CBDs: the dawn of a new era?

The way we live and work in cities is changing. This is, in turn, changing the geography of real estate. Investors need to understand these changes or be left with underperforming and obsolete stock in the wrong place. They also need to consider whether the traditional office stock in established central business districts will stand the test of time. People want to work in cities and towns, not out-of-town business parks. They also want to live, play and visit in the same cities. So what we’re seeing is the emergence of many new CBDs; a plethora of urban neighbourhoods where people can do all these things and which provide a choice of workplaces for workers and their employers. The emergence of these new CBDs has led some urbanists to coin the term “polycentric city”. The single big, mono-use CBD may be a thing of the past but even small cities will see more choice of small CBDs, urban quarters in which people will set up different businesses. A short history of the CBD The CBD is a term most property people take for granted. It’s the obvious and most desirable place in a city to locate business premises and it’s where you’ll find other enterprises to support your business or service. But CBDs have not always been the location of choice for every office occupier. Many global cities which now have varied and extensive CBDs suffered city flight in the 1950s, ‘60s and ‘70s. They watched their CBDs fade as businesses moved upstate and out of town to purpose-built business parks with modern facilities. This left some downtown areas in Europe and North America no-go areas, especially after dark. Downtown LA, for example, was considered highly dangerous by the mid-1980s. Mono-use office blocks and no night-time economy left the area to gangs and drug dealers after office hours. This was a pattern repeated throughout many late 20th century CBDs dedicated solely to daytime workspace. The globalisation of financial services and a more enlightened approach to city planning started to turn this around in the lead-up to the millennium. The urban renaissance of the 1990s was seen across the developed world. Capital and business were repatriated to the CBD so that deserted downtown districts became lively and safe again. New development in the late ‘80s and ‘90s provided large new prestigious offices fit for accommodating, moving and trading financial capital, as well as housing a host of other associated business services. Household flight was reversed and people started moving back into the city to live as well as work. [caption id="attachment_910638" align="aligncenter" width="847"] Brooklyn, New York[/caption] Phase two of the urban renaissance The urban renaissance has had two phases. The first ended in 2008 with the demise of some big financial institutions and the weakened growth of financial services in the wake of the global financial crisis. Meanwhile, an unnoticed second phase of urban renaissance had already begun. It had its origins not in the rise of financial institutions, but in creative and tech industries in the dotcom boom of the millennium. As the dominance of financial institutions receded – even in cities like New York and London – new, innovative and different tech and creative enterprises started to drive city economies across the globe. These companies were frequently the fastest growing sectors of local economies. Importantly though, the studio start-ups and scale-ups that characterise the early stage of their growth didn’t want the marbled halls built in CBDs during preceding decades. Rather, it’s the fringe locations away from the traditional CBD that have thrived. It’s the buildings, often heritage buildings, previously thought inappropriate or obsolete during the first phase of urban renaissance, that came into their own in the second phase. Demand for flexible, collaborative co-working space in basic buildings with a great street scene has never been higher. It is this that has shifted the gravity of CBDs, and even created new ones. Implications for investors This renewed popularity of old, undervalued neighbourhoods with their independent shops, cafés, restaurants and business premises is now a global phenomenon. It is associated with the growing importance of the millennial generation in the workforce, with globalisation, changing technology and new social norms. The challenge for the real estate industry when investing in and developing these areas is not to kill the golden goose. Retaining authenticity, keeping existing communities and businesses in place is an essential part of enabling a regenerated area to retain its original appeal. People power In the new working environment, people have to take centre stage. The highly skilled, footloose millennial workforce has a world of possibilities to choose from and is more likely to make a decision on the basis of city quality than on a company name. The needs and wants of real estate occupiers are therefore paramount. Corporations have to consider carefully not only the city that they locate in but also the neighbourhood. Their aim is to make sure their location and their building will attract the workforce they need. It is no surprise therefore that HR departments are now heavily involved in making the real estate decisions for their companies. The cost of premises is no longer the number one factor in leasing decisions. Getting the neighbourhood and working environment right is. Little wonder then that the popularity of locations for businesses is shifting. In a world where corporations no longer have the hiring power that they once had, investors must reconsider the definition of an “institutional covenant”. Some prestigious corporations may prove to be less long-lived than upstart new tech companies. Investors need to understand these shifts when selecting stock, which is likely to maximise net income and minimise capital depreciation in future. This means understanding occupiers. Communication between property professionals in premises management, especially the management of co-working and co-creation spaces, and occupier services with those in investment and finance is essential. The CBD is far from dead, just a bit different to what it used to be. [caption id="attachment_910636" align="aligncenter" width="847"] Melbourne, Australia[/caption] Click here to read all of EG’s global content.