How will urban change impact our ability to 'Level Up'?

How will urban change impact our ability to ‘Level Up’?

During the recent UKREiif conference, Cushman & Wakefield hosted a small gathering of private and public sector organisations involved in property led regeneration to debate the key issues facing our cities and towns, drawing on our emerging Future of Cities insight, to respond to the following questions.....

• Can Levelling Up ever realistically be achieved? What should ‘good’ urban policy look like?
• Can technology and the use of the internet reduce the north / south divide?
• Circa 80% of the buildings we occupy could be obsolete by 2030. How do we deal with the scale of obsolescence in our urban areas?
•  Is de-urbanisation inevitable in some areas?  Should we accept and embrace managed decline in certain circumstances?
• Automation of industries and jobs threatens widespread redundancies which could widen spatial inequalities. How can real estate deal with this?
• How does the machinery of Government, and the relationship between public and private sectors, need to be redefined to deliver the challenges facing our urban places?

The following represents a summary of the discussion….

Can Levelling Up ever realistically be achieved? What should ‘good’ urban policy look like?

Over 70 years of UK and European regional policy has failed to address geographical and spatial inequalities, so is it realistic to think we can break the cycle? What have we learnt? What do we need to do differently?

All acknowledged the scale of the challenge and whilst there was a sense of optimism that improvements could be achieved, there was a feeling that this would only come with a radical shift in the approach to regenerating our towns and cities, with the need for much greater substance to back up the Government’s Levelling Up ambitions. Key themes discussed included the importance of local leadership, developing a willingness to take more risks, and of shifting the mentality from one of trying to catch up, to trying to get ahead. Innovation and new thinking were considered to be needed, a focus on skills and education, and encouraging a greater level of competition between areas were cited as important. The regularly stated desire for more devolution of powers and resources was mentioned and the model of German federalism through the autonomous regional ‘Lander’ government was suggested as a template we should try to emulate.

Can technology and the use of the internet reduce the north south divide?

The evidence of the last two years has shown that the internet is threatening to break the rule of distance, as people increasingly work remotely, reducing the need to be close to the place of work. This is enlarging labour markets, and removing distance as a barrier to job opportunities. For example, someone living in say, a declining northern coastal town can now access a job in London on the basis of being prepared to withstand the long commute for only one or two days a week in the office.

There was general disagreement with this hypothesis, with a counter argument being that the accessibility of higher paid jobs could result in out migration from traditionally poorer areas into more aspirant places, resulting in a gravitational pull back to the South East.   It was also suggested that there is currently a reversal away from home working taking place with many returning to the office for human interaction and social culture. In relation to the argument that suburbs were capturing the spend displaced from city centres, it was suggested that this was exaggerated. And finally, it was argued that the trend of remote working actually risks increasing the divide as those communities not able to access technology based jobs could be marginalised by not being granted the same freedoms brought by remote working cultures.

80% of office buildings we occupy could be obsolete by 2030. How do we deal with the scale of obsolescence in our urban areas? What are the repurposing solutions of the future?

As a result of environmental legislation it is predicted that approximately 80% of office buildings will be obsolete by 2030 (unless adapted) as a result of the energy efficiency requirements that come into effect at that point. It is inevitable that there will be widespread obsolescence as a result of retail spaces being vacated, offices buildings becoming obsolete and being unviable for retrofitting, and a general consolidation of town centres. 

There was general agreement that the level of obsolescence of land and property is set to grow and that it should become a priority for both the public and private sectors. Whilst obsolescence presents some major risks for assets, landlords and funds, it is also considered to offer some opportunities, for example by repositioning assets to new markets and opportunities. 

There was an interesting debate about the balance of roles and responsibilities between the public and private sectors in addressing obsolescence, with a question mark regarding the extent to which the Government could or should, ride to the rescue of landlords of declining and failing assets which are turning into liabilities. The widespread experience of shopping centre owners trying to offload their declining assets onto local authorities was cited. 

There were a number of opportunities discussed, including where local authorities own the freehold of shopping centres on a ground lease structure and, despite the falling occupancy and rental roll, receive a fixed minimum ground rent.  The surrender of such commitments via reverse premium from long leaseholder, could offer an opportunity to fund repurposing projects. Another opportunity cited was the prospect of using proceeds from carbon credits to fund retrofit and repurposing schemes.

In respect of future repurposing uses, there was a sense that there are new uses and activities which towns and city centres could be repositioned for, such as R&D and innovation districts linked to universities, health, fitness and leisure, all of which are sectors that are more resilient to the changes impacting other sectors and are experiencing growth. Alongside this, a refocusing of office and retail uses on ‘interactions’, and new mixed use buildings which blur the boundaries between live, work and leisure are seen as an integral part of the future city centre.

Is de-urbanisation inevitable in some areas? Should we accept and embrace managed decline in certain circumstances?

Is it realistic to think that we can sustain and regenerate all our major urban centres given the pressures of decline facing many of them? Can we afford to fund the level of public sector investment required to regenerate all places? Should we replace some vacant areas with parks, green spaces and urban forests, thus enhancing the quality of the environment, and facilitating carbon off setting, whilst resizing those urban places to align more closely with reduced demand?

This provoked the strongest reaction and most disagreed both with the hypothesis that de-urbanisation in some areas is inevitable, and that we might embrace managed decline in certain circumstances. There was a view expressed that cities and large towns remain the pre-eminent growth hubs for wider regional economies and thus should be cultivated and supported to sustain that function. There was also a perception of conflict with social inclusion and sustainability objectives in allowing urban areas to decline given the accessibility of urban centres by public transport and spatial isolation of some of our most deprived communities.

Automation of industries and jobs threatens widespread redundancies which could widen spatial inequalities. How can real estate deal with this?

The prospect of all of us becoming obsolete as a result of our roles being taken over by robots provokes fear and the excitement in equal measure! Whilst having more leisure time might sound attractive, having limited disposable income to spend in that time surely should curb our enthusiasm! One solution suggested was to introduce a ‘robot tax’ which could fund a universal base level of income to ensure that all are able to enjoy the additional leisure time that automation could create.

There was a general sense that automation actually presents an opportunity to enhance productivity and output and that we should all be better off as a result of the wealth creation facilitated by automation. In particular, it is seen as a solution to the current skills shortages and difficulties in recruitment.

However, it was acknowledged that the extent to which we are all able to benefit depends on how the wealth created is managed and distributed. In the short to medium term, the sectors and occupations most exposed to automation are those lower skill activities associated with low income areas and communities, and this is a matter that Levelling Up needs to address by placing education and skills at the forefront of regeneration plans.

How does the machinery of Government, and the relationship between public and private sectors, need to be redefined to deliver the challenges facing our urban places?

For many in the room, this question provided an opportunity for a cathartic release! There was a general agreement that radical changes are needed to deliver the challenges of Levelling Up including a long term, counter political cycle commitment to delivery.   Of the more provocative comments made was a query as to whether the extent of the challenges associated with Levelling Up have been properly understood by those defining the policy.

Among the ideas discussed was the principle of a greater level of stewardship being taken by the public sector to directly fund certain asset types where conditions allowed. There was some discussion about the fact that private funding is driven by IRR where the speed of return is often at odds with the long term, patient capital funding required for complex regeneration schemes. Among the funding solutions discussed were patient equity-based funding structures, area wide funding models and value capture mechanisms, and raising private money through bond issues or ‘regeneration wrappers’. 

There was a discussion regarding the case for more single minded delivery vehicles such as development corporations and regeneration companies with broad based powers and resources, which could arguably be more effective than existing structures at achieving the outcomes sought, and that Homes England could become more directly interventionist in this space. There was also a view that the approach to prioritising public sector investments via HM Greenbook principles needs to be overhauled to realign with the needs of Levelling Up areas struggling to hit BCR metrics based on Land Value Uplift models.

Summary

Putting ‘Levelling Up’ into a debate about how our cities and towns are changing makes for a thought-provoking discussion. Arguably the mega trends shaping our cities add a further level of complexity to how efforts to Level Up might need to play out. My personal view is that the impacts of the various trends present opportunities and challenges for real estate which both the public and private sectors need to find new models to address. 

We will shortly be launching C&W’s full campaign on the Future of Cities so watch this space for further insight and opinions on the implications for real estate of urban change.