13. Ten for Twenty - Top Global Trends with Avison Young's Dr. Nick Axford

Welcome. This is Real Estate Investing Live from New York with James Nelson, the principal and head of Avis & Young's Tri State investment Sales Group. In this program, you'll learn about the world of commercial real estate and find out why it is one of the largest investment opportunities in New York and around the world. Now, here is your host, James Nelson.

Welcome. This is your host James Nelson of Real Estate Investing Live from New York. It is time time for our 13th show, lucky number 13. We are on a roll. This past week I hosted two dozen students from my alma mater, Colgate University and was asked the question, what's the best way to learn about the business? Well, you're doing it right now. Listen to these shows, go back, start from the beginning. If you're just joining us now, you can find these shows on itunes, Spotify. I really appreciate the support. Today's show we're going to be going macro. We're going to be talking about the top 10 trends for 2020. We have Avison Young's global head of research coming in. Before you start investing, it's great to get into the trenches and think locally, but also you've got to think macro. So we're in for a great discussion. And at the end of the hour, I will be doing a recap of the New York City sales market for last year and we're going to start doing spotlights in the future so you can also find out what is going on in other cities across the US before we get to that though, it's time for our week in review powered by the Daily Beat in sales, a JV that includes Blackstone will buy the real estate of the MGM grand and Mandalay Bay resorts and casinos on the Las Vegas Strip in a deal valuing the properties at $4.6 billion. The sales according to the Wall street part of the MGM's asset light strategy intended to pull cash out of its real estate and focus on new business areas including sports betting, entertainment and a casino development in Japan. If you all have not read Steve Schwartzman's what It Takes book, founder of Blackstone, highly recommend it in other sales Industrial continues to be white hot. Prologis acquires 150 E 52nd St and Sunset park from Dovert's DH Property holdings for 60 million 2 acre site with 130,000ft Bob Chapman from Centerpoint Properties has acquired the leasehold interest in a massive industrial portfolio in flatlands from Basin's rent our development for 134 million. This warehouse portfolio encompasses almost a million square feet and Then lastly, Nightingale Properties and Wofford Capital Partners in Werner have closed on their acquisition of the leasehold interest of 111 Wall street from Zurich Insurance Group for around 175 million. This 24 story office building was formerly leased entirely to Citigroup. They plan a $150 million renovation for the property which is financed by SL Green. Moving to leasing now, Rolex has signed a 3,950 square foot lease on the base of Mintown Equity's 29th Avenue in the Meatpacking District. The corner retail space rented for an approximate 2.1 million square feet. And I guess in what's not leasing, WeWork only signed four new leases covering 184,000 square feet of space in the fourth quarter, which is a 93% drop from its average of 2.54 million square feet, according to a Forbes article. So clearly they are looking to firm up their balance sheet. In other news, by the end of 2021 the city will have more than 144,000 rooms available to visitors and 3,900 of these will come from the 20 new hotels that opened in 2019. More are on the horizon. Hotels in the construction pipeline include 56 in Manhattan, 21 in Brooklyn and 37 in Queens, eight in the Bronx and one in Staten Island. According to NYC & Co. In the Post article, the city's official tourism office 2019 saw a record 66.9 million visitors from both home and abroad. I believe that might only be surpassed by Orlando. I had heard that they attract close to 70 million visitors a year, but you might want to confirm that. Okay, and then in final news, Bed Bath and Beyond has signed a deal to sell roughly half its real estate to a private equity firm in a leaseback in the space that will generate more than $250 million in proceeds for the troubled home goods retailer. The 2.1 million square foot of space sold to Oak Street Real Estate includes the New Jersey Headquarters distribution facility and roughly 1500 stores. Bed bath and beyond will continue to occupy under long term leases, according to the Wall Street Journal article. And I guess then in politics, Senator Lindsey Graham is co sponsoring a bill that would ease some new restrictions on the EB5 program. The bipartisan bill is backed by Governor Schumer and would. Excuse me, Senator Schumer and would lower the minimum amount of for foreigners investing outside low employment areas by allowing more investors to move to the U.S. the program currently allows foreign investors to obtain a U.S. green card in exchange for investing at least 1.8 million into a Job creating development project. The new legislation would lower the minimum investment outside low employment areas to $1.1 million and extend the program to 2025. So that is it for the week in review. We're going to take a quick break from our sponsors. Please stick around and we will be right back. Interview with Dr. Nick Axford.

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Welcome back to Real Estate Investing Live from New York. This is your host James Nelson. And now you all are in for a big treat. We have Dr. Nick Axford joining us from our London office. Nick is our new Principal and Global Director of Research where he oversees our firm's research operations. He was formerly global Head of Research at cbre. Nick, great to see you. Thank you so much for making the trip across the pond to see us.

Great to be here James.

Yes. So really excited about this new initiative that you've done for our firm in the 10 trends that we're advising investors need to know for 2020. This is very on point for what we're doing with this show. Educating investors and thinking about some of these topics on a macro basis. Then we're going to look forward to digging into the details. Starting with the number one trend. I believe you surveyed all of our offices, 120 offices around the world. Really saw what was on our investors minds. It seems like this low interest rate environment. How long is this going to go on for and what should investors be thinking about in relationship to that?

Yeah, we called the trend lower for longer and I think probably we should have called it lower for even longer. It's something that we've been talking about for feels like getting on for over 10 years now. And in terms of how long is it going to go on? Well, many of us would have expected it to have come to an end by now, but the key issue is that economic growth remains broadly balanced. What we're not seeing, despite very low unemployment, is any real signs of inflation picking up meaningfully. And we don't expect to see that in the near future. So consequently, interest rates are likely to stay lower. And that has some quite significant implications for the investment environment, as we're already seeing.

So one thing that you mentioned in the report was that, yes, pricing is starting to feel very full as a result of these low interest rates. But you're still suggesting that investors should still be optimistic about buying for the long term. So why would you say now is still a good time to be buying?

Well, I think it's a good time to be buying because of the characteristics of real estate, which are exactly what many investors are looking for, which is long term secure capital value, secure income, contractual income, and a real asset. So that even if the tenant that's in your building goes bust, you've still got a real asset which has inherent value and you can re let it. But we don't think that investors should be going in blindly. You need to be conscious that pricing is at quite a high level. And so you need to be thinking very carefully about your financing strategy to make sure that you're not going to be exposed if conditions in the capital markets and the credit markets change at some point in the future when you face a refinancing. And you need to not just be doing the same old thing that everybody's been doing year after year and paying an ever higher price. You need to be looking around at what are some of the opportunities in new sectors, in new parts of the market that are perhaps a bit less crowded.

No question. And tying into that at the same time is concerns about where we are in the cycle. And we always get asked this question, what inning are we in? How is this compared to the last go around? So how do you answer a question like that?

You all play cricket.

You're not going to use the ninth inning. Your cricket matches can last three or four days? I believe so.

Well, yeah, well, even cricket matches come to an end in the end, at the end of five days, whereas your baseball basketball games can just go on to infinity in theory. And kind of we've been saying we're in sort of the bottom of the seventh for a long while. And now it feels as though we're well into about the eighth inning of overtime. I think the key thing is that investors need to be thinking long term, need to expect the unexpected. I mean, from our point of view, the most dangerous thing in the world is when everybody thinks something's a one way bet. I think the biggest risk at the moment is everybody's expecting that interest rates are going to stay low, not just for an extended period, but forever. So we're advising investors. Yeah, we do think interest rates are going to be low for a while. But stress test your portfolio, think about where your risk is, think about where the potential vulnerability is, and put in place a strategy to mitigate that. And as long as you go in with your eyes open, there are still good opportunities out there.

Perfect. Okay, so that brings us to trend number two. So how does populism change the dynamics? You call it power to the people.

Yeah, I think, you know, really this came to the fore, I think in 2016 when we had the Brexit referendum vote following on from the inauguration of Donald Trump and a sense that politics, big picture politics really had changed. And if you ally that with a lot of the problems that we've seen in many of the European countries, you know, the data from people who are looking at populism shows quite clearly that around the world we have seen a steady strengthening in populism and populist success in elections over the last 20 or 30 years. And I think the thing that's notable to us is less that we're going to see the kind of radical government changes, for example, that we saw in Greece, there were fears that that might be seen in Europe during 2017, 18, that didn't really come to pass. But what we have seen is big picture, single issue politics. So Brexit in the uk, the Green Party in Germany, really succeeding in capturing the mainstream agenda. So that even if those parties don't themselves get into power, they're having a significant influence on mainstream politics. So the Brexit Party never won power, but they still ended up achieving their aims. And from a real estate point of view, the reason we think that this is quite interesting is that the battleground is kind of shifting from national to local, that what we're seeing is as part of this sort of popular uprising is too strong a word for it, but certainly popular protest, vocalization and organization using social media and physical protest, we're seeing issues coming to the fore, like climate change, but also rent control. So here in New York, the protests, and it's not just In New York, we're seeing it in Berlin, we're seeing it in London. Protests against the level of residential rents resulting in local governments taking action, which is materially affecting the outlook for real estate markets. So everybody involved in real estate, whether you're a developer, an investor or an occupier, you need to be keeping an eye on what's going on in local politics and expecting that this could end up with some legislative change that could often affect the real estate market.

No question at all. If you ask New Yorkers about what happened to Amazon here, you certainly have to be watching social media as well. Things can happen very, very quickly for our listeners out there who are investing across the US or even around the globe. I know we have had some international listeners tuning in. It's really important to understand the lay of the land and how that could impact the dynamics. Number three, de globalization. For a while we talked about all these increasing global capital flows and what's going on with Asia. But what do you mean by de globalization?

Well, I think if you think about the major forces and the kind of the paradigms that have been driving business and the economy, the second half of the 20th century was characterized as a period of very rapid globalization and the integration of some previously separate trading blocks, particularly the former Soviet Union and China and much of Southeast Asia and the Southern Hemisphere into the global trading environment. So we saw this very rapid expansion of corporate activity, globalization of capital markets, and from a real estate market point of view, big globalization of capital flows. But I think if you take a step back and look at what's driving the world, actually that period of peak globalization has certainly passed. So the pace of future globalization is going to be lower. And in some areas we're actually seeing a bit of a reversal. Part of that is cultural people reacting against the kind of common globalization of culture. And every single shopping center around the world, world being filled with exactly the same retail brands. Part of it is political. Whether it's Donald Trump or anti immigration protests across Europe, we're seeing a sort of political shift away from globalization is good and back towards a more sort of regional, local approach. And if you look at the business agenda, some of the economics that drove offshoring and outsourcing, sourcing to Asia because of cost rises there and changes in the way in which organizations are doing business, actually quite some of that activity is starting to come back and being reassured into the region or even local areas. So we're seeing a kind of shift in the process. It's not the end of Globalization, but it certainly is a change in the overarching dynamic and that's having some impacts on what's going on in local property market.

No question. I know we're going to get to the rebirth of retail coming up as well. But when you talk about locally sourcing and even if it comes to logistics, it's no longer about a company's strategy around the world, it's then how do you really focus in and deliver the goods and really making sure that you have the local infrastructure. It would seem also that, that there's a trade off. I'm sure when you're dealing with multinational companies, they're thinking about finding that balance of cost efficiency, but also effectiveness for their business.

That's absolutely right. Producing and sourcing locally allows you to be more flexible. It's now often cheaper. It's seen as more socially acceptable if you're reducing the carbon footprint and the transport miles involved in the products and, and the services that you're sourcing. So, you know, as you say, it's a slight rebalancing of the drivers. And from a logistics point of view, we're likely to see a bit more emphasis on local and regional supply networks rather than just linking to the west coast ports and sourcing everything from Asia.

So number four, building resilience. And we're talking about how cities have responded to climate change. I've seen this firsthand in New York with our Climate Mobilization act, Local Law 97. Great intentions to make sure that we develop in a more resilient and sustainable manner as far as how they're going about doing it. I mean, I guess we can put the politics aside, but talk about. Because there were some really interesting statistics in the report about the need for investment. I think you referred to a UN study and then also about the magnitude of some of these local disruptions that we're starting to see.

Yeah, yeah. I mean, if this was a phone in, the lines would be jammed with people screaming, we've got a climate emergency. And those claiming that there isn't, I think, you know, there is clear evidence, and particularly for our major cities, many of which are located on major rivers or ports or both, that, you know, the number of extreme weather events certainly has been rising over the last 20 or 30 years. We're seeing the impacts coming through and the cost of those events is rising. And so interestingly, whilst national governments seem to be struggling to come up with effective responses, possibly because of the scale and the complexity of the issues involved, what we're really seeing is major Cities at the forefront of implementing measures to deal with climate change. And some of those are independent, some of those are part of sort of broad coalitions of cities. You know, the C40 alliance that represents over 25% of global GDP at city level. And so we're seeing, you know, New York being possibly one of the poster child of this in terms of implementing, implementing local legislation for which real estate tends to be right at the forefront of this. A huge proportion, 60, 70% of emissions in urban environments come from buildings and the activities going on in buildings. So it's a key battleground. And I think the key is not only that some of the initiatives that are being launched have quite short timeframes. I mean, you know, here in New York you've got five years before the first thresholds start to kick in and find start being issued. That's not long to respond. And clearly that's going to be impacting from day one, the new construction that goes on. And of course, for investors and occupiers who are operating in multiple different cities, where you've got a patchwork of different city initiatives, it gets quite complicated, keeping track of what you have to do, where and what the legislation is and how it's moving and so on. So it's an area that's very complex but very, very important.

And you talked about the need for investment and one of the stats that you said was that by 2030, according to the UN, there's going to be, unless proper investment is made in resilience, it could cost $314 billion a year to pay for these improvements. I mean, it's kind of a daunting. But there is, I guess, a sentiment that if you don't address some of these issues now, it's not like they're going to get better.

No, exactly. And I think it's possible to look at this just as an unwelcome cost. On the other hand, there is huge opportunity here. I mean, clearly this is something that occupiers, as we've seen from Greta Thunberg and protest movements, this is something that people feel very strongly about occupying. Organisations and employees want to see these sorts of actions being taken. So occupiers are going to be looking for buildings that meet the new standards and preferably exceed them. That means that investors and developers who understand the codes and invest and develop into those codes are going to see strong demand for their product. And there is real opportunity here. There are lots of services in terms of helping companies understand what they need to do. Measuring and Monitoring emissions and carbon footprints and then helping, helping people manage those down is all huge opportunity. So it's not just a negative cost. This is actually a very important issue and there's huge opportunity in there for those people who kind of grasp it and look at it from that perspective.

Great point. And no question that many of the landlords who invest in this type of sustainability are going to see greater rents paid by companies who are looking to do right by the environment. And then there's also a cost savings piece where if you know, and we've talked about passive development and the energy savings and that's going straight to your bottom line. One of the stats that you also referred to in talking about the densification is that 70, 70% of the global population will occur in cities by 2050 and yet only 60% of that has been built. So not only do you have more and more people living in cities, but we're going to still see a lot of development that's needed. And so we need to do that in a thoughtful way.

Absolutely. And this is where clearly in many cases we're talking about retrospect fitting buildings, but there's also a huge opportunity to be developing the new generation of buildings that meet modern standards. That will be the benchmark against which others will be judged.

Perfect. Okay, so we're almost halfway through and we'll take a quick break after this one so you all can process this. This is a lot of information, but you know, it's great information as you look to build out your investment thesis and where you want to be looking and what asset class. But five, talking about placemaking, but the impact of it. There's a lot of talk about how do you program and if you have multi, you want retail and it's got to be 24, 7. But you really talk about the social responsibility of investing, which I think is a new topic maybe for many of our listeners, although I'm sure plenty of them are aware of the Opportunity Zone 8,700 areas which have been designated in the U.S. there was just new rules that came out that now give investors even a longer period of time, 62 months to complete a project. But again with the focus that these are communities that really need the investment. What do you make about social responsible investing?

Well, I think we called this section of the report Place Making and Impact because we see it as the coming together of two trends. The first well established in urban design and development. If you think about a Hudson yard, if you think about a big picture, a big development scheme, really gone are the days where you would think of putting in a single type of occupier, just mass residential with no facilities, or a whole series of office blocks with no other types of uses in there. Mixed use development, creating not just a scheme, but a place that has culture, that has feel, that has character, that responds to local community needs. So there's residential, there's retail, there's leisure space in amongst office and workspace and maybe community space and residential. So creating that kind of environment is seen as very positive. And it's a good place to, to live, it's a good place to work. Good places to live and work and have fun, create value. And that's what developers are trying to achieve. So the idea that we're creating the, you know, creating these kinds of places is well established in urban design and development theory. What's become more evident recently is that environmentally, socially conscious investors, retail investors, people like us, who are thinking about where to invest their savings, where to put their investment dollars, are looking at the credentials of the organizations and the type of funds they're putting money into and they're looking for opportunities to invest in ways that still create a commercial return, but that generate social good as well. And so the growth in, whether you call it esg, environment, social governance funds, or socially responsible investing or impact investing is the latest term which is really looking to invest in things that make a difference to people, still creating a return, but doing it in ways that benefit, have wider benefits for society. And so if you see those two coming together, what you see is investors and funds out there looking for opportunities and opportunity zones are a classic example. Opportunities to go out, create development, create value, create, but do it in a way that creates wider benefits for people and societies and communities in a way that genuinely gets close to being a win win for everybody concerned. And that conjunction of those two trends is something that we see, we think is going to start coming to the fore in 2020 and over the next few years.

So what was really interesting to me was this isn't just a principle that sounds good, but it's actually if you and you answered one of my questions about what is the esg. But if you look at funds that are targeting those type of socially responsible opportunities, the growth of those funds year over year are enormous. This isn't just something that sounds good, but there's real money behind it. I believe there's 180 top US CEOs who now have statements of purpose.

Yeah, statements of purpose that say that they're going to run their organizations not just for the benefit of the shareholders, but for the benefit of all the stakeholders. Now, that may not sound something very significant, but that hits right at the heart of the fundamental nature of capitalism and the fundamental nature of our stock markets, that the fiduciary duty of the board of directors of a public company is to the shareholders, and that's it. And the fact that there's now recognition that actually it is in the interests of, of shareholders of an organization to be responding to this wider set of imperatives. If as an organization, if you go out and use child labor in the Asian subcontinent to manufacture your goods, then you might make a profit short term. But when consumers find out and stop buying your products, that's bad for your shareholders. And if you extend that more widely, there is now recognition that recognizing the needs of wider stakeholders in the community and responding to those is part of building the sustainability of the organization.

Just last question before we go to a quick break. Are there certain asset classes which benefit from this? I mean, healthcare would be an obvious one, maybe affordable housing.

What should investors be? I mean, there's a lot of criticism of people who are going out and sort of, you know, building a leisure centre in the same way as the they would have done normally. They're not doing anything different than they would have done normally. But they're then claiming that that's impact investing. But there's no question that healthcare, aged care, social housing, education, all of these are areas where you can go out and quite deliberately set out a strategy to create a commercial return, but accept that you're trying to create wider social good as well, which does mean giving up a bit of that commercial return. And that's where the rub really comes. But nevertheless, it's something that many retail investors are prepared to put dollars into because they see that as being beneficial to society.

Brilliant. I think, as you all say, and I love how you say leisure, by the way, I think just the fact that I'm bringing. I think just the accent alone adds an extra 10 or 20 points to your IQ.

So I'm already gone from Milwaukee, but I just. Perfect.

All right, listeners, stick around for us. Just a quick minute. We're going to have a word from our sponsor and we will be right back with Nick Axford.

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The bottom line in business. Welcome back to Retail Real Estate Investing. Live from New York, this is your host, James Nelson, back here with Nick Axford talking about the top 10 trends for 2020. And for all you investors out here, these are definitely things that you're going to need to be thinking about as you look where to invest for the next decade. Number six is the rebirth of retail. Nick, this is a topic that gets a lot of discussion here in New York about the changing landscape and the need for experiential.

But.

You really dig in here, talk about how shopping is no longer about getting goods into the hands of investors.

Well, yeah, I think the key point that we're trying to make, James, is that if you read pretty much any of the press, it's Armageddon out there. Nobody's making any money. The world is all going online. Physical retail is dead. And we just think that's completely wrong. The vast majority of retailing still happens in store and is probably likely to certainly for the foreseeable future, if not forever. And there is a massive difference between shopping and buying. Buying is a transactional process and there's no question that some of that process of just getting goods that they want to buy is into the hands of consumers is best done for all concerned online and delivered to your home. But the bit that shopping, the activity, the process, much of that is as much entertainment as it is a transaction, which is why the phrase retailtainment. And if we look at what's going on in the retail world, sort of Phoenix, like from the ashes, we think that you can see lots of different signs of highly successful retail activity. That gives us a clue as to the direction that physical retail is going. There's no question that it's challenging out there and models are changing and margins are under pressure. And in this time of transformation, there are real challenges both for retailers and for retail investors. But we do think that the signs are there that the way in which retailers are responding in different ways gives us a clue as to the the direction things might be moving.

No question. You talk about how shoppers today want to re engage and yes, they do want that experience. As part of your presentation, you had the picture of the Microsoft showroom and you had me at the McLaren where you could sit in the car and experience that.

That's a good Example, it combines several things, but I mean, experience, experience. How many times do you get to sit inside a McLaren with technology? Because what they're offering is the opportunity to sit inside a McLaren and play a driving game, which they're trying to sell. But you do it from sitting inside, you know, in the driving seat in a McLaren. So it's.

You're not doing that at home.

No. Funnily enough, I don't have one of those in my front living room.

Okay, so let's talk about adaptive reuse, because we still have a practical issue, which is we have a ton of retail space here and in New York there's a lot of talk about the vacancy rate and how that's been growing, but also there's been a lot of new retail created as well. Not all of the traditional ground floor can continue to be retail. So what are some other uses for that space?

Well, I think the phrase about property is location, location, location. And that's kind of true. More of probably of retail than it is of any other sector. And there's no question that if you're talking about locations where the surrounding environment is not good, where there is not a thriving community, then finding uses for that space is going to be challenging. And there is no question the US is kind of overshopped structurally. So we shouldn't be surprised that some of that space is going to go by the wayside. But equally, much of the retail space, whether it's malls out of town or whether it's in town destinations, much of that space is extremely well located. There's good footfall outside it. And whether it's adjustment to more food and beverage type retail, often it's a change in the type of retail that's in there, getting that experience in providing something that you don't find on every other street corner or every other shopping centre in order to attract people in through the door rather than letting them walk past on the outside. But in some cases it's true that whole neighbourhoods need revitalising and their retail probably will have a part to play. But maybe some of that retail space does need to shift into other uses. Well said.

So, number seven, let's talk about flex. I don't know if that was. Yeah, that's what I caught that actually, you didn't. I like that you research people are a little cheeky, aren't you?

Oh, well, you know, we recognize that we need to appeal to real humans at times.

Good, good. Okay, so there's been, again, this is another topic that has been all over the media. Clearly WeWork questions about how that company is going to continue to occupy space. But I love the point here that you said that coworking is here to stay. This is not just a fad. And in fact, you see this growing. So talk about that.

Yeah, completely. I mean, and in some ways it's similar to the retail story that all the headlines over the last three or four months have been pretty negative and you'd be forgiven for thinking that the whole sector is dead. Actually, the fact that the particular business model of one admittedly very high profile operator has come under a bit of scrutiny doesn't mean that the whole sector is dead at all. And if you look at the underlying drivers behind WeWork's success up until, you know, up until recently, and behind the huge expansion of many of the other players that there are in this sector who are doing extra so, many of whom are doing extremely well and performing very successfully. It's the fact that the world is changing and it's changing very fast. We're seeing more technology coming into business. We're seeing the business cycle shortening. We're seeing occupiers less certain about what the future holds, wanting to take advantage of opportunities, but not wanting to do it in the way that they would have done traditionally, which is to have to go out, find an office, sign a three or five year lease, then find some furniture to put in it. They're needing to respond quicker than that and they don't want the hassle of having to set up and hold and run and manage their own space, not across all of their portfolio. They'll do that for their headquarters or for their major core buildings. But occupiers are going to be looking for, we think, between 15 and 30% major occupation, 15 and 30% of their occupational portfolio to be held on some kind of more flexible basis.

Currently, coworking accounts for about 5% of the office stock. And I believe your report said this could triple, quadruple in the next 10 years. This is a pretty big prediction here. That also begs the question, what happens to traditional office space?

Well, I think what we're saying is that as more particularly larger occupiers increase the amount of space that they want to hold on more flexible terms then in the types of major downtown markets and major cities where these occupiers congregate, we're going to see a higher proportion of space being turned over to flex space. Because we think about it co working. It's a combination of independent startups, people who would have been sitting in coffee shops and now able to work somewhere else alongside major occupiers who are taking quite big chunks of space. And that's the element that we think is going to grow that sort of corporate demand. We're going to see challenges from a number of areas. We're going to see co working operators and flex space operators because co working is only one form of flexible space. We're going to see them continue to expand and grow and change in some markets, and New York's a good example where we've seen very, very strong growth in the last couple of years. We may well see that slow down or even reverse a little bit over the short term. But we're also going to see conventional landlords looking at incorporating a flexible offer into some of their existing buildings or developing brands or whole buildings that they turn over to this so that they can compete with the specialist operators. So I think this is more about the way in which the office sector as a whole is changing and we will see more hybrid type models emerging and conventional players taking on board the lessons of the flexible working revolution rather than it being just one versus the other.

It's a great point and clearly you'd have to believe that the Tishman Style and Silversteins of the world who are offering coworking is an opportunity for them to get a look at a company in their early stages. I'm sure when it's time for that company to grow and find more permanent space, that they've got plenty of opportunities to show them.

Good landlords need to be looking at, thinking about and working with their occupiers. That's what they do. That's their stock in trade. This is part of that strategy.

Another really interesting stat that I found in the report was that London, it appears, has almost three times the amount of coworking locations. I think London has over 1,400 locations. New York at 550, Hong Kong next at about 325, and then Paris and Shanghai. You look at London's office market and if it can support that many locations, you would think that there's still more room to grow, certainly in some of these, these other markets.

Yeah, absolutely. And you know, the London market has been one of the markets where we've seen this offer grow very intensely. That's partly to do with the structural characteristics of London that, you know, you've got, you know, lots of demand concentrated into a very small area. And, you know, so we've seen a lot of operators emerging to compete with some of the bigger Brand names. So a lot of space on offer in that market.

Perfect. Number eight, AI. And we're not talking about artificial intelligence, we're talking about augmented intelligence. So what's that?

Yeah, the term that we think is going to come into common parlance is a cobot, which brings to mind images of sort of, you know, C3PO sitting next to you at your desk and you know, the robot does the hard work and you get to do all the fun stuff. Stuff.

So I'm not out of a job is what you're telling me.

You're not, you're not out of job? Not completely. Not completely.

Okay.

And, and sadly it's not likely to be literally a robot sitting next to you. But you know, if you think for, for many of us in our day to day jobs, there's a mix of creative, fun, strategic, this is real sort of, you know, the bit, the bit that a lot of us think about as being really fun, bit of doing our job. But there's also the blocking and tackling, there's the regular data review, data work processing, analytics type stuff which is not fun and creative, it's just repetitive. And for some people it occupies the vast majority of their job. If you think of back office functions in insurance and banking and so on, those types of activities are already increasingly being automated and done by robots. Not things sitting there tapping at the keyboard, but computer programs. And what we're seeing is clearly that's going to become ever more widespread and that will have big real estate implications for those back office type locations and offshoring. Rather than sending something to be done by a human in India, it's cheaper to send it to be done by a computer in Phoenix.

Does that mean that the office from requirements will shrink in some of those secondary and tertiary markets? Is that a concern?

Absolutely, absolutely. Yes. This is the equivalent of sort of automation of manufacturing and so on, which reduces footprints. And clearly yes, it will have some implications there, albeit that at the same time, you know, much of this industrial, you know, the fourth industrial revolution is creating new jobs, new industries and new professions. I think the area that we do find that this is really changing is as I say, not people whose job is just pure data processing, but for the many of us where it forms part of our job, the cobot, the computer program, the app, is going to form part of the toolkit that we use which hopefully will reduce the amount of day to day drudgery that we have to do and frees us up to be more productive and have more fun doing the bits of the job that we probably enjoy.

The next number nine.

And this is kind of the, I don't want to say the counter, but the other piece to this is the wishing well and the war for talent. Even though maybe in some of those secondary tertiary markets maybe there's going to be less need for space because you're going to see less people in the traditional office format. But meanwhile in the cities, there's a huge demand for talent. With seeing it here in New York, Facebook now up to a million and a half square feet, you've got Apple actively looking, you've got Google saying they're going to add 1,000 employees a year. How are companies going to attract them?

Well, it's really interesting. This is where wellness, we think, is one of the new fronts in the war for talent. If you talk about to consultancy firms, if you talk to a lot of real estate firms, a lot of work being done on where can we find the talent, you know, which are the markets, which are the places that we can go to, the good universities where we can find, you know, good cost of living, you know, good standard living. And we can, we can get the right talent at the right cost. But if you talk to the occupiers who are trying to attract that talent, they say, great, that's the easy bit. How do we convince, convince the talent to come and work for us as opposed to our competitors, and once we've got them, how do we keep them? And it's easy to be cynical about this kind of thing, but wellness is really one of the areas where good occupiers can differentiate themselves. This started with, you know, offering facilities, you know, flexible working approaches, which is very, very important. You know, bowls of fruit being put out in the morning, healthy food available in the cafeteria, massages at work at lunchtime kind of thing. But I think it's going beyond that. And what it reflects is that particularly the younger generation are really looking for organizations that genuinely care about their people. There is a true win win here. Happy employees who feel valued and looked after are likely to be more loyal to the company. They are likely to be more productive because they're happier. They're likely to have a better attendance record because they get sick less. And that's, you know, companies that are genuinely taking that on board. That's not a cynical thing. It's a win win for everybody concerned. And I think the area that is really emerging as a big focus is the role that the physical environment plays. So, you know, making sure that there are mixed Use environments so that people are moving around the office, putting staircases in the right locations to encourage people to walk around the office rather than just take the lift. Making sure that there are bike racks and catering facilities that offer good quality food. All of these things come together, together with the management style of, you know, live work, life, work balance. All of that comes together to help employees look after themselves and that's good for them and it's good for the organization.

And I believe that there's now scores also where you can actually rate the quality. And much like LEED designates how sustainable a property is, there's now, well, certification that's actually talking about the quality of light air. Is it walkable in all these attributes that. Because again, when you look at the amount of time that sadly we spend indoors, how do we make it the most optimal?

Absolutely. And a lot of these things come together. We were talking previously about place making and so one of the things that people are looking at is the ability to integrate the building into the local environment so that you're not just putting in catering facilities in the basement, but ideally you're locating yourself as an organisation in an environment where people can go into a local town community centre and take advantage of local retail facilities at lunchtime. Buildings that use natural ventilation so that you know you're getting fresh air into the building but you're not adding to the carbon footprint by having huge air conditioning and you know, carbon emissions as a result of trying to keep the environment good.

Okay, so that brings us to number 10 and there is a bonus. So stick around. This, this isn't like the old LP where you have to wait 10 minutes and then at the end of the record you're going to hear it. We'll hit that right next. 10 is heavy lifting. This really has to deal with logistics. A lot of investors might be thinking about the need to get product out the door, but your commentary here in the report talks about the need for the reverse, which is the return talk about that.

I think logistics are, has been the darling of the investment, I mean along with multifamily here in the US. But for the last 10 years logistics has been kind of the darling of investors around the world. The headline story is Online retail revolution massive boom in delivery required and logistics. So that's driven the development of logistics networks for retailers and third party logistics and this sort of network of, of enormous great big Amazon and other warehouses populated by two people and 1,000 robots. And actually nothing could be further from the truth. Whilst automation is growing in the logistics sector, actually the vast majority of warehousing, particularly warehousing that's related to online retail, is hugely labor intensive. And that's a challenge. It's a challenge in an environment where margins are very tight and where unemployment is at record low levels. So one impact that we're seeing is occupiers looking for locations where they can try and find the workforce that they need. We were talking in one of our other trends about wellness and we're seeing logistics operators and warehouse operators incorporating the kinds of wellness and activities for their employees because they need to attract employees exactly the same way as other sectors do. So those challenges are very real. What we're also seeing is in addition to sort of last mile retail, which is the thing that everybody knows is the big opportunity, but is also reverse logistics, that one of the defining features of online retail is overall ordering, people don't tend to walk into a shop, buy seven pairs of shoes, thinking that they're going to return five of them. But online, in some segments of retail, up to 40% of what gets bought ends up being returned. And that creates a huge problem for retailers, a logistics problem, because that product has to be reintegrated into the supply chain, otherwise it has to be completely wasted. And that's a very labour intensive process. So there are significant changes going on within the logistics industry, working out how to cater for those high levels of returns which are only actually going to increase in terms of total dollar volume.

That statistic of up to 40% of this e commerce merchandise being returned, that blew my mind. So I guess it's not just my wife who does that now. It's finally the bonus portion. And this is the, is this the Elon Musk portion of the interview where you spark up and tell us your thoughts on future growth?

It is, this is, this is where we expand our minds to encompass new opportunities. And it's the cannabis industry. And I know everybody, everybody at home will be smiling and memories of Bill Clinton and not inhaling. But you know, the point that we're making is that since those days where it was kind of slightly radical for any public figure to admit that they ever even knew what cannabis was, we've seen a significant social easing in terms of attitudes towards cannabis. You know, Canada probably creating the biggest headlines with full legalization. But actually in many other parts of the world, what we're seeing is legalization for medical use. And it's very rare that you see a kind of fully fledged industrial industry in the shadows, suddenly coming out into the Big wide world and it creates huge opportunity. If you think about cannabis as now a legal industry, from research and development, cultivation, then the processing and manufacturing of a whole range of different products through to distribution and retail, that's a huge new industry that is coming out into our cities. And the Canadians have led the charge in terms of venture capital funding and the big organizations. And if you look at several of those large Canadian companies, you look at their footprint, where they're operating, touches markets right the way around the world, whether from different parts of that supply chain, including many countries where cannabis use isn't either for medical or recreational use, isn't currently legal. So we do think that legalisation is coming. It's certainly being talked about, certainly for medical use, but even for recreational use. It's being talked about in many countries, including the US and the uk. It's something that is going to come, but well in advance of that, there are real opportunities there and it's something that for some investors it's well worth looking into because there are real real estate implications.

There's no question about the footprint, the expanding footprint. I mean, if you, your report references Canopy, which is one of the largest cannabis companies in Canada, which now occupies 5.4 million square feet. And if you look at what's going in the US, you talk about venture capital now reaching $1.6 billion. Invest in the space. And this is still not all states have legalized, but we're clearly just scratching the surface here.

Well, with the, with everybody chasing the next tech unicorn, a different strategy is to look for an industry that is perhaps being overlooked because of a historic image and that might not be justified. There's great growth potential there.

Perfect. Well, we'll go out on that. So, Nick, thank you again for joining us today on the show. Really fantastic stuff for our listeners to think about and take us into the new decade. Thank you again.

Thanks, James.

Foreign.

Thank you for tuning in this week to Real Estate Investing live from New York. Please join your host, James Nelson for another program next Tuesday at 7pm in New York, 4pm Pacific Time on the Voice America Business Channel. All shows are rebroadcast Wednesday mornings at 7:00am Eastern Time, 4:00pm Pacific Time, as well as always on Demand. We'll talk again next week.

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