The future of commercial real estate in Europe A scenario approach Brochure / report title goes here | Section title goes here

Content

The future of commercial real estate in Europe 04

Scenario: Boooom 05

Scenario: Gotham Country 11

Scenario: Tech-No! Crisis 17

Scenario: Lazy Bone 23

The future of the real estate value chain 30

European cities trend analysis 35

Conclusion & outlook 45

Methodology 47 Sources 49

02 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

Introduction Scenario thinking

The future of commercial real estate in Europe

The European real estate market is in We originally planned to write a study with With the help of these theoretical scenari- Companies and investors in the real estate futures by highlighting the risks and oppor- "Boooom", “Gotham Country”, "Tech-No! motion. Depending on where you look, our views on these developments. How- os, we took a closer look at the most impor- industry generally invest in assets for the tunities of certain strategic issues. In order Crisis", and "Lazy Bone". Within these sce- the market has either fully recovered from ever, without a crystal ball to look into the tant European cities: how far are they along long term. What they decide today will have to evolve robust strategies, it is necessary narios we try to indicate the impacts on the financial crisis or is still in the process future, we felt that the level of insecurity the road to digitization and how has the a major impact in the future – and in many to develop a set of scenarios. These scena- each type of commercial real estate use of recovering. Across the entire European was too high for us to be able to make se- real estate sector performed in the last five cases will make a life or death difference. rios are uniquely heightened stories. Each (office, retail, manufacturing, and logistic investment market, activity in the last quar- rious predictions about the long-term im- years as the world emerges from the finan- However, with the help of traditional analy- scenario models a specific but plausible space) and describe the city of the future ter of 2016 was up by 5 % compared to Q4 pact of disruptive forces or the general cial crisis? Is there a link between attractive ses it is hard to say what the future will world of the future which differs consider- and its real estate value chain. 2015, for a record quarterly transaction economic development of European real yields and the extent of digitization? While bring, since no amount of research can ably from the others. The objective of sce- volume of €86.8 billion. estate markets. this study may serve as a starting point, it remove all the uncertainties affecting the nario design is not to identify future events will be invaluable to see how these factors outcome of a decision over the next de- but rather to emphasize large-scale forces For 2016 as a whole commercial real es- We therefore decided to take a more cre- develop in future. We are therefore plan- cades. It can also take many years to wit- that might move the future in different tate investment amounted to €251.1 bil- ative approach: working with our scenario ning to update this assessment on a regu- ness the consequences of a decision. directions. Scenarios are narratives of lion. This represented a fall of 10 % from experts in Deloitte’s Center for the Long lar basis in order to track the performance Nevertheless, players in the real estate alternative future environments in which 2015, reflecting a lack of attractive invest- View, our expert real estate consultants of the selected cities and link them with industry are expected to make decisions today’s decisions might be played out: ment opportunities. Looking within this looked at the most important drivers of their digitization capabilities. in the face of uncertainty. they are neither predictions nor strategies. figure, only the industrial sector showed a change (social, technical, economic, eco- By making these forces visible, strategic positive trend (+4 % on 2015). By contrast, logical, and political) and came up with four Finally, this discussion paper offers stra- Scenario design is one way to facilitate de- planners in the real estate industry can the retail sector recorded the largest fall scenarios of what the future might look like, tegic guidance for assessing the risks and cision-making in a high uncertainty envi- recognize them and adapt their strategy in investment (-22 % from 2015). All other in, say, 20 years’ time. What will the markets potential of the commercial real estate ronment. While forecasting the future is accordingly. sectors saw single-digit decreases in acti- look like? What will cities look like? And who market. We hope that our reflections and nearly impossible, scenario design aims vity. However, negative developments in will be earning money in real estate? As insights will help investors, project develop- to permit the development of robust stra- In the following chapter we will illustrate the the Brexit-affected UK accounted for the a little teaser, we summed up these four ers, asset, property, and facility managers, tegies that will work in different potential four scenarios that have been derived: overall decline in Europe. Excluding the scenarios in a short video available here: technology companies, and government UK market, investment activity in Europe’s institutions to understand what might be commercial real estate market actually rose expected and how to react to the inevitable by 5 % during 2016. changes.

This shows a stable development contin- Please scan QR code to watch the video: uing the overall path of market recovery, but now the next challenges lie ahead. How will digital disruption affect the market? How will Europe cope with demographic developments and with the current political https://www.youtube.com/watch?v= insecurity? k7m5n5QPX3o

Low disruption potential attractiveness High market High disruption potential Low market attractiveness Low market

03 04 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

The "Boooom" scenario describes a future The basis for real estate’s successful inte- in which new technologies present a high gration of technology has been a general degree of disruptive potential in a broad economic recovery across Europe and a range of industries. In this scenario, howev- buoyant housing market. These drivers er, the real estate sector has overcome the have made real estate a future-oriented challenges of the digital era and is thriving asset class again. on previously unknown technological opportunities. High market attractiveness High market

Low disruption potential High disruption potential

Scenario: Low market attractiveness Low market Boooom

05 06 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

Short term Long term Global economic performance was relative- thorities introduced support programs retail sector and permitted constant ex- The emerging role of technology in the outcome, but also the labor market was ly positive in the years immediately follow- and subsidies for research and develop- cellent returns despite costly investment. real estate environment and the prospect stimulated by huge demand for qualified ing 2017. The real estate sector also benefi- ment activities focusing on the technology Manufacturing and logistics facilities also of additional market share attracted new IT and tech workers, caused by the intense tted from the general upturn and establi- sector. increased in attractiveness as they became players to the market. Europe became the competition. However, the other side of shed players recovered from the post-2008 available to multiple tenants owing to data hotspot for PropTech start-ups challenging the coin was a reduction in low-skilled la- financial crisis. It turned out moreover that These two drivers, low vacancy rates and integration and automation. the established players. While start-ups bor due to the high degree of automation several regions across Europe were able to government promotion of the investment were focusing on niche markets, tech gi- inside buildings. The victory for technology profit from Brexit. In many industries and environment, were the perfect incubator The combination of high-class real estate ants from Asia and the Americas saw their and productivity has therefore caused sectors, companies relocated from the UK for pro¬gressive technology in the real facilities and advanced technology made opportunity to make a successful, large- some social and political problems. to mainland Europe. This provided a boost estate sector. In addition to the increasing manufacturing more efficient, reducing the scale market entry. However, thanks to in particular for office space markets on the volume of investment in real estate, the required space demand. Logistics space strategic investments in the past, the in- From an economic point of view, all the in- mainland, leading to a shortage and result- technological components of the buildings grew in contrast, with the addition of small- cumbents had gathered comprehensive novation and massive investment combin- ing in an increase in prices. However, those also represented an attractive opportunity scale distribution centers in urban areas. experience during prior years and had ed with sharp competition maintained the who had been expecting a downturn in the for capital expenditure. Furthermore, digi- built up a competitive skill set in terms of upswing. Technology became the main driv- real estate market in London were proved tal construction equipment turned out to However, the technology sector was not technology and digitization. This led to a er of real estate markets. The constellation wrong. The gap was immediately filled by be a critical competitive advantage. New the only sector to thrive. Based on conti- highly competitive market environment of market players changed, but no major the growing start-up scene and by compa- technologies enabled flexible building lay- nuing economic growth, the level of wa- and a race for dominance in the real European player disappeared. All that hap- nies taking advantage of the deregulated outs, which were the basis for combining ges increased throughout Europe. The estate sector. pened was that market shares were redis- market environment. The unparalleled several types of use in one space. Offices continuously rising cost of labor gave an tributed. In the end, strong competition price recovery continued. and shops became smaller but of higher additio¬nal boost to automation in the The beneficiaries of the billions invested made Europe the leader in real estate tech- value. Quality and flexibility were the main real estate sector, in order to keep down in technology and digital building equip- nology, combining the highest quality stan- Not just the private sector but also Euro- drivers for increasing rents. costs and maintain high profits. The drive ment were in the first place the users of dards across all commercial usage types pean governments benefited from the eco- for lower operational costs paired with the real estate, the tenants. Not only high- (office, retail, residential, and logistics). nomic recovery. In order to encourage fur- Rising customer expectations with regard desire for high-tech buildings meant that quality infrastructure and state-of-the- ther sustainable growth and high levels of to the shopping experience led to demand technology remained crucial art buildings can be seen as a positive investment by the private sector, the au- for high-tech building equipment in the

Short term Long term Short term Long term

07 08 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

A typical “Boooom” scenario city Big cities in the "Boooom" scenario will have separate workplaces from homes, which spending, some sort of “digitalization tax” Event-driven offerings will be highly individ- use of online shopping for basic goods a highly attractive appearance. Given that are mainly in suburban areas. However, it or “robot tax” is likely to emerge. ualized, due to the personal data which the such as food or clothing. Just-in-time logis- investment in real estate is economically is still normal to go to the office. smart and interlinked buildings of all asset tics are standard, deliveries by drones are advisable, old buildings have been moder- A basic income for everyone should miti- classes are utilizing. Data security will not safe and fast. Logistics centers are located nized and new, high-tech buildings have It is where people meet colleagues or busi- gate the worst aspects of this future, but be a major cause for concern, as this data at the periphery of the city, releasing space been built. Money has been invested not ness partners to develop ideas and make not everyone will accept the basic income usage is broadly accepted by most citizens. for other uses in the city center. only in the functionality of buildings, but social contacts. This trend includes the fur- voluntarily. There will be major income and also in the design and quality of those buil- ther rise of co-working concepts which are social gaps between the class of the work- Life in the "Boooom" city of the future is Nevertheless, luxury High Street miles are dings, shaping the landscape of a "Boooom" realized in highly developed offices in order ing, highly-educated data scientists and en- good for another major reason: fresh air. prospering as before, thanks to their flag- scenario city. to increase their utilization and rates of re- trepreneurs and the non-working, basic in- Fewer people working means fewer cars ship stores and their “see-and-be-seen” turn. As a result of this trend, the average come class. driving in and out of the city. People who function. In addition, bricks-and-mortar In economic terms the city will be highly duration of rental contracts has declined. still commute to work use a combination providers of food and basic needs continue productive. However, as a result of digiti- In the city of the future the construction of car-sharing and route-optimied self- to exist. This is fueled by the new definition zation some jobs will have become obso- There will nevertheless still be some social of gated communities for wealthy people driving car concepts. Such cars generally of luxury, which is “non-digital time”. While lete. Many of the remaining jobs are either questions to be answered. The success of (already visible in some cities today) could don’t need a parking space. Once they it might be possible to live a completely vir- in the service area or are held by highly- digitization will lead to unemployment, es- therefore be a consequence. However, it is arrive at their destination they can be tual life, most people still meet with each skilled experts who make use of and im- pecially for low-skilled, blue-collar workers. unlikely that the rest of society will live in a used for another purpose. other and enjoy the possibilities their city prove the new, digital way of working, shop- This will raise the question of whether the grey and bleak environment. As a result of offers. Some of them go to shopping malls ping, producing, and living. Education is the "Boooom" scenario is an economic fairy tale the fact that people will have more time to As with the use of office space, the over- that have developed more event-driven most important economic factor, strongly or a ticking time bomb. spend their income, it is likely that event- all demand for retail real estate assets is concepts in order to meet the demands supported by the government. Due to the driven real estate investments will prosper declining owing to online shopping and of new customers. complexity of services and ex¬cellence in The introduction of an unconditional basic (for example, parks, cinemas, gastronomy, 3D-printing at home. Most people make the productive sector, the city’s GDP is income for all citizens could help to prevent fitness and sports, theme parks). There is higher than ever. social conflict and satisfy the needs of large more than enough space for these offer- segments of society. This would be made ings, since the number of office buildings Office buildings are mainly downtown in possible by the prospering digitization in- has reduced significantly. They have be- the central business districts. Getting in dustry and by the high demand for IT and come more digitalized and productive than and out of the city is fast and convenient, tech know-how in the highly developed city. ever, for example due to co-working con- and there are many opportunities to work On the other hand, for the public purse to cepts. In addition, workforce cuts have remotely, making it easy and common to be able to afford such a high degree of made many working spaces redundant.

Scenario factors Boooom Gotham Country Tech-No! Crisis Lazy Bone

Real Estate investments high medium low high

Vacancy medium high high low

Traffic volume low low medium high

Quality of life high low medium high

Rent level high low low high

Construction activity high medium low high

Degree of centralization high low medium medium

09 10 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

The “Gotham Country” scenario describes a The real estate market is characterized by future in which technology has become the low attractiveness and dwindling returns. main driver of the economy in general and As a result, the European real estate sector of the real estate sector in particular. The has not kept step with other regions and human element, in terms of construction asset classes as investment opportunities. and facility management, is minimized as a result of automation and technological developments in the real estate sector. High market attractiveness High market

Low disruption potential High disruption potential

Scenario: Low market attractiveness Low market Gotham Country

11 12 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

Short term Long term In the years following 2017, the real estate The new players immediately developed The internal infrastructure and interlinking While real estate investment became processes were introduced. In a tough investment market suffered a slight down- highly scalable business models to build of buildings became the main purchase more and more speculative in Europe, business environment, digitization be- turn, while the number of real estate deals and maintain office buildings with efficient criteria. Cities realized the major signifi- another industry sector came under in- came the driving economic factor. One and prime yields remained static. and fewer labor-intensive processes in cance that infrastructure would have in creasing pressure. Simplified construction consequence was an increasing gap bet- order to prosper in the real estate sector’s future and requested sub-sidies from the methods resulting from new technologies ween the creation of highly skilled jobs Most office buildings were seen as an in- low-cost environment. EU and other authorities. Ultimately infra- and the lack of investment in real estate and the replacement of low-skilled em- vestment asset instead of being occupied structure and technology became more caused incumbent construction compa- ployees with less labor-intensive process- by the owner, and thus the office sector The retail sector was facing technologies important than location. nies to struggle. es and automation technologies in the real was strongly correlated with real estate such as virtual and augmented reality as estate sector. market developments. Investors withdrew well as changes in consumer behavior, These aspects also affected the logistics The last remaining investors were looking from the office sector and the majority of which transformed the composition and sector. Disruptive technologies and inno- for compatibility, standardization, and high Manufacturing properties were not unaf- office buildings lacked fresh investment structure of shops and entire retail build- vation changed the way goods were dis- rates of utilization. The layout of the ma- fected by the changes either. The new re- and failed to maintain high standards. ings. Building technology merged with ap- tributed and the composition of logistics jority of buildings focused on functionality quirements of Industry 4.0 brought oppor- plications which were formerly used solely assets. This again opened the door to new and cost. This change in the composition tunities and challenges. This resulted even- Combined with increased pressure from in the retail trade. Parking machines and players in the market. Online retailers were and structure of property opened the tually in high interlinkage between manu- the technology sector and constant new surveillance cameras identified future cus- already leading players in the logistics sec- door for progressive technology-based facturing engineering and progressive buil- tech trends, the focus of investment star- tomers and initiated a personalized experi- tor and developed new ways of distribution business models, which became the stan- ding technology. Building operators be- ted to shift from bricks-and-mortar real ence for each customer entering the shop. and transportation. The entry of online dard across Europe. These new types of came the strategic partners of manufac- estate to high-tech building systems and This combination of retail space and digital retail and tech giants into the logistics real buildings were maintained and managed turing companies. digital building equipment. This trend was customer experience paved the way for estate market, with entirely new processes in a more and more autonomous manner, recognizable in simple designs offering tech companies to enter the real estate in terms of construction, layout, and man- with a primary focus on efficiency. This The low-cost environment proved to be compatibility, standardization, high utiliza- market, benefitting from their know-how in agement of facilities, was the next logical automation of facility services changed the the perfect breeding ground for new play- tion, and a low-cost building structure. As data analytics and digital business models. step. However, even the most progressive nature of real estate assets themselves. ers in the market, thanks to their ability to a logical consequence, small and flexible The new market participants came to be technology was worth nothing without leverage technology know-how and apply PropTech start-ups focused on newly more and more recognized as serious the appropriate infrastructure. A modern Encouraged by automation and cost pres- it to the new challenges in the real estate emerging business areas of technology competitors. distribution platform and advanced inter- sure, digitization was the key to compen- sector. In addition to the small and flexible in the real estate market, niches which faces around logistics facilities became sating for decreasing market attractive- PropTech sector, tech behemoths were en- were ignored or simply too progressive indispensable. ness. More efficient, technology-related couraged by their considerable experience for existing players. with automation and had the necessary ca- pital to challenge real estate market shares. This means that automated as well as data- driven business models take over, suited to the requirements of all asset types and pro- pelled by standardized and, to an increasing degree, digitalized building equipment

Short term Long term Short term Long term

13 14 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

An example city in the "Gotham Country" scenario The city of the future in the “Gotham Coun- the offices for social and team-building rea- To ensure security and defend against Offerings such as small theme parks or combined with easy accessibility, as traffic- try” scenario is focused on functionality sons. Their employers unburden their lives growing criminality, the city has a large in- even allotment gardens are in demand to jams in the city center can be avoided. and cost. Real estate assets are seen as by relieving them of tasks such as washing terconnected system of CCTV-supervision. satisfy the human need for interaction and Also, traffic has declined overall. Car-shar- pure shells in which to work, live, or shop. laundry or shopping for groceries. Open Selected data are sold anonymously by fresh air. There is plenty of space for them ing is less expensive and has been adopted The added value is provided by the digital space and co-working concepts have ad- the government to data marketing agen- because the vacancy rates of all types of by many citizens. In this way, commuting infrastructure. New landmark buildings vanced from a niche existence to a domina- cies. This income source covers part of real estate assets are high. Logistics con- in and out of the city has also become effi- do not suit the zeitgeist of high efficiency. ting role in this scenario. Rental contracts the costs of social welfare. Nevertheless, cepts include both delivery from smaller cient, like everything else in this scenario. New buildings are rather homogenous are often valid only for a few months or the costs – both social and economic – peripheral hubs or directly by air from and look similar from the outside, in order even weeks, depending on the tenant’s of digitization are higher than expected. unmanned aircraftand delivery drones, to leverage resources. Former major real needs. For tasks requiring focus and con- packed with fast-moving consumer goods. estate owners and managers have lost centration, the home office is the predo- As in the "Boooom" scenario, the upper margins to technology providers and data minant concept. class has expensive and exclusive districts This new functionality has increased the management companies taking advantage (gated communities) in which to live and problems of the retail sector. High Street of these developments. All kinds of labor are performed in this spend free time in. The socially weaker and concepts are still in place, but small shops city, whether blue-collar, white-collar, or economically less favored population lives in decentralized regions quickly became The new digital era has led to a productivity other services including digital know-how, in older residential buildings which have obsolete. level never known before. Manufacturing, data analytics, or IT components. People not been updated. The cost of living has logistics, and also parts of the retail sector without such capabilities have a hard time de-clined in these unattractive non-central Now that the need for the “right” location are automated to a large extent. in the job market. disditricts. One reason for the fall in costs has lost its competitive importance, office is the declining demand for expensive fur- buildings have become widely spread The inside of an office building in this city is This obviously raises urgent social ques- niture. Many interiors consist of only basic across the city. At the beginning of the more attractive than its shell. Technically, tions. A complete layer of society threatens furniture, because in the virtual world any- digital era, old and vacant offices in B or C the concept of offices has become more to become obsolete in the labor market. thing can be decorated and changed at any locations were modernized and digitalized. and more obsolete. Remote working is a Many people escape into virtual worlds. time. They now offer all the necessary features, permanent option. The “high-potential” Virtual reality technology is booming and employees working inside the office walls has become close to real-life in recent need to be motivated and drawn into years.

Scenario factors Boooom Gotham Country Tech-No! Crisis Lazy Bone

Real Estate investments high medium low high

Vacancy medium high high low

Traffic volume low low medium high

Quality of life high low medium high

Rent level high low low high

Construction activity high medium low high

Degree of centralization high low medium medium

15 16 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

The "Tech-No! Crisis" scenario describes Additionally, the turnaround in the interest a future in which the possibilities of new rate policy of the European Central Bank technologies have disrupted several indus- has led to a dramatic fall in real estate asset tries but have proven to be overestimated prices and further declining total returns, for the core real estate industry. especially compared to other asset classes. High market attractiveness High market

Low disruption potential High disruption potential

Scenario: Low market attractiveness Low market Tech-No! Crisis

17 18 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

Short term Long term Europe lost ground to other regions of the European labor markets experience diffi- In an attempt to ward off the negative ef- Years of unattractive returns from real es- However, digitization led to people viewing world with regard to the opportunities of- cult times too. As a result of digitization, a fects of digitization, new regulations were tate investments, as well as job cuts and their lives and the way they live, shop, and fered by digitization in the years following broad range of jobs became obsolete and introduced to prevent the exhaustive mi- the loss of competitiveness in Europe led work together differently. Incremental inno- 2017. unemployment rates rose significantly. Oc- ning of personal data. As a result, Smart Of- to real estate vacancies and liquidation of vations changed their manner of interac- cupancy rates in commercial real estate re- fice and Smart Shop concepts were thwart- assets. The corresponding maintenance tion but did not replace face-to-face meet- Apart from a general lack of speed and in- tail and office assets came under pressure, ed, as was the efficient use of Wearables. backlog turned formerly prosperous city ings or the demand for traditional shops in novation, European regulations and data resulting in high vacancy rates. districts into problem zones. the long term. privacy laws proved to be uncompetitive Other techniques such as 3D-printing in the new world. As a result, American These changes, combined with a phasing failed to gain a foothold in the real estate New construction did not take place in a Finally, this new social revolution triggered and Asian companies took over significant out of the European Central Bank’s low industry. The possibilities ended up being targeted manner. Infrastructure investment a wave of European start-ups, reviving old shares of the global market and supersed- interest rate policy, led to a dramatic fall in too restricted, the printed assets were fueling digitization is performed very defen- properties at moderate rents, filling vacant ed established European companies. real estate prices and a further decline in unattractive or did not comply with the sively, as the investment does not return offices and shops and putting Europe back total returns, especially compared to other required security standards the required profits. on the map for foreign investors. Run-down While digitization was changing the world, asset classes that were more successful neighborhoods were given a facelift in an the disrupters came from outside Europe. in taking advantage of the possibilities of While the construction industry suffered entrepreneurial spirit. New techniques such as 3D printing led to digitization. from the declining demand for new buil- decreasing demand for retail stores. Cus- dings, facility management providers were Hedge funds start to invest their capital in tomers shop from home or print their own Major European cities even lost their “safe relieved. The fact that the majority of build- European real estate again. Prices are low products. The 3D printing trend has caught haven” image, as investors shifted capital ings were not digitalized on a large scale and the future is more promising, now that manufacturing and logistics investors on from Europe to the Americas and Asia. The meant that the old business models were the market seems finally to have bottomed the wrong foot. The much-publicized de- failure to establish international trade agre- preserved. out. mand for smaller, neighborhood logistics ements such as the Transatlantic Trade and centers for on-time delivery by drones Investment Partnership further boosted proved weaker than expected. Many pro- this effect, making it even less attractive for ject developments in this sector remained large global investors to invest in Europe. unfinished.

Short term Long term Short term Long term

19 20 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

A model city in the “Tech-No! Crisis” scenario In the "Tech-No! Crisis" city of the future, the ficant unemployment, but there is no Prices there have remained high and stable current world is still recognizable. The hype structurally obsolete layer of society. due to the narrow market offering. about digitization was overdone. Of course, on-demand delivery and remote working Office buildings that are not vacant are to The retail sector is weak, but stable. Some proceeded and found their place in our be found mainly in city centers. Commuting shops have closed, but this can be attribu- daily lives, but people’s overall lifestyle did to work remains a time-intensive routine ted as much to the general economic situ- not change significantly. At first glance, the due to traffic, though no worse than before. ation as to online shopping. Local distribu- city and its buildings still look very much as Car-sharing and other sharing concepts are tors and bricks-and-mortar supermarkets they did in the past. still awaiting their breakthrough. Remote for food and non-food goods still exist in working is an option, but not the general the old-fashioned manner. The same is true However, after years of rising prices and rule. Different kinds of office concepts still of High Street properties and luxury goods. rents, the price bubble finally burst. The compete with each other. city suffers many problems due to the eco- The positioning of the city in this scena- nomic downturn. The lack of moderniza- However, a look at the High Street, parks, rio depends on another important factor: tion and new construction lead to a back- or other leisure facilities shows that many tourism. If the city has a strong tourism log in fundamental maintenance. Vacancies citizens are not depressed. The non-digital backbone, especially thanks to historical in commercial real estate assets, especially lifestyle fosters social connection and architecture, it can attract tourists and in office and retail, intensify this effect. The high individuality. People can meet each retain a stable source of income. In addi- overall productivity of the city declines, as other and enjoy the (rather worn-out) tion, private investors can be relied on to the construction industry is in crisis and opportunities of their city. Complete and maintain the city’s major assets. In this city, investments are being held back due to permanent datamining and supervision gastronomic and hotel facilities will be high interest rates and widespread eco- have remained the realm of science fiction. abundant and will be able to absorb some nomic insecurity. While sensor technology of the vacancies. Former industrial cities to optimize real estate assets were much Individuality also leads to a trend towards that lack tourist appeal will be threatened discussed in the past, in this scenario they investing in one’s own walls. Prices are low by a permanent downwards spiral. are not able to enter the city. and anyone who can afford it acquires their own small residence with neat furniture ar- The good news is that hard-working people rangements. The most affordable assets performing low-skilled tasks have not been are still at the periphery of the city and not replaced by robots. There is indeed signi- in the highly sought-after city centers.

Scenario factors Boooom Gotham Country Tech-No! Crisis Lazy Bone

Real Estate investments high medium low high “If you look at history, innovation Vacancy medium high high low doesn't come just from giving Traffic Volume low low medium high

Quality of life high low medium high people incentives; it comes

Rent level high low low high from creating environments

Construction activity high medium low high where their ideas can connect”.

Degree of centralization high low medium medium Steven Johnson

21 22 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

The "Lazy Bone" scenario describes a future Global markets keep on booming and ca- in which new technologies have pushed pital inflows to the real estate sector are into most industries and markets world- secured for a long time. Thriving industries wide, changing the way we live. However, lead to low real estate vacancies and high the real estate industry has not followed rents. The pressure to upgrade buildings this global trend, with digitization being for digitization has proven too low. only a niche trend. High market attractiveness High market

Low disruption potential High disruption potential

Scenario: Low market attractiveness Low market Lazy Bone

23 24 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

Short term Long term In the years following 2017, real estate pean cities, also flourished. New buildings After prices had risen to a level that pro- Combined with the “laid-back” attitude Construction companies have by now markets in Europe have continued to were created in all asset types: office, retail, duced close to zero yields, the real estate towards new technologies, the market also become service providers for the big thrive under the European Central Bank’s residential, and logistics. More risky niche market slowly turned around. The Europe- down-turn led to the inevitable entry of technology companies that are taking most low interest rate policy and the resulting products such as cinemas, hospitals, or an Central Bank finally reached a turning non-industry data specialists and technol- of the development margins, given that the need for secure investment opportunities server farms were also in demand, due point in their low interest rate policy. Real ogy companies. With declining real estate technical equipment of new real estate is that bring at least some level of return. to the desperate search for returns on estate prices stopped rising and even drop- prices, the hurdles finally became low far more complex and important than the investment by insurance companies and ped slightly as a first reaction. On top of enough to invest billions of euros in digital old conservative construction work. The expected negative consequences of pension funds. this, the end of the rally uncovered some transformation. New Prop-Tech start-ups Brexit have proven greatly overestimated. severe structural problems. In the preced- from Asia and North America entered And yet real estate tenants – both com- In fact, investment in real estate assets in Outside the real estate industry, the speed ing few years, the strong demand for office niche markets, while global technology panies and people – have benefitted from continental Europe has been encouraged of change in the world increased. Digitiza- space had led to rising rents and the incre- giants acquired market share with their this development. The new possibilities by the withdrawal of capital from London tion began to impact the way we live, work ase in those returns had appeared to be business models based on data mining make living, shopping, and working more and the relocation of white-collar jobs to and shop. Two powerful forces grew in this set in stone. Established players missed the and exploitation. With this approach, these comfortable and efficient – at least for Frankfurt, Paris, Amsterdam and Dublin. environment: established North American chance to pursue technological innovation tech players quickly pulled ahead of the those whose jobs have not yet become technology giants took the next steps after or develop new business models due to the competition by leveraging the superior obsolete. The EU crisis was solved by the smooth acquiring home support companies and lack of need to invest in buildings beyond efficiency of their assets. integration of refugees and the conclusion entered the commercial real estate prop- simple maintenance. High data protection of new peace treaties in the Middle East, erty management mar¬ket, beginning with standards in Europe made it even more un- At the end of this process, prices stabilized, which slowed the inflow of refugees. The “Smart Shop” concepts and “Smart Office” attractive to invest in the digitization of the but the real estate market and its players real estate sector emerged strengthened solutions. In Asia, Prop-Techs and other European real estate sector. Other asset had changed. Real estate service providers from the crisis, with positive effects on the start-ups from outside the real estate in- classes became more attractive than Eu- became completely obsolete, as in the case investment market. dustry developed new ways to boost the ropean real estate. More and more capital of real estate agents, or had been degraded efficiency of real estate usage and man- was withdrawn from the real estate market, to low-margin service providers, in such The construction of new real estate assets, agement and brought their concepts to inducing a price crash. areas as property and facility management. especially in the prosperous major Euro- Europe.

Short term Long term Short term Long term

25 26 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

A stereotype “Lazy Bone” city The general feeling of citizens in this future blue-collar workers. Re-densification con- giants and successful start-ups will soon scenario is positive. The ongoing economic cepts in particular are required to meet the discover the under-developed European recovery has kept the real estate market strong demand for space in all real estate market and enter those cities that have not booming. Digitization remained an inter- sectors. been able to digitalize themselves. The old esting niche in Europe, relevant mainly for real estate market players are in a comfort- high-tech or industrial businesses. There Although work is very demanding and able situation, which they are about to lose was no need to invest money in the digiti- task-driven, the average office space has to some new entries, unless it is not too zation of real estate assets, and therefore not evolved a great deal. Rental contracts late to react. the city’s buildings are new and modern, are concluded for ten and more years. but mainly non-digital. Everything is new and smart, but hardly digital. Location is an important factor for The quality of life is good and productivity people when it comes to living as well as is high. However, productivity used to be working. People are still commuting to their higher in the past, but that is not some- work, mainly by car, and the traffic jams are thing anyone worries about. Services focus even worse than before. on personal assistance, consulting, and customer experience The distribution of asset classes in this city is also a non-radical, generic de-velopment. The manufacturing of goods has hardly Due to the overall prosperity, retail stores evolved in recent years. The number of are successful for all income levels. Also, office jobs has increased. More worrying is shopping centers and leisure facilities have “Without change there is the lack of human resources. In a world in been widely modernized and are attracting which digitization did not make jobs obso- increasing numbers of visitors. no innovation, creativity, lete and the economic climate is growing, a or incentive for improve- war for talent is taking place. Cities and em- Logistics facilities have been created close ployers need to attract qua-lified workers to the city to ensure timely deliveries, which ment. Those who initiate from all over the world. The character of are still being made mainly by car or by change will have a better the city has therefore become heterogene- cycle messengers. ous and multicultural. opportunity to manage The downside to this nice-looking, warm the change that is In terms of real estate, this situation leads city is that the positive situation is not likely to strong demand for space. Vacancy rates to remain. This scenario, unlike the other inevitable“. are low and new buildings are being con- three, is not stable. Outside Europe, digiti- structed on a regular basis, which requires zation will have taken place. Technology William Pollard

Scenario factors Boooom Gotham Country Tech-No! Crisis Lazy Bone

Real Estate investments high medium low high

Vacancy medium high high low

Traffic volume low low medium high

Quality of life high low medium high

Rent level high low low high

Construction activity high medium low high

Degree of centralization high low medium medium

28 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

The future of the The future of the real estate value chain commercial real estate Just as all the scenarios differ, so do the roles of the key sector in Europe is full market players and their share of the value chain. of uncertainty… After gaining an impression of the look and As a basis we have set today’s market rent- feel of the cities in each scenario, we now al level as 100. The chart below shows the want to assess what the real estate value development of the absolute market rent chain will look like for the main real estate and the distribution of the rent between players. The following chart shows how the the market players in comparison with the single components are allocated within the other scenarios. scenarios.

Absolute market rate and relative distribution

Boooom

Gotham Country

Tech-No! Crisis

Lazy Bone

0 20 40 60 80 100 120

ins an mols

RE broker Government Financial institutions Infrastructure provider Facility management Technology companies Owner

Source: Deloitte analysis, 2017

29 30 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

Level of Real estate market rents market players

The level of market rents will be strongly Current and future players in the real estate market influenced by the specifics of each scenario. will have to adapt differently in each scenario.

Compared to today, market rents in the demand, the low quality of space exacer- Regarding the individual players in the real scenarios are intended to compensate for "Boooom" scenario have increased. The bates the declining rent level. Even though estate sector, it is obvious that real estate the negative impacts of the economic crisis overall price movement appears to be investment is made, the real estate sector brokers are no more than initiators in the and show the low level of government spen- rather moderate, despite a lack of new is not a beneficiary. The capital is invested "Boooom" scenario. In general, the entire ding, for example in real estate and infra- developments and additional space. In in the technology itself, without significant real estate transaction, whether it involves structure. fact, as digitization increases productivity impact on real estate assets. Location and a property acquisition or signing a rent con- and efficiency, the demand for commercial design are secondary in this scenario. tract, is based on blockchain technology, Financial institutions real estate space is continuously in decline, reducing the need for all kinds of intermedi- For financial institutions too, the degree leading to an oversupply of space. Existing The market rent in the scenario "Tech-No! aries in the future. In the “Gotham Country” of technological disruption is the main non-high-tech buildings face an upgrade Crisis" is decreasing, but still a little higher scenario the market is suffering high vacan- driver of future success. With regard to or reuse. In addition, the data produced compared to “Gotham Country”. The sce- cy rates and real estate is uniform, because the "Boooom" scenario, banks take advan- by real estate users and technology within nario shows a stable demand for property, location and design are no longer the focus tage of the high degree of debt financing high-tech buildings will be considered as due to the lack of digital disruption, which of investors. In contrast to these two highly for property projects to fund expensive additional value by tech companies in the absorbs part of the general rent decline. disrupted scenarios, brokers retain their building technology. However, crowdfund- real estate sector and by property owners. However, the lack of investment and the function in the low-tech future. Especially ing platforms become strong competitors The user data provided will become a fixed, declining building stock are clear signs of in the "Lazy Bone" scenario, brokers play for established financial institutions. This non-monetary component of rent pay- low market attractiveness and therefore of a relatively significant role due to the high new kind of competition in combination ments and therefore an additional part of low rents. standard of living of city inhabitants and with a lack of profitable alternative invest- the value chain, leading to reduced growth the high demand for and large variety of ment opportunities forces the banks to in the level of rent. Within this scenario, By contrast, the "Lazy Bone" scenario shows property. offer low-interest loans with a shrinking the real estate sector focuses on the city strong market attractiveness, which is the share in the value chain. Relatively less im- center and high quality real estate with key driver for the highest market rent of all Government portance appears in the “Gotham Country” digital building equipment. Prime locations scenarios. This is partly due to the absence The government is one of the major bene- scenario. The financial sector is disrupted combined with progressive technology of significant unemployment due to digital ficiaries across all scenarios , taking into by FinTechs, which spill over into the real infrastructure will be the key to pushing the disruption. Additionally, new project devel- account direct real estate taxes, but also estate market. Investment is mainly finan- market rents of the remaining buildings be- opments cannot keep up with the strong including the indirect income from value- ced by the tech- companies concerned. The yond the current standard and outweighing demand. Based on thriving economic de- added tax and similar taxes. The thriving exact opposite happens in the "Lazy Bone" decreasing demand and the replacement velopment combined with restricted alter- economy of the "Boooom" scenario, which scenario. Real estate appears to be a highly of rent components by data. native investment opportunities, a major boosts public revenues, is accompanied attractive asset class with a huge invest- share of investment flows into existing real by major costs for basic income and other ment volume and a large number of trans- “Gotham Country” has the lowest market estate. Another driver is the generally high- social benefits, which have to be funded by actions. Yield compression forces investors rent of all scenarios. As in the "Boooom" er standard of living which results in great- the State. An increase in taxes, in particular to leverage to retain an acceptable return scenario, increased productivity and effi- er demands on real estate in this scenario. new digitization or robot taxes, will be a key on equity. This leads to a high market share ciency are the main drivers of decreasing To meet the tenant’s needs, a higher rent element in funding this. The tax reliefs in for financial institutions. demand for property. In addition to lower level is mandatory in order to cover costs. the “Gotham Country” and "Tech-No! Crisis"

31 32 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

Infrastructure providers Infrastructure providers (gas, water, heat- place and they can’t cope with the corre- ing etc.) benefit most in the "Tech-No! Crisis" sponding challenges. This can be seen in scenario. In particular, old and inefficient the “Gotham Country” scenario. Facility man- heating systems and other building equip- agement companies are demoted to the ment, together with a general backlog in role of a subcontractor of the new players maintenance, lead to a relatively increased in the market such as tech companies and share in the value chain for utility providers. suffer from declining turnover and lower Infrastructure providers also appear to be margins. great beneficiaries in the "Lazy Bone" sce- nario. Due to the lack of modern technolo- Technology companies gy and the associated inefficiencies, estab- Technology plays a major role in any pos- lished infrastructure retains an important sible future. The central question is the ex- market share, with increasing prices for tent to which technology is applied in the energy and water. In the two tech-driven real estate sector and what role technology scenarios, “Gotham Country” and "Boooom", companies will have. By definition, the however, massive investment in technology "Tech-No! Crisis" and "Lazy Bone" scenarios and modern building infrastructure leads imply a low-tech future. These show only a to a remarkable decline in consumption of minor participation by tech companies in gas, water, and electricity. the value chain. By comparison, the thriving economic environment in "Lazy Bone" pro- Facility management companies motes, at least indirectly, the distribution Comparing all four scenarios, the future of of technology, for example as part of the facility management companies (including customer experience in retail buildings, technical, infrastructural facility manage- leading to a higher share compared to the ment and property management) is highly "Tech-No! Crisis" scenario. In contrast, the uncertain. The players in this sector are “Gotham Country” scenario shows how somehow architects of their own fortune. start-ups and tech giants evolve, based on The "Boooom" scenario foresees a future in the key drivers, digitization and automa- which the established facility management tion. They thereby become major players companies overcome the challenge of tech- in the real estate market. Supported by nological and digital disruption and provide the high tech environment, combined with and maintain the highly digitalized build- their comprehensive experience in digital ings. The focus of work has shifted from business models, the tech companies con- low-skilled roles to complex data scientist quer the construction and facility services functions, managing entire buildings at an sector and gain a major part of the real operational but also a strategic level. This estate value chain. Nevertheless, this kind extended service portfolio improves the of technological predominance is not in- In conclusion, the rates of return for the demolition. Owners in the "Lazy Bone" avoiding further investment. However, the margin and increases the added value for evitable. As long as established real estate owners of real estate differ. The main driv- scenario benefit from high demand which difference is the low market attractiveness “The key is to embrace their clients. Another (but no less profitable) operators keep up with digital change, the er is, of course, the overall attractiveness leads to a steady cash inflow without signi- in the latter scenario. The decline in the disruption and change extreme is the role of facility management opportunity exists to maintain the status of the real estate market. But this is no ficant investment needs. However, profita- rent level leads to low rental income. Finally, companies in the low-tech scenarios. Due quo in terms of market share, as shown by guarantee for success. In the "Boooom" ble market conditions such as this involve low attractiveness and the interchangeabili- early. Don't react to it to a lack of automation, facility services are the "Boooom" scenario. scenario, the owner will take advantage of a high risk of disruption. As a long-term ty of real estate assets lead to the lowest decades later. You can't still carried out manually. The maintenance a high-tech asset in an attractive market consequence, the entry of new players rates of return of all scenarios in “Gotham of building equipment is also still carried environment. However, this works only as can be expected. One similarity between Country”. fight innovation“. out by the ordinary, blue-collar worker. The long as the space meets all the require- the "Lazy Bone" and "Tech-No! Crisis" sce- future of these service providers will be ments. Outdated buildings are prone to narios is that real estate investors base Ryan Kavanaugh more difficult, if digital disruption takes high vacancy rates, modernization, or their business model on existing buildings,

33 34 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

Analysis of major

European cities Digital return rate map

In the last five years, indicators have showed heterogeneous developments in European cities, pointing to the different scenarios. Helsinki In this chapter, as a final step in the sce- we derived a digitization index for Europe- in particular markets are not analyzed, nario design process, we have derived indi- an cities whereby the European average is nor are they the subject of this study. The Stockholm cators and signposts by evaluating the cur- set as 100. transparency and comparability of real es- rent status of the commercial real estate tate market trends in this context will be sector in selected European cities. The list For real estate price development, the in- broadened by developments in forthcom- Talinn of cities investigated came from an expert dex is derived from a portfolio mix includ- ing versions of this analysis in coming years. panel discussion. The indicators are key ing all commercial use types. The index developments and dynamics that we track represents the changes in rent and price The results of this first edition of the “digi- to identify when a particular scenario levels in all locations with the 2012 level tal return rate” map are shown in the chart Copen- Riga seems to be unfolding. For this we focus as a common basis. below and the map on the following page. hagen on two sets of indicators, “digitization of While some of the results and scenario Vilnius cities” and “real estate price development”. Of course, special circumstances in the allocations to the cities may surprise at For digitization we reduced the European 2012 index year might favor one city as first sight, we picked four sample cities to Dublin Birmingham Berlin Digital City Index 2016 to the relevant fac- against another (for example,a price drop further analyze the reasons for their re- Warsaw tors. We then standardized those factors in the Spanish real estate market). These sults and provide an outlook on potential Hamburg according to population, ranked the indica- extraordinary effects occur in every year developments in coming years: Amsterdam tors, and added up the rankings. From this and the general macroeconomic criteria London Cologne Prague Brussels

Paris Frankfurt it ranin oooom Bratislava 1 Copenhagen 5 Madrid Munich Vienna Luxembourg Budapest The a one oooom 2 Helsinki 6 Berlin 3 London 7 Luxembourg 4 Dublin 8 Barcelona Ljubljana 4 Milan otham ountr Bucharest 9 Stockholm 12 Munich Zagreb 10 Amsterdam 13 Hamburg 28

e 33 27 11 Paris 14 Tallinn t Sofia a 5 3 t 26 7 s 29 6 32 8 Barcelona E 31 30 2 1 Techo risis

a l Rome 20 e 22 14 12 10 9 15 Prague 21 Bratislava

R 21 18 13 11 Madrid 24 23 19 16 Brussels 22 Budapest 16 17 17 Milan 23 Rome 25 15 18 Lisbon 24 Zagreb Lisbon 19 Bucharest 25 Warsaw 20 Vilnius Athens The a one 26 Cologne 30 Frankfurt Techo risis otham ountr 27 Vienna 31 Sofia Digitization 28 Riga 32 Ljubljana 29 Birmingham 33 Athens

Boooom Gotham Country Tech-No! Crisis Lazy Bone

Source: Deloitte analysis, 2017 Source: Deloitte analysis, 2017 35 36 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

London – Boooom

As one of the major global financial centers, London offers a high- salary environment, which drives real estate prices. Also, in terms of digitization, the city is a front runner. Brexit will bring tremendous change. Will London keep its position as “Boooom” city?

London, the Old Smoke, is a leading global don’s status as a financial hub, as already in inheritance tax up to 2020 which could Despite companies‘ conservative inactivity, which leads to high demand for digital ser- downturn, London could slide into the city in many ways, including the economic some banks are planning to relocate their postpone purchasing decisions or even the London real estate market will not vices. As a consequence, the local online “Gotham Country” scenario. Initial price and cultural sphere. With more than 10 mil- London staff, other industries are likely to lead to a decision to divest. suffer from boredom. Due to the drop in market is growing strongly. falls directly after the Brexit vote pointed lion inhabitants in the metropolitan area, it fill the resulting gap. Google, for example, prices resulting from decreased trans- in this direction, but the markets quickly is the second-largest metropolitan area in recently announced the creation of 3,000 Similar behavior is observed in the London action volumes, the coming years will be London has a huge number of start-ups. recovered. If London were to halt the high Europe. As a result of our indicators, based high-tech jobs in London. Other tech giants office market. After a slowdown in the run- buyers’ years. The one lesson 2016 taught Around 1.5 million employees work for investment in digitization, for example, due on real estate market developments and and disruptors such as Facebook, Amazon, up to the EU referendum, many companies us is that buyers will act when they have over 275,000 start-ups that have raised to economic problems following a “hard digitization, the capital of the United King- or Snapchat, are also planning to invest have put their location strategy plans tem- the feeling that the price is right, in many more than 8 billion euros in funds since Brexit”, this could also bring London to the dom can be seen as a stereotype "Boooom" heavily in London’s tech sector. porarily on hold. The result of the EU refer- cases irrespective of wider issues such as 2005. Consequently London has more "Lazy Bone" scenario. scenario city. In the past 20 years, the endum has not brought clarity; uncertainty Brexit. However, during the next two years, unicorn start-ups than any other Euro- British economy as a whole, and London’s How does the real estate market perceive has persisted as the road map for Brexit is the London real estate market will show pean city. Those unicorns cover all branch- All in all, however, the established digital economy in particular, since London is the latest political developments? After still under discussion. Many companies are little to no growth as long as the Brexit ne- es such as finance (Marktit, TransferWise), basis, the main business language, English, responsible for more than 20 % of the UK’s decades of runaway growth, London has therefore hesitating to act until the terms gotiations continue. This began in the last fashion (ASOS), food delivery (Deliveroo) or and London’s worldwide economic impor- GDP, have been growing strongly. London been facing an unusually low number of of Brexit are finally negotiated. quarter of 2016, when prime office rents virtual discovery (Blippar). There are also tance, make staying in the "Boooom" sce- is one of the wealthiest regions in Europe in executed transactions and thus decreasing declined by 4.3 % in London, compared to a variety of PropTech unicorns in London nario the most likely outcome, even if the terms of gross domestic product. London is prices in the last two years. Looking ahead, an overall rise of 4.3 % in all 24 other major that are reshaping the real estate sector, rest of the UK was to face greater problems a command center for the global economy London is facing the introduction of further office markets in Europe. But this trend such as Rightmove or Zoopla. Start-ups are as a result of the current challenges. and in particular an international banking policy measures, such as the reduction of won’t last forever. As early as 2019, the Lon- promoted by the supportive political and hub. Even though Brexit endangers Lon- tax relief on mortgage interest and changes don real estate market will return to capital administrative environment – for example, growth in line with the long-term trend of through low administra¬tive barriers to the "Boooom" scenario. The outlook for starting a new company. Furthermore, “When there are things five-year price growth in London will reach London is seeking an open data environ- that don't go according 21 %. The likelihood of a long-term recovery ment, for example with the London Data from the recent downturn will be increased Store which enables start-ups to conduct to plan, London will cope“. by the activities of foreign buyers, given data-related business more easily than in that sterling fell by more than 16 % against other cities. London hosts world-leading Jeremy Hunt the U.S. dollar and by nearly 13 % against universities such as University College Lon- the euro in 2016. Therefore the general don, Imperial College, King’s College or the tendency for prices to increase is very likely London School of Economics. Obviously, to continue. talent with digital skills is in high demand from many employers. But it is not only London’s real estate mar- ket that is extremely dynamic. Particularly Even though the cost of living and the costs in terms of digitization, London is a Euro- for commercial real estate are extremely pean front runner. For the private sector, it high, growth continues. London is likely to offers relatively high-speed internet at low pursue its path by investing in digitization cost. Customers are keenly focused on con- to be sure of remaining in the "Boooom" ducting transactions on various offerings, scenario. If Brexit causes an economic

37 38 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

Stockholm – Gotham Country

Stockholm is a digital and start-up pioneer in Europe but policies keep real estate price levels constant, making the market less attractive. Will Stockholm use digitization to drive growth in the future?

Thinking about Stockholm tends to bring capital city. In addition, some indicators particular, the construction costs of build- If Stockholm wants to keep its title as one start-ups per capita, Stockholm has the IKEA or Pippi Longstocking to mind, even if are pointing towards a possible downturn. ings have skyrocketed, due to long plan- of Europe’s tech hubs, the real estate mar- second highest number in the world after they are only from Sweden and not from For example the current unemployment ning processes, regulations that vary de- ket has to be aligned with developments in Silicon Valley. Companies such as the com- Stockholm. However, based on our digiti- rate of 6.9 % is above the long-term aver- pending on the location, a costly appeals other sectors, especially in terms of digi- munications tool developer, Skype, music zation and real estate indicators and com- age of 5.9 %. process, and laws regulating rents. These tization. Veteran tech players such as streaming pioneer, Spotify, King, the crea- pared to other European cities, Stockholm factors have a negative impact on the mar- Ericsson and new heavyweights such as tor of Candy Crush, and mobile payment is a city steering towards our “Gotham Several policies adopted in Stockholm have ket’s attractiveness. Owing to comprehen- Spotify have reported a negative impact providers such as Klarna or iZettle have Country” scenario. The capital of the King- encouraged rises in real estate prices. This sive rules affecting development and com- on their business in Sweden due to the their roots in Stockholm. These start-ups dom of Sweden, with more than two mil- makes it difficult to expect further growth plex construction regulations, Sweden’s lack of available housing. This makes at- can source their talent from highly-ranked lion people in the metropolitan area, is in the local real estate market. What is pre- production costs for real estate are the tracting the best talent more difficult. universities such as the KTH Royal Institute the largest city in Scandinavia. After being venting the real estate market from over- highest in the European Union: 72 % above of Technology or Stockholm University. hit by a financial crisis in the 1990s, the coming the nearly “bubble-burst” status average. As a consequence, project devel- However, in terms of digitization, the Swe- Other factors that make Stockholm less Swedish economy was forced to transform, and jump on the bandwagon like any other opments are not taking place and interna- dish capital is still a European hot-spot. attractive are the cold climate and the high as the unemployment rate increased and sector did in terms of digitization? Integra- tional developers are waiting on the side- While the European average for high-tech- cost of living. public spending rose out of control. tion of technology into real estate property lines in most cases. The good news is that related jobs in the workforce is 10 %, 18 % and the real estate market could underpin Sweden has noticed the problem and has of Stockholm’s jobs are in the high-tech By increasing market attractiveness, Stock- Currently, the Swedish economy is doing the market and enable further organic started to act. A specific example of how sector. Studies report a greater proportion holm could move into a "Boooom" scenario, quite well, with low national debt and low, growth. However, this is not the only step the real estate sector is opening itself up to of Stockholm’s information and commu- though this is challenging, as Stockholm al- stable inflation. The good economic cli- needed to keep the market attractive in fu- digitization is that Sweden is currently con- nications technology-specialist users in ready has high-cost structure. Therefore, in mate has led to a high cost of living, low- ture. There are several more reasons that ducting tests on the adoption of blockchain the total economy than in any other OECD the next few years, Stockholm, being at the ering the attractiveness of Sweden and its make the market appear dysfunctional. In techonology in its land registry. member state. Consequently, the digital edge of the indicators, will be a showcase infrastructure is characterized by propri- for whether high digitization correlates with etary advances, leading the European land- an attractive and growing real estate mar- scape and fueling the local economy. In ket ("Boooom" scenario) or if those two fac- comparison to other European cities, the tors can actually drift apart and develop Swedish capital has the greatest penetra- into a “Gotham Country”. tion rates of residential broadband. Fibre broadband connection of houses is also the highest among its European peers. On average, every citizen possesses 1.5 smart devices. Stockholm has a well-known start- up scene that is driven by the highly-de- veloped digital infrastructure and also by the supportive government environment. In Sweden, it is comparably easy for start- ups to set up and maintain a business. Furthermore, the public innovation agency, VINNOVA, offers public funding. Stockholm has produced some of Europe’s largest and most eminent digital start-ups and is therefore called a “unicorn factory”. A unicorn is a start-up valued at more than 1 billion US dollars. In terms of unicorn

39 40 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

Rome – Tech-No! Crisis

The Eternal City seems to sunbathe in old glories, not focus on the future. Digitization is at a low level. Will Rome stage a turnaround or remain in a Tech-No! Crisis?

Rome, the Eternal City, with its more than In general terms, the Roman real estate In its current state, the office sector is the Thus far, Rome appears to be incapable of start-up ecosystem is very poor. There is by the European Commission, Italy is on 4.3 million people in the metropolitan area, market has been facing a downturn since best example of what the future of the taking advantage of digitization as a driver a lack of venture capital and seed funding a par with Greece, Bulgaria, and Romania can be seen as a city heading straight for the global financial crisis started in 2008. real estate market could look like in the of investment and progress. The real estate which also hampers start-up companies. in terms of digitization. Potential govern- the "Tech-No! Crisis" scenario. Based on our Buyers who are not dependent on external "Tech-No! Crisis" scenario: a stagnant market sector is only one example of the lack of To overcome this deficiency, the Italian ment policies to overcome this should be classification of third-party digitization and financing are favored by market prospects, with a shortage of quality supply. Modern digitization: the e-commerce sector would government is trying to support start-ups positive for budget revenues but would real estate indicators, Rome fares badly expect that property prices will fall further office space represents only about 10 % be another one lagging behind its peers. with a variety of initiatives. For example, also generate long-term costs. Filling the compared to other European cities. As Italy in the next few years, or at least remain of the total available stock. Almost no new However, this turns out to have positive in 2012 the Start-Up Act came into force, infrastructure gap by 2030 could cost more is currently slithering through a political constant. Given this background, investors office space has been provided in Rome in effects for retail and logistics space. intended to transform the Italian business than 800 billion euros. and economic crisis, a further economic in Rome’s real estate market are not eager recent years. The lack of high-quality, grade Generally, Rome is not very attractive for world into a start-up-friendly environment. slump is possible. Due to the crisis but also to invest since prices could drop further. In A locations keeps rents stable, although at manufacturing, with the major hubs locat- To promote the start-up sector further, the Even though Rome hosts Sapienza, one owing to the lack of digital capabilities, the addition, the majority of real estate players a low level. ed mainly in northern Italy. government launched a 200 million euro of the oldest and largest universities in unemployment rate in Italy has been in- still face hurdles such as the strong nega- Smart&Start program in 2015. However, Europe, and is home to a wide range of creasing in recent years. It is expected that tive effects of the euro crisis and restrictive The inhabitants of Rome display a very low unfavorable tax and labor legislation hin- public, private, and clerical universities, digitization might create some new jobs in measures such as higher property taxes. In acceptance of online shopping, leading to ders digitization and the development of there is no top research institution in the Rome, but also replace many jobs that will particular, the lack of will or even ability of relatively minor e-commerce business. On new start-ups. This discourages entrepre- QS University ranking among the top 200 become obsolete in a future, digitalized Italian banks to grant loans and mortgages the other hand, the Romans are still cre- neurs from coming to Rome to start a universities worldwide. Moreover, research world. This could exacerbate real estate appears to be a hurdle to the domestic ating great demand for traditional bricks- business. expenditure per head of population is not vacancies and run down some quarters in market and to any kind of investment in and-mortar retail. competitive in comparison to other Euro- the Italian capital. real estate or technical building systems. In terms of digitization, broadband speed is pean cities. The inability of many Italians to very low compared to the European front speak English, even in the tech-sector, also “Rome has not seen a line, at relatively expensive rates. This pre- hampers progress. modern building in more vents a large-scale, high-speed internet connection in the real estate sector. Pro- To avoid the "Tech-No! Crisis" scenario the than half a century. It is a gress to enhance broadband infrastructure Italian economy needs to make a U-turn city frozen in time”. is very slow. Consequently there are very and grow again. Political instability in Italy few homes and buildings with access to impedes reforms which could drive digi- fibre internet. Not only is digitization rela- tization and enable growth. By filling the Richard Meier tively, but other aspects of infrastructure, investment gap, Rome could make it to the such as public transport, are of poor quality “Gotham Country” scenario, which would too, reducing the attractiveness of Rome. make growth possible and consequently There is currently a weak start-up scene in Rome is however quite typical for Italy, as make the city more attractive. Eventually, Rome. In comparison with European peer the entire country lags behind in terms of if they bundle all their resources and show cities, few companies are founded. Further- infrastructure projects. According to the the political will, Rome could be in the more, public engagement with the digital Digital Economy & Society Index published "Boooom"-scenario.

41 42 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

Vienna – Lazy Bone

Fueled by a high standard of living, Vienna’s real estate market is highly attractive. Celebrating the past and enjoying life have been the focus so far, not digitization. First indicators show that Vienna aims to migrate from a Lazy Bone to a Boooom city. Will this journey succeed?

Vienna, the capital of the former Austrian Vienna’s attractiveness is founded on a strong dynamism in recent years and is ex- In 2016, the office sector reported the tions are not very common, leading to low If the digital environment is stimulated empire, still reminisces about its past glory high lifestyle in combination with a compa- pected to continue in the same fashion in lowest level of office completion in recent local demand for such transactions. How- by the initiative but continuing economic and tries to preserve its old shine, for exam- rably low cost of living. Furthermore, the coming years. In particular, the increasing years. This has aggravated the scarcity and ever, when e-commerce does happen it decline lowers Vienna’s attractiveness, it is ple in its famous Viennese Coffee Houses. crime rate is among the lowest in Europe- activity of foreign investors from hitherto has provoked unprecedented peak rents often involves foreign firms due to the lack also thinkable that Vienna could be pushed And so even though the real estate market an metropolitan areas. The high quality of less represented countries will provide ad- for office space. Large volume leases of of local players, draining more than 3 billion into the “Gotham Country” scenario. While is highly attractive, its approach to digitiza- life gives little appetite for change. Geo- ditional demand in Vienna’s market. continuous spaces have become especially euros from the Austrian economy annually. 10 years ago Austria was a front runner in tion approaches are is rather conservative graphical location is also a clear advantage difficult. The market potential for mobile-based of- economic terms, which in turn made its compared to the European peer group. for Vienna, as it is a perfect hub for compa- Up till now, the retail sector in Vienna has ferings is also not very high. Start-ups are real estate highly attractive, the current Consequently, it can be seen as a "Lazy nies that are active in Eastern Europe. appeared to be immune to the slowly but In central Vienna, offices and retail spaces not a main driver for the economy of Vien- downturn is putting Austria at the back Bone" city. Vienna is one of the wealthiest surely increasing share of online shopping. dominate the city, replacing residential na; apparently there is no unicorn located of Europe’s economic growth rankings. places in Europe in terms of gross domestic It is thus no surprise that Vienna offers an Despite the growth of e-commerce, the properties at a progressive rate in recent in the Austrian capital. Even though there product, fueled by the strong Austrian eco- attractive real estate market. Owing to the 2016 mid-year sales figures for bricks-and- years. The creation of new office space is is a reasonably supportive environment for nomy of the past. However, in recent years large number of investors and the low sup- mortar retail reported a nominal increase an attractive option for historic buildings in start-ups, there is ample room for improve- the Austrian economy has been transfor- ply of real estate projects, the real estate of about 1.2 %. As the real estate sector is the city center. However, the old buildings ment. The Austrian government is aware of ming from a European front runner in sector currently has the lowest initial yields proving little troubled by e-commerce, side- struggle to meet the requirements of mod- the lag and is trying to fill the funding gap. terms of economic growth to one of the for decades. In combination with constantly ways movement in retail rents is expected. ern office space. In many cases retrofitting slowest-growing countries. low interest rates, Vienna has displayed digital infrastructure is either impractical Despite the lack of a digital environment, or, in some cases, impossible. The struc- Vienna offers a high-quality lifestyle. This tures are unable to meet the requirements is also fueled by the high quality of Vienna’s of modern-day offices with flexible layouts research facilities, with two universities, responding to changes in co-working and the University of Vienna and the Vienna mobility. University of Technology, among the top 200 universities globally. However, access As in the real estate sector with the lack to trained ICT employees is less easy than of modern office space in Vienna, the in other European peer cities. Austrian capital is behind in other areas in terms of digitization, compared to other Vienna has acknowledged that digitization European cities. is vital and that the city cannot rest on its laurels. At the end of 2015, the city council While Vienna offers comparably high speed initiated an innovative Vienna 2020 strategy internet, prices for users are slightly higher to drive innovation. This includes the devel- than elsewhere. Also the availability of fibre opment of a new urban quarter in Aspern, internet for businesses and households as a research project, to facilitate the smart “Vienna is a handsome, cannot be compared to the more advanced city of tomorrow. This project includes data lively city, and pleases European cities. The use and provision of mining as well as a smart electricity grid. digital services by companies and the pub- If the initiative succeeds, the city’s great me exceedingly“. lic sector is capable of improvement. One potential could move it into the "Boooom" consequence is that local online transac- scenario. Frederic Chopin

43 44 The future of commercial real estate in Europe | A scenario approach TheThe future future of of commercial commercial real real estate estate in inEurope Europe | A | scenario A scenario approach approach

Conclusion “Times and conditions change so rapidly that and outlook we must keep our aim constantly focused on “Times and conditions change so rapidly Deloitte will focus on the relationship bet- that we must keep our aim constantly fo- ween real estate value and digitization fur- cused on the future.” The words of Walt ther in the future. With this study, we star- the future”. Disney were true then and are even more ted our “digital return rate” map for selec- so today, in times of constant change and ted European cities. Over the next years, high uncertainty. This paper illustrates four we will update this exercise and add new potential scenarios on how that change aspects to it. We will assess how interre- might look like in cities in Europe, and how lated the scenarios we presented here ac- this would affect the commercial real estate tually are. Will there be a focus on "Boooom" Walt Disney sector. One robust conclusion from our and "Tech-No! Crisis"cities? Will cities exist study is this: the real estate industry will in the future that do not focus on digital be disrupted. Real estate players need to innovation but are still prospering? Or, vice prepare for dramatically changing markets versa: Will there be cities with a weak real in the future. estate market despite digital innovation?

We don’t know when this disruption will The next years will show how quickly new take place and we can’t predict the precise technologies are adopted in the real es- factors that will influence this change. tate industry. Current developments are Therefore, to succeed, ongoing strategic pointing to more rapid adoption than many foresight will become critically important. experts expected. Virtual reality, the sharing economy, teleworking, fully integrated and The trajectory for possible future develop- mobile on-demand shopping, or even the ments is defined today, and so all market blockchain technology will challenge the players, from construction companies, status quo in the real estate sector. asset managers, tech companies to inves- tors, will have to be vigilant. They will have As John F. Kennedy said, “change is the law to make long-term and big-impact strate- of life". And those who look only to the past gic decisions in spite of high levels of uncer- or present are certain to miss the future”. tainty. The good news is that the founda- So now it’s the turn of the real estate sec- tions for success are also laid today. Stake- tor to monitor and shape the future. holders need to understand emerging technologies, build up risk monitoring systems, diversify their portfolios and define their strategy accordingly.

45 46 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

Methodology Contacts

Introduction to scenario design and methodology

The methodology of this study on the fu- Scenarios are a way of understanding the The scenario framework was developed in Michael Müller ture of the European commercial real es- dynamics that shape the future. Therefore, the next step by focusing the entire list of Lead Partner | Head of Real Estate & Construction tate industry is based on earlier achieve- in the second step, we pinpoint the forces related uncertainties into two orthogonal Tel: +49 89 290368428 ments developed by Deloitte. A seven-step that drive the focal questions. Driving for- axes. We then defined a matrix consisting [email protected] scenario development approach (see ces are fundamental sources of future of crossing and independent axes that image) applies the guiding scientific prin- change. They shape the course of events allowed us to define four very different, Florian Klein ciples of objectivity, reliability, and validity. and history and dramatically enhance our but plausible, quadrants of uncertainty. Head of the Center for the Long View The study is the outcome of a series of ability to imagine future scenarios. These In the underlying study, we used Market Tel: +49 151 58003683 workshops involving real estate experts drivers can be grouped into five categories, Attractiveness and Disruptive Potential of [email protected] from the Deloitte EMEA network as well as known as STEEP forces, as they consist of New Technologies as critical uncertainties. experienced scenario practitioners from Social, Technological, Economic, Environ- Hendrik Aholt the Center for the Long View (CLV). mental and Political forces. Since most In the fifth step we developed the scenario Senior Manager Real Estate Consulting issues involve more than one of these narratives by using the previously investi- Tel: +49 151 58004755 Scenario design starts by identifying the categories, they are only handles. In order gated drivers that became characters in the [email protected] focal question of the underlying issue. to derive our driver list, we also conducted developed stories. It is not our goal to tell Since we could tell an infinite number of expert workshops using CLV Deep View, an four different stories, one of which — we Volker Wörmann different stories about the future of the artificial intelligence (AI)-based trend-sens- hope, as futurists — will be true. We rec- Real Estate Consulting real estate sector, we first had to agree on ing and analysis machine. CLV Deep View ognise instead that the real future will not Tel: +49 151 58070738 the issue or strategic challenge we wanted helps to avoid the bias of the traditional conform to any one of the four scenarios, [email protected] to address. This enabled us to support approach, which often has a builtin ten- but that it will contain elements of all of our the decision-making of our key real estate dency based on the character, mood, or scenarios. Our goal is to pin down the cor- Andreas Schühly clients in an appropriate way. Scenarios preference of the scenarists. ners of the plausible futures. These corners Center for the Long View are tools for shedding light on the strategic are exaggerated — the outer limits of what Tel: +49 151 58071474 challenge, while the focal question sets the As a part of the workshop series, we is plausible. Thus our scenarios will have an [email protected] scope of the scenarios. In the present case identified in a third step the critical un- element almost of caricature. we focused on the question “What will the certainties for the focal question. Not all commercial real estate market in Europe driving forces are uncertain, some may We then use these scenarios to derive impli- look like in 20 years’ time?”. be pre-determined. These are the trends cations by investigating the impact on each already in the pipeline, unlikely to vary type of commercial real estate use (office, significantly in any of the scenarios. Critical retail, manufacturing, and logistic space) 1 oca nicaors 7 esion inposs uncertainties are driving forces with the and describing the city of the future and potential to tip the future in one direction its real estate value chain in each scenario. 2 6 riin picaions or another. They have two fundamental orces pions characteristics: an unusually high impact 3 5 riica cenario and an uncommon degree of uncertainty ncerainies ories or volatility. Initially, all uncertainties ap- pear unique, but by stepping back we can 4 cenario raeors reduce bundles of uncertainties to bun- dles that serve as the building blocks for Seven step Scenario Development Approach creating our scenario sets.

47 48 The future of commercial real estate in Europe | A scenario approach The future of commercial real estate in Europe | A scenario approach

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