5 Reasons to Prepare for the Impact on Real Estate

This post highlights an enlightening conversation between Randy Rowe, Global Chairman for Urban Land Institute, and Dave Bragg, Managing Director for Green Street Advisors

Dave Bragg (left) and Randy Rowe (right)

Green Street has been an early thought leader on disruptors (e.g. ecommerce, AirBnb, Uber), publishing research to help our clients better understand and prepare for the impact they will have on real estate. After publishing a deep-dive report on the transportation revolution, Dave Bragg hosted an informative call with Randy Rowe, who leads organizations focused on development, parking and creating economically prosperous communities.

Rowe kicked off the call with a bold statement.

“Ride hailing and driverless vehicles could be the biggest game-changer for real estate since the arrival of the car itself.”

Undoubtedly, the proliferation of ride-hailing services and the introduction of driverless vehicles will mean fundamental changes for transportation but even Bragg had his eyes opened at that moment.

Here are five reasons why real estate investors and operators should think twice about the transportation revolution and its impact on the industry. Even with early warning signs, the shift to ecommerce and its rate of adoption still caught many retailers by surprise. When operating at full speed, be prepared and don’t forget to check your blind spot.

1. Disruptors extend beyond the typical seven year IRR model

Real estate market participants often do a good job assessing cash flow prospects over at least the next seven years when valuing properties, but their effort wanes beyond that. To optimize investment strategies and minimize risk, investors need to make realistic estimates for long-term growth (critical inputs for determining appropriate allocations across property sectors). This is the challenge with disruptors. They have the ability to disrupt real estate in ways that aren’t fully predictable, and at an unknown pace.

“Two-thirds of a property’s present value is attributable to its value seven years in the future. As a result, issues that extend beyond the seven-year window employed in IRR models, such as the transportation revolution, are usually ignored, resulting in mispricing,” Bragg reiterated.

2. A 50% Reduction of Parking Needs is Possible

Reduced car ownership due to the introduction of driverless vehicles and proliferation of ride hailing services could result in a reduction to parking requirements of 50% within the next 30 years. This would potentially unlock more space for development than is currently held in all major real estate sectors combined.

“Parking is a very expensive add-on to most real estate and approximately 90% of parking is unpaid. Parking is just a burden on the cost of the desired use,” Rowe said. He continued, “So if in fact we're going to need less parking, then it's likely we'll require less parking to be built going forward. When we no longer have to plan projects around parking needs, it will free us up to do a lot of other things.”

Bragg and Rowe didn’t speculate heavily on the effect of the increase in available land due to the reduction in parking needs, but they did go so far as to say it’s already being anticipated by developers. In fact, according to Rowe, developers are already scooping up urban parking garages as land banks, favoring their low improvement needs, high land value and the ability to tear down and repurpose the space in the future.

3. Longer commutes become more practical, increasing the odds of suburbanization

The coming of driverless and ride hailing technologies allow longer commutes to be more feasible, shifting the appeal of suburban vs. urban living. Although urbanization has been increasing with the maturation of Generation Y and millennials, Rowe and Bragg considered the possibility of a reduction or reversal of this trend. If in fact you can commute much faster and much more cheaply while being productive in your vehicle is there more dynamic competition between urban and suburban?

“I don't think anybody has the answer,” said Rowe, though he did note that, “Maybe two years ago 10% of ULI leaders would have said this could lead to more suburbanization, but now I would say maybe 25% are saying it could, and so there's a really healthy debate going on about this dynamic.”

4. Autonomous vehicles could solve the last mile problem in ecommerce

Also pressing to the pair was the effect this transportation revolution might have on the last mile problem in ecommerce. Bragg and Rowe agreed that such transportation technologies may be a strong solution, mostly due to the flexibility of these autonomous vehicles. As an example, Rowe pointed to an experience he had at the Consumer Electronics Show in Las Vegas in January, where he saw a concept vehicle he found to be incredibly forward-thinking. “It was going to have in the back a capability to run a route at night while you're sleeping. Then, when you wake up in the morning, you'd have all your shopping and your errands done, waiting in the vehicle. It struck me as an interesting concept,” Rowe recalled.

5. Autonomous vehicles is expected to improve road efficiency and safety

These kinds of efficiencies were ultimately what Bragg and Rowe found to be most compelling about the technology. A major point of efficiency discussed was the drastic improvement in road safety due to the reduction of vehicles on the road, combined with the elimination of human error in driving brought on by the adoption of a driverless system. Bragg noted, “As a society we will be significantly safer. We had 38,000 traffic-related fatalities last year, but the autonomous cars are much safer because, like it or not, computers are better drivers than humans. That's a fascinating, humbling point associated with this.”

In addition, services like ride-hailing and driverless technology open up a number of ethical and regulatory challenges. “Redistribution of human capital is going to be a big challenge because as you point out in your report, at least 3 million jobs may no longer be needed,” Rowe commented. “The issue of where one redeploys that human talent is going to be a big one, but there ultimately will be a lot of societal benefits.”

As the webinar concluded, Rowe offered his perspective on the future of real estate in the context of transportation:

“As you and I have had the experience of talking about this for a number of weeks, it's one of those topics the more you talk about it, the more you realize it's just talk. The knock-on effects of things that initially appear relatively straight-forward are not very straight-forward when you start looking at the multiplier effect. The way cities are thought about, the way they're designed, and the way we look at real estate is going to change. A lot of our real estate is going to change. There will be opportunities, but there will also be some challenges. The #1 thing I would say is, we look seriously at each asset we buy to make sure we have a lot of optionality for other uses. If you get too boxed in and too tight a use, you risk ending up on the wrong side of the shift.  It's going to be an exciting time over the next 20 years.”

This is a high-level summary of the conference call, featuring select insights from Green Street’s special report, “Beyond the IRR Model – Transportation Revolution: The Impact of Ride-Hailing and Driverless Vehicles on Real Estate.” For questions or additional information on this research and future calls/webinars, please email blog@greenstreetadvisors.com.