Waiting in a café to meet a research counterpart recently, I was struck by just how much work-related activity my fellow coffee aficionados were conducting. Several were typing away furiously on laptops, one was talking business - rather too loudly - on the phone and a number of meetings were in progress. Every customer was engaged in some form of work.
Traditionally, buildings have been divided into distinct sectors - such as retail, industrial, offices or hotels. However, they are becoming increasingly difficult to categorise. Take my café experience for example. A conventional view would classify this as a ‘retail' asset but, as my visit shows, the role of city centre cafés is more akin to that of an office. The fact it sells coffee is secondary to its primary function as a place to get business done.
Examples abound in other areas too. The sole purpose of shops used to be to make sales, but they are increasingly cultivating in-store experiences - whether through interactive displays, pop-up food stands or make-up studios. In addition to fitness classes, an increasing number of gyms are offering food and beverage options, as well as apparel. Are these leisure assets, or retail assets?
The geographical independence of many of today's office workers, brought about by advancements in mobile technology, has resulted in the home becoming a quasi-office and the office evolving beyond just a workplace. Modern offices are part meeting space for transient workers, part social space for employees. This is reflected in the broad array of non-office uses modern offices provide - everything from restaurants to fitness studios to medical suites.
Even logistics are not immune. Parcels are no longer only dispatched from warehouses on industrial parks - retail warehouse units and shops are also being used to fulfil online orders. Real estate uses are blurring everywhere.
As assets become more mixed in use, the concept of an area being an office location, a retail location or an industrial location is becoming outdated. The primary driver of this change is a consumer demand for the living, working and amenity space to be provided in as close proximity as possible, for their convenience. This expectation reflects the blurring of concepts such as ‘work' time, ‘home' time and ‘shopping' time - which have been eroded by technological change.
This trend is illustrated in the emergence of ‘sheds and beds' - urban logistics co-located with residential uses - as seen at the Segro redevelopment of the former Nestle factory in West London. London's Kings Cross is a case study of urban regeneration underpinned by the delivery of a broad mix of uses, while the Shard exemplifies vertically integrated mixed-use buildings containing offices, hotels, retail, leisure and residential under one roof.
Real estate investors must consider the extent to which buildings provide a mix of uses and their ability to do so in the future. This can create capital growth opportunities. For example, adding a ground floor café within an office lobby could both provide an additional income stream and make the property more attractive to occupiers.
More broadly, the blurring of uses means the importance of micro location has increased. Assets must be viewed in the context of other uses in the wider locality. Buildings or locations unable to align to the blurring of uses will increasingly underperform. Divergence of returns is thus likely to be a long-term trend.
Analysing real estate performance will become more challenging as assets are harder to characterise and benchmark. As a result, Mayfair Capital recognises the need to apply new strategies in order to capture real estate outperformance in a more polarised world and is responding through its thematic investment approach.
Tom Duncan, senior analyst - investment strategy and risk at Mayfair Capital