Future developments can be guided by listening to the market

Walk around any major Australia city these days and it is clear real estate uses are merging. Once cities had clear delineations between different types of uses – offices in the CBD, a retail district nearby, separate suburban residential and industrial, logistics districts. CBDs today contain a broad range of uses, both horizontally within a precinct, and vertically within a single building.

Take 447 Collins Street, the recent $1.25 billion Cbus development in Melbourne’s CBD, which delivers offices, residential, hotel and retail uses in two vertical towers.

Blurred lines within assets

Uses are blurring within individual occupancies, too. Shops are broadening out from pure sales to cultivate in-store experiences through make-up bars, exercise classes or events. Gyms commonly offer food, drink and apparel sales alongside fitness.

So does that make these retail, or leisure assets?

As technology remakes the nature of work, tasks which were once solely office based now pervade everywhere from homes to coffee shops to hotel lobbies. Offices are, in turn, diversifying their offer as their purpose evolves to focus on specific tasks and provide a stronger attraction to staff who are empowered to choose where to work. Less office space is being devoted to desks, more assigned to amenities like kitchens, meeting rooms and social areas. Even logistics uses are blurring with shops, car parks and office basements used to fulfill online orders.

Three drivers of space evolution

The growing proliferation of mixed-use has three structural drivers:

1. Occupational demand is shifting rapidly making many existing uses redundant. The changing way we shop, for example, means aggregate demand for physical retail space is falling. The more flexible way we work alters office demand and makes some types of space, especially secondary space, unfit for purpose. This has forced landlords to consider innovative ways to repurpose space which is no longer viable in its traditional use.
2. Households increasingly want to live, work and play in one location. Doing so provides time and financial efficiency gains and quality of life benefits. This aligns with the growing power of workers and households to dictate where space is provided. Much has changed from when landlords and developers chose what to build where, with workers and households forced to travel to access the space they needed. As this localism trend grows it is creating new types of demand in new locations – live and play space in CBDs; office, retail and amenity space in residential areas.
3. Demand is emerging rapidly in several nascent segments such as urban logistics, build to rent and small ‘edge’ data centres. Occupiers in these segments urgently need urban real estate in dense cities and must compete with established uses to get it. This requires novel solutions and offers landlords, developers and investors opportunities to rentalise under-used or under-developed space for new purposes.

As with many things, these trends have been accelerated by the pandemic, quickening the pace of change and hastening the spread of mixed-use.

Blurred lines: The three predominant drivers of rising mixed-use

Major implications for real estate stakeholders

Putting real estate uses into neat categories is getting harder. This challenges land-use planners to guide development whilst applying more flexible and bespoke zoning and development regulations reflecting modern demand which will vary widely by location. A one-size-fits-all approach is increasingly redundant.

Landowners, developers and investors cannot adopt a cookie-cutter approach to assets either. The land-use mix within every building and location will be unique, requiring a tailored solution to align to occupier demand. More hands-on asset management and capex will need to cater for more demanding occupiers with greater power than ever before to choose what type of space to take and where. Higher input costs and shorter secured income mean perceived risks will rise.

Those who get it right can expect greater rewards through stronger occupier demand, shorter voids, higher rental premiums and more optionality on asset management and business plan execution. They will favour larger lot sizes which maximise the benefits from higher input costs and provide wider choice on the range of uses that can be accommodated.

Users: The biggest beneficiaries

The greatest winners from all of this will be the people and businesses who use property. They will be served by real estate which is more attentive to their needs. They will have more power to avoid real estate that does not meet their requirements and, in so doing, directly force adaptation. Society will benefit as harder-worked assets promote operational and land-use efficiency, delivering substantial sustainability benefits.

Ultimately, if users win, then we all win. New developments need market support to be successful, so understanding these influences and ensuring visibility over not just financials, but market demand, will allow for future planning to be viable now and for the long-term.