Future Opportunities For Real Estate Development | 2020
“Retailer X bites the dust.”
“Company Y goes remote.”
“The hospitality industry is confronting an imminent crisis.”
”People are fleeing dense, urban locales for the suburbs.”
~ Any Given Headline
2020 will reshape residential development for decades to come; where we are today just eight months in has been one eventful ride. We continue this voyage into what we consider “The Big Reset” for residential development. In this report, we are focusing on three opportunity areas for future growth:
Suburban/Urban Placemaking
Hotels > Residential
Malls to Mixed-Use
Skidmore Owings & Merrill (SOM) asked in 2019, “We Recycle Bottles. Why Don’t We Recycle Buildings?” What are the ways in which we can challenge ourselves to utilize existing built environments that we have put so much time, effort, and money into already? Architecture Daily recently released “On Recycled Architecture: 12 Proposals to Promote Adaptive Reuse” which provides insights from the cost, adaptability of infrastructure, and sustainability factors. To thrive we have to ensure that the numbers make sense whether the property is distressed, ground-up, or an adaptive-reuse opportunity.
We want to emphasize that none of these merits a one-size-fits-all approach. Each property must be thoughtfully approached and solutions tailored specifically to what makes the locale special, predicting and adapting to customer needs (based on data), and intelligently weighing what the development budget can allow for.
Before we go into each opportunity area and the accompanying thought-starters, let’s review:
What We Know
Social distancing works and is here for the foreseeable future.
There is higher than average attrition from dense urban environments.
Restaurants, visual arts, performing arts, and parks are closing, sometimes permanently in prominent cities.
Large companies such as Google are extending working remotely to as far back as June 2021.
Our homes are the most used product of 2020
What We Are Learning
Social isolation affects our mental health and psychological well-being.
Remote work is permanent and companies are learning how to operate in a new collaboration-based, remote work environment.
Supply-chain issues can be tackled with technology, design + modular solutions.
A lack of diversity affects real estate development’s bottom line.
What We Don’t Know
When we will get a vaccine and the protections that it will offer.
What the long-term return to the office will look and feel like.
How much culture, arts + entertainment will cities offer to continue to draw people.
How regulatory hurdles will affect shifts within residential developments.
The results of the elections will affect how the United States is perceived globally.
Our goal is to provide information + thought-starters for the residential development industry to rise the challenges presented, and emerge from these moments in history stronger, and thriving.
Below are the three opportunity areas that we have identified.
Suburban/Urban Placemaking
Hotels > Residential
Malls to Mixed-Use
01
Suburban/Urban Placemaking
“Our public spaces are as profound as we allow them to be”
~ Candy Chang
City-dwellers are moving to less dense and more affordable places. These locales are not full-on suburban and still are attached to densely-populated areas that offer the infrastructure needed for a modern lifestyle. It is imperative that these locales attract, engage with, and nurture the types of creative, culinary, work, and lifestyle collaborators that have made major cities highly desired.
Consumers are going to start demanding big-city level design + elevated product in these new locales. Working remotely is no longer an experiment; for many of us, it is here to stay. Hanley Wood’s Jennifer Castenson discusses "How Working From Home Is Changing The Way We Think About Where We Live" in Forbes; she highlights why moving to more affordable locations is desirable, beneficial + lucrative for both companies and employees. We know that millennials (~25-40 years old) have been disproportionately affected by two major recessions + high housing costs during their prime earning years. This highly-educated and diverse generation who has prized their careers now has the opportunity to afford an age-appropriate lifestyle as they embrace opportunities to live away from the more expensive urban cores. Buildium recently published a piece that predicts that the fastest-growing rental markets are in the Sun Belt and the suburbs.
It’s been done successfully before; it is being done right now. Avalon, in Georgia, is one of the best historical case studies for this model. From a contemporary standpoint, we admire what has been completed in the last five years at One Paseo in San Diego, The Domain in Austin, and Bay Meadows in San Mateo. Exciting things are in the works for Stapleton in Denver and Vallco Town Center in Cupertino. Leading urbanologist Alan Ehrenhalt summarizes it best in “The Pandemic and the Suburbs’ Second Chance” for Governing Magazine:
“We need to give the suburbs a second chance. Over the past few decades, as we have watched cities grow and thrive, we can take the lessons learned from them and bring them to suburban developments. They've been trying for a long time to attract city dwellers by installing amenities that urbanites crave. COVID-19 fears are providing them with a new opportunity to get it right.
"We will continue to see a strong market for places where someone feels part of a community and a sense of belonging," she told me recently. "Some will find that in dense urban neighborhoods or rural areas, but I suspect most looking for that will seek walkable neighborhoods with the mid-rise density that can support coffee shops, some small local businesses, farmers markets, yoga-in-the-park and other not-crowded but still-social activities.
(Ellen Dunham-Jones, Georgia Tech)
In other words, urbanized suburbs."
It will be done even more in the future. We predict that will see “urbanization in reverse” aka “densification” as a growth opportunity in 2020 + beyond.
01 | Discussion Starters
What are the city amenities that make urban life so rewarding + how can we incorporate them? (arts, culture, F&B, parks)
Which elements of the urban lifestyle can we build? (parklets, dog runs, sidewalks, bicycle paths)
How can we contribute to and sustain city amenities/ small businesses in our communities? (partnerships, in-kind marketing, support)
How can we use predictive data to drive decision making? (terms people are searching for now)
What is the ideal user + resident customer journey? (a few hours, a whole day)
How can we build generational and global loyalty? (across ages, locales, demographics)
Who can we engage with as a strategic consultant to help guide our vision + execution? (Butterfly Voyage)
02
Hotels > Residential
"When everything seems to be going against you, remember that the airplane takes off against the wind, not with it."
~ Henry Ford
Hotels + hospitality-focused businesses are in trouble. Leisure travel has become a weighted luxury, and most business travel is still very much off the table for almost every major company. Driving destinations are currently faring far better than ones that require a flight. A standout recent McKinsey report weighs the various scenarios to get to “no vacancy,” with all scenarios pointing to a variable and very high difficulty of recovery. The hospitality industry has rallied before, and will always be needed to (we could really use a vacation), but finding out how much is undeterminable right now. What is determinable is that not every location is proving to be as desirable as it used to be; the stunning Yabu Pushelberg Times Square Edition hotel announced that it was permanently closing, recent intel suggests otherwise, but it is all dependent on how bad COVID-19 is. Everyone agrees that the hotel industry has a very tough road to even partial recovery, and many operators will have to pivot to survive. So, now what?
We follow the equity and look to put more of it into currently under construction or already built distressed assets. Over the past few years, a majority of the equity poured into the hospitality industry has been from overseas investors and private equity firms; these are brands or properties that are already operating or have secured financing, materials, and are actively under construction. Brad Cartier lightly outlined the rationale for how this can be done in a piece for Million Acres. Potential approaches could be an extended or corporate stay model, a micro-unit/affordability model, or rental/for sale product.
We address the hurdles. The hotel industry is highly fragmented; outside of the marquee brands, it is not dominated by major firms. Franchise agreements are not easy to be released from - which begs the question - is there a major operator who will take this on and use the recovery period to build out this model? Unions can be especially difficult, but they also have a big problem with their base not having employment. If they are amenable, there may be ways to preserve jobs for workers and employ them for residential services + peripheral offerings. Cities and counties, particularly those experiencing a housing shortage with no densification strategies in place, will usually be in favor of introducing more residential units to the market. One thing to pay attention to is zoning; in most cases, it will need to be adapted as hospitality zoning designations vary based on the locale.
We look at the opportunity; a potential of conversion to multifamily. Hotels whether boutique or large-scale are almost fully-baked residential offerings. They are designed as spaces to live in; have a service-first mindset already in place, and are usually in desirable locales with each product-type having an identity of its own. Hotel brands that we admire who have a residential offering are Proper, Auberge, The Edition, and the stalwarts Four Seasons + Waldorf Astoria.
Converting hotel product to a longer-term residential offering is a growth opportunity for developers + equity partners.
02 | Discussion Starters
What are the zoning and regulatory hurdles that need to be addressed? (zoning + use based on locale)
What building systems are in place and which need to be put in place? (HVAC, cooking systems, metering)
What amenities are in place and can be adapted? (spaces + experiences)
What amenities will we have to create? (what is missing)
For more than one property, what will the overarching residential brand be? (consistency is key)
What are the data-driven approaches (standard, atypical, using current data) to understanding demographics + psychographics?
03
So, What Becomes of Malls?
“We cannot solve our problems with the same thinking we used when we created them.”
~ Albert Einstein
We’ve read a lot lately that declares retail dead; we think that it is in critical condition. Malls and retail have been such a huge part of our culture, our history, our memories; the challenge is how do we adapt them for future generations. Miracle on 34th Street, Clueless, Mall Rats, Bad Santa, and more movie action sequences than we can count. They’ve not just been places to shop, but places to gather, to celebrate, to discover new shops, restaurants, consumer goods. Yet somewhere over the last decade due to a combination of shopping online, people migrating to larger cities with more direct street retail, and mass-market brand fatigue, we’ve experienced a decline in our desire for that sector of the built environment.
When you walk into most United States malls, you feel like you have entered the past with only a few notable exceptions. We are always surprised when we travel how different the mall experience is outside of America. Global mall environments have very successfully established themselves as forward-thinking destinations, and when you walk into one, you feel a palpable sense of energy and excitement; it feels as though you have entered the future. Their full-service offerings have also demanded a service level that is close to perfection. Deloitte released this report that discusses the "Future of the Mall" and we agree that malls need to make way for the food revolution, embrace technology, and appeal to a wide audience for their offerings. Yet, even that isn’t enough.
Developing around an existing mall building is essentially placemaking in reverse. A and B-level retail environments are usually in established destinations; people are already aware of them as established locales. In traditional placemaking offerings, a development team is challenged with bringing an often non-existent locale to life by introducing a combination of lifestyle, F&B, retail, wellness, hospitality, and residential products. They sell the dream and they hope that people will come. With the adaptive-reuse model for a place that exists you have to adjust perception for the expanded reuse, but the base concept of the locale being a proven destination is there.
Malls can learn a lot from notable placemaking and mixed-use developers. Brookfield Properties, Hines, Related, Wilson Meany, and Grosvenor are some of our favorites to look towards and learn from. TechCrunch contributor Jon Evans makes a stronger case in “Let housing rise from the empty offices and malls.” Patrick Sisson via Bloomberg CityLab made the strongest case while delving into a conversion of a former Sears in Lynnwood, Washington by Brookfield and Avalon, in "The Dying Mall’s New Lease on Life: Apartments." Prior successful case studies to look at include City Center in DC, The Arcade in Providence, and the Crosstown Concourse in Memphis.
Malls need to shift their thinking to become mixed-use destinations for their customers to connect, discover, engage, thrive, and live at least a part of their daily lives in.
03 | Discussion Starters
What is special about your locale + property? (why did they come, why will they come back)
What are the demographics + psychographics of your customers? (how do they live, work + play)
How do retail and residential customer journeys intersect? (few hours vs. all day)
How could a mixed-use or residential brand interact with your retail brand? (seek common themes)
How can you drive a consistent experience across the two? (consistency = luxury = brand building)
Who are existing development companies or brands that inspire your team? (role models)
Which developments (legacy, actively marketing, and in design), can you look towards, as case studies? (knowledge saves you time and money)
In closing, we believe that for residential real estate development to thrive we will need a combination of problem-solving, creative-thinking, and deep knowledge about our customer needs. All in record time, because the clock is ticking and history has proven that those who think ahead of the curve come through crises successfully.
We would love to discuss any of the opportunity areas with you and your team; we want to be a strategic, and execution-based partner with your team as we all embark on The Big Reset. Please reach out to Meghna Krishna Bondili if you would like to begin the conversation.
A thank you to our Butterfly Voyage industry insiders and contributors (including the incredible Basma Rajper). Their perspectives, insights discussion, and support were a key part of making this piece come to life.