mean for real-estate players, including landlords, developers, constructors, and investors? We suggest seven actions to ensure continued success:
- Know your end customer.Even when operating in a B2B environment, players should proactively seek to keep pace with trends in consumer behavior, so as to understand their end customers.
- Further evaluate deployed collaboration with different players.Increased “mixed” use of real-estate spaces will prompt today’s largely vertical players to collaborate more in the future, as they attempt to extract additional value and win a larger share of the pie. This will include investors and developers, alongside broader infrastructure players such as concessionaires and transport operators. Their ultimate goal will be providing the final customer with an end-to-end, seamless experience.
- Maximize the use of technology.Consider deploying high-tech or digital technologies while making use of growing IoT opportunities to turn a place into a platform. For instance, sensors can collect analytics on asset conditions to streamline predictive maintenance, as well as create data streams that offer people additional services—orchestrating demand and uncovering additional value. Voice-activated personal-assistant tools can connect residents directly with nearby grocery stores with which asset owners can contract. Similarly, landlords might use digital communication tools to inform tenants of maintenance or other updates. Real-estate developers and landlords must consider how they might potentially coordinate such offerings to consumers or tenants.
- Establish partnerships with other sectors.Today, most smart-home solutions are driven by individual consumers purchasing specific solutions, such as digital assistants, smart thermostats, or connected washing machines. To fully capture the IoT’s potential, developers must establish strong partnerships with traditional utility, security, appliance, and technology providers to introduce holistic, integrated solutions.
- Embrace new ways of designing and building.McKinsey research finds that a five- to tenfold increase in productivity would be possible if construction moved to a system of mass production with a much greater degree of standardization and modularization, where the bulk of construction work takes place off-site. However, a major hurdle results from real-estate development (unlike manufacturing) often being characterized by bespoke designs and unpredictable demand. Predictability of demand is vital if companies are to invest in productivity-enhancing capacity and innovations, because prefabricated elements tend to be more capital intensive.
- Guarantee a top customer experience.Considering the increasing consumer focus on quality-of-life issues and the growing amount of time customers spend outside the home, new spaces should offer a distinctive customer experience for multiple segments and uses. Digital leaders in other industries have powerfully demonstrated the advantages of an integrated multiplatform approach to focusing on customer needs along the purchasing journey.
- Develop new capabilities.Given the depth of change facing the industry, companies also need to prepare themselves internally. This could mean increased focus on parts of the value chain they may have outsourced or disregarded in the past. They will likely need to develop new capabilities such as data-driven market scouting, multi-asset-class development skills, and legal and regulatory capabilities, while gaining better knowledge of public and private partnership opportunities.
The road ahead for real-estate players will pass through a landscape of multiple asset classes and require a broader set of relationships. Becoming a future real-estate leader that satisfies the expectations of digital consumers is a formidable goal.
However, the high-value customers of tomorrow will expect nothing less than a superior experience, seamlessly integrated into their multichannel engagement. In a global sector where good returns on multiple assets are prized, investors will look elsewhere if they do not find them in real estate.
By Stefano Napoletano and Nicola Sandri are partners in McKinsey’s Milan office, and Gernot Strube is a senior partner in the Munich office.