Technology is accelerating the growth of new real estate models that straddle the lines between traditional asset classes
By SARAH YAUSSI
Real estate investors, owners, and developers have historically cut across clear lines. Office was office. Hospitality was hospitality. Multifamily and single-family were their own things. And retail was totally distinct from everything.
Beginning in the 1990s, however, mixed-use developments gained traction and asset classes started to partner up. Offices and apartments got ground floor retail. Hotels co-located with shopping malls and added residential units to the mix. Town centers anchored traditional residential neighborhoods. And live/work developments became popular.
Now, the lines are once again shifting as new real estate models are emerging and tearing down, literally and figuratively, the walls between asset classes. As we move from mixed use to “mixed-up use,” as I heard one executive recently say, these changes are set to have serious implications for real estate writ large—from financing, to design, to construction, and beyond.
Challenges to Tradition
At the heart of this transformation is the new consumer. Internet-based and mobile technology has not only given today’s consumer nearly infinite choice but also untethered them. As a result, today’s hyper-connected consumer values flexibility, convenience, and personalization—all things that go against the grain of traditional real estate, which is deeply rooted in location, long- term commitments, and scale.
While real estate arguably has not been on the leading edge of this transformation, it is now happening. New models are emerging, fueled by a wave of venture capital, and disrupting the traditional tranches of the real estate spectrum.
Coworking is one of the best examples of this shift. Unlike the traditional office market, which relied on long-term leases of five, seven or even 10 years, coworking provides professionals like freelancers, entrepreneurs, start-ups, and small companies highly-amenitized shared workspaces that can be accessed on a short-term or subscription basis.
This sector has been on a tear. According to Inc. Magazine, more than 2,000 coworking spaces opened up globally, with roughly half of those in the United States. Moreover, it’s estimated that by 2020, there is likely to be more than 25,000 of these spaces around the globe.
New Models Emerge
There’s a similar shift happening in multifamily as co-living companies garner headlines and the attention of venture capitalists worldwide.
Co-living is even reaching into the single-family realm with the growth of that promise more affordable rents, flexible leases, and hassle-free living in a more traditional neighborhood setting.
It’s difficult to talk about co-living in any context without also considering its cousin, short-term rentals (STRs). The sector’s promise of providing convenient, flexible and arguably affordable lodging/housing options is dealing a double punch of disruption to both the hotel and apartment industries.
Over the last handful of years, capital has been pouring into this market. The big players continue to attract major dollars, and it’s beginning to drive consolidation in the market.
At the same time, venture capital is also supporting the emergence of new players, each with its own spin on the model. The market has also expanded beyond these platforms that effectively repurpose existing space into the development world with companies beginning to do purpose-built STR communities.
Leaders in the multifamily sector have been watching the growth of the STR sector closely, with some dipping their toes gently into the waters through pilot programs and creative partnerships where a set number of units or floors are put on the platforms.
Forward into the Future
The newfound success of coworking, co-living, and short-term rentals, paired with the rise of things like pop-up and experiential retail, is challenging existing paradigms.
We only need to look at innovative projects like RXR’s 75 Rockefeller Plaza in New York to get an idea of how our asset classifications might be turned inside out as space becomes less about square feet and more about services. Called a “unicorn playground” by one media outlet, the development will layer coworking space, short- term rentals and meeting/event space-cum- member lounge over traditional office space. Similarly, Related Companies’ Hudson Yards condo towers are mixing residential with hotel, fitness, office, and even coworking.
With this type of innovation, there are certainly some challenges. Underwriting projects with such a me?lange of income streams is just a start. The regulatory environment is likely to get thornier as local jurisdictions grapple with how these dense, multi-use spaces fit into the existing community plan. Moreover, building codes will be under pressure to adapt more quickly to keep up with development changes.
But growing pains aside, this is undoubtedly exciting for the future of real estate development. Space is being reimagined. Rigid divides between asset classes are yielding. The decades ahead will deliver new answers to the question of how people will live, work, and play in the future.
Sarah Yaussi is the vice president of business strategy at the National Multifamily Housing Council (NMHC) in Washington, D.C. She can be reached at firstname.lastname@example.org.