1、March 2023Real Estate PracticeSix new imperatives for real estate playersHigher inflation,higher interest rates,and other challenges mean that the real estate industry needs new paths to success.by Sophia Braes,Daniele Chiarella,Aditya Sanghvi,and Brian VickeryIf you build it,they will come.For deca

2、des,thats been as true for well-located office,retail,and residential real estate as for the baseball field in Field of Dreams.But today,paradigm shifts,higher inflation,higher interest rates,and climate change are forcing real estate investors and operators to face a fraught reality:today,if you bu

3、ild itor buy itin the usual way,they might not come.It goes without saying that the COVID-19 pandemic upended where and how the world uses spaces.In some regions,office attendance is still dramatically lower than it was before the pandemic;in the United States,for example,it hovers at around 50 perc

4、ent.1 Consumers have returned to brick-and-mortar stores2 but are shopping closer to home.3 Greater expectations for same-or next-day shipping have increased demand for industrial square footage near the places where people live and work.Perhaps even more transformative than altered demand is the fa

5、ct that occupiers have a new set of needs,beyond what real estate companies have traditionally provided.Hybrid work and omnichannel sales require that landlords supply creative physical designs,as well as innovative services and solutions.Tenants,lenders,and other stakeholders increasingly look for

6、buildings that play a role in fighting climate change.Digital sophistication has become essential to help real estate players act more quickly and make wiser decisions,to enable emissions reporting,and to track and analyze how space is used.Complicating the panorama is the fact that after a decade-l

7、ong growth market,capitalization(cap)rates have expanded across sectors.4 Interest rate hikes,5 combined with higher inflation in many parts of the world,6 have dramatically altered the financing costs and expected returns for owners,developers,and managers.Coupled with lower labor availability,thes

8、e higher costs have made development and redevelopment more challenging and less profitable.7 Further,raising capital is more difficult today than it was just a few years ago,8 since some limited partners have reduced their annual commitmentsin part because their public-equity portfolios have declin

9、ed sharply in value,so their real estate portfolios,as currently valued,exceed their allocation targets.(This is called the denominator effect.)Inflation and uncertainty about the direction of the global economy have made housing significantly less affordable,made gaining access to credit even more

10、difficult in emerging markets,and created a challenging fundraising,deal-making,and return-generating environment for real estate investors and operators.Those who invest in and operate real estate as they did five years ago may underperform and lose share.In this unique moment,real estate players s

11、hould adopt a new mindset:replacing“if you build it,they will come”with“if you operate brilliantly and please tenants,they will stay.”In the current market,the success of a real estate investor or operator hinges upon whether they adopt the following six imperatives:1.Create solutions for clients,no

12、t just physical spaces.2.Use developments to generate momentum,not merely to capture momentum.1“Getting America back to work,”Kastle,accessed February 2023.2“Quarterly retail e-commerce sales 3rd quarter 2022,”US Census Bureau,November 18,2022.3“Commissions new consumer survey shows impact of COVID-

13、19 and popularity of greener choices,”European Commission,March 12,2021.4“McKinseys Private Markets Annual Review,”McKinsey,March 24,2022.5“Central banks ramp up rates again but the pace slows,”Reuters,December 15,2022.6 Paul Hannon and Harriet Torry,“World Bank cuts 2023 global growth projection as

14、 inflation persists,”Wall Street Journal,January 10,2023.7 Austen Hufford,“Home building fell sharply in July as costs increased,”Wall Street Journal,August 16,2022.8 McKinsey analysis of Preqin data.2Six new imperatives for real estate players3.Find value creation opportunities throughout a project

15、s life cycle,not just at the end points.4.Embrace sustainability as an opportunity,not a compliance process.5.Embed digital solutions and advanced analytics in everything,not just by sporadically adopting individual solutions.6.Focus on operating efficiency,not just on income.Acting on these six imp

16、eratives will require investments or partnerships to access technology,analytics,operations,and climate science capabilities.Investors and developers have long been the stars of real estate organizations,but today its clear that the value created by people with digital talents and capabilities may c

17、ome to equal that created by“traditional”real estate people.Real estate executives face new challenges in navigating todays shifting demand patterns,the changing needs of occupiers,and a difficult macroeconomic climatewhile transforming organizations both sustainably and digitally.In this article,we

18、 examine the actions that have become crucial for investors and operators seeking a competitive edge.Create solutions for clientsWith some companies cutting back on the office space they own or rent,competition to attract tenants is stark.Over the past three years,a net 125million square feet of off

19、ice space became available in the United States and United Kingdom combined,the result of three consecutive years of more space being vacated than newly rented(Exhibit 1).9Todays competitive pressures mean that real estate owners and operators should rethink their purpose.Its not enough to offer fou

20、r walls;leading players will help tenants create workplaces that confer a competitive advantage.10 Expanding into problem solving requires a new operating model,fresh talent and capabilities,and fundamentally different uses of technology.In office buildings,this new mandate means partnering with emp

21、loyers to understand how they want their employees to use spaces.Workplace solutions could include providing energizing locations where employees want to spend time,dynamic designs that can accommodate both collaborative and individual work,and sensors to track patterns of usage,which can inform an

22、employers approach to hybrid work.Todays competitive pressures mean that real estate owners and operators should rethink their purpose.9“McKinseys Private Markets Annual Review,”McKinsey,March 24,2022.10“The Future of the Workplace,”McKinsey,accessed February 2022.3Six new imperatives for real estat

23、e playersIn retail,theres an opportunity to offer omnichannel delivery solutions,requiring real estate players to view their roles not just as space providers but as lead generators.Solutions include offering new store formats,same-day delivery and fulfillment systems,industrial locations adjacent t

24、o stores,and mobile-shopping experiences that can compete with the best aspects of e-commerce.The shift from providing a static product to providing solutions creates new business opportunities to supply,for example,technology for hybrid work,in-office digital systems for ordering foods and beverage

25、s,better omnichannel fulfillment systems,and smart-parking systems.Generate momentum via developmentForecasting the futureof industries,design tastes,or tenant behaviorhas always been among real estate developers most difficult tasks.But today,expanding cap rates,higher input costs,and lower labor a

26、vailability11 raise the stakes.At the same time,rapidly changing behavior makes traditional speculative plays less predictable(Exhibit 2).Exhibit 120222020201820162014201220102022202020182016201420122010Web Exhibit of Ofce space net absorption,200721,square feet,million Top 50 US metro areas.Source:

27、CoStarIn some markets,lower net absorption of ofce space pressures owners to create new solutions.McKinsey&CompanyUS1UK806040200204060801008060402002040608010011 Lydia ONeal,“Builders hunt for alternatives to materials in short supply,”Wall Street Journal,October 6,2021.4Six new imperatives for real

28、 estate playersTop-performing developers can intentionally create tenant ecosystems that go beyond landing an anchor tenant.Well-designed clusters have the potential to attract anchors and fast followers that benefit from being near one another.Some developments known as magnets for top-tier tech co

29、mpanies,for example,have also proved appealing to residential tenants and buyerswho may work for or with some of the on-site firms.They also attract retailers eager to serve tenants,workers,and visitors.12 Our analysis points to rewards for players that successfully curate ecosystems based on how pe

30、ople will want to use spaces in five years:in our experience,innovation hubs enjoy a 10 to 12percent average premium in commercial rents over nearby central business districts.13Invest in value creation throughout the full life cycleOutperformance in the decade preceding the pandemic required adept

31、deal making.Buying right,making modest operational improvements,and riding contracting cap rates produced strong returns.Buying right remains critical,but todays environment emphasizes operationsan area that has grown more competitive.Becoming an operating-platform owner is one critical way in which

32、 larger players are taking advantage of their scale and boosting returns.14 Platforms give tenants a consistent experience and enable leveraged investments in technology(as further Exhibit 2Capitalization rates and vacancy rates for major property types in the US,%(quarterly)Green Street data includ

33、e all historical transaction data for asset purchases$25 million across all asset classes in the top 50 metropolitan statistical areas.Source:Green Street Cap Rate ObserverIn early 2022,capitalization rates across all asset types started to increase.McKinsey&Company200520102015202022RetailIndustrial

34、ApartmentChange in impliedvaluation of net operating income Q4 2021Q4 2022,percentage points142333Ofce0246810024681012 Katy McLaughlin,“L.A.s new Playa Vista neighborhood is where Silicon Valley meets Southern California,”Wall Street Journal,April 12,2018.13 McKinsey analysis.14 Lisa Prevost,“Seekin

35、g an edge,developers and investors turn to proptech,”New York Times,May 7,2019.5Six new imperatives for real estate playersdiscussed below),as well as efficient procurement and finance.Funds greater than$5 billion,many of which are platform owners or fully vertically integrated,outperformed funds in

36、vesting less than$1 billion by 440 basis points in internal rates of return from 2009 to 2019(Exhibit 3).15 In combination,scale and vertical integration enable a consistent experience for tenants,better use of technology,and efficient procurement.Embrace sustainability as an opportunityEnvironmenta

37、l,social,and governance issuesparticularly sustainabilityhave moved from check-the-box items to value-creating activities.Real estate players can think about addressing sustainability in three ways:first,by analyzing existing portfolios through a sustainability perspective in a search for value;seco

38、nd,by decarbonizing existing buildings;and third,by building new sustainability-related businesses.Each of these will require cutting-edge digital and analytical tools.Real estate players would be wise to assess their portfolios through a climate change lens,not least because climate change is alrea

39、dy showing up in valuations16(Exhibit 4).Owners and operators that dont consider both growing physical risk(such Exhibit 3Fundraising by fund size,%of total(3-year trailing)Global real estate fund median internal rate of return(IRR),%(200919 vintage year)Net IRR to date through Sept 30,2022.Source:B

40、urgiss;PreqinScale is among the most sustainable advantages in real estate investment management.McKinsey&Company20122022$1 billion$5 billion$5 billionpercentagepoints682210464311+4.4Ofce15 McKinsey analysis of Burgiss data as of September 30,2022.16 Brodie Boland,Cindy Levy,Rob Palter,and Daniel St

41、ephens,“Climate risk and the opportunity for real estate,”McKinsey,February 4,2022.6Six new imperatives for real estate playersas floods)and transition risk(such as regulatory requirements)may underestimate cap rate expansion,the cost of reducing emissions,or both.With$7.5 trillion globally at risk

42、for climate-related write-downs,17 much is at stake.Climate analytics can help identify mispriced assets and determine whether its wisest to buy,sell,or retrofit them.Our research indicates that in a diversified commercial real estate portfolio,only 10 percent of the assets drive 80 percent of the r

43、isks and that some assets(for example,those in markets with a significant renewable-energy industry)actually benefit from the climate transition.Acquiring assets strategically and adding value through decarbonization improvements strengthens portfolios.The ability to generate returns while meeting c

44、limate objectives can also help real estate owners access more capital on better terms.Decarbonizing buildings requires investments but also opens doors to lower energy and operating expenses,as well as a potential green premium on rental income.18 The smartest operators will not only identify asset

45、s that would benefit from Exhibit 4Commercial real estate portfolio climate risk(illustrative),$billionSanitized portfolio with diversified locations across the US.Devaluation due to combination of physical risks(especially flooding,heat)and transition risks(especially lower rent in markets with car

46、bon-intensive industries).Source:Example analysis on real estate portfolio;Glasgow Financial Alliance for Net Zero;International Renewable Energy Agency;Science Based TargetsClimate change is fundamentally disrupting the real estate industry.McKinsey&Company17%$7.5$171,30070758590Value in 5years wit

47、hclimate riskValue in 5years withoutclimate riskCAGR6%CAGR10%Real estate will be valued,built,retroftted,and capitalized difer-ently because of climate changetrillion in total global property value is at risk of“stranding”(major write-downs because of climate risk or inability to decarbonize)major c

48、ompanies have committed to reducing emissions in line with the 1.5C pathwaytrillion in capital com-mitted to real estate targeting net-zero emissions in 2021Startingvalue55Startingvalue5517 Jean Eaglesham and Vipal Monga,“Trillions in assets may be left stranded as companies address climate change,”

49、Wall Street Journal,November 20,2021.18 Christian Ulbrich,“The conversation about green real estate is moving on as corporates prioritize sustainability,”World Economic Forum,January 12,2022.7Six new imperatives for real estate playersimprovements(including better insulation,more efficient windows,h

50、eat pumps,and rooftop solar)but also find opportunities to improve the economics of their net-zero pathways.We have found that the typical path to net zero is net-present-value(NPV)negative.Operators can create positive NPV-net-zero pathways by using analytics at the portfolio level to figure out th

51、e right order for implementation,which assets to invest in at what times,and how to link actions at the asset level with strategies for purchasing renewables.Operators can also significantly increase the value of their assets and portfolios by taking additional steps,such as measuring emissions and

52、communicating them to tenants,leveraging scale for better procurement,and incorporating these insights into the investment process.The climate challenge also introduces opportunities to build new businesses,such as offering emissions reduction services to other owners,generating and storing energy o

53、n-site,or providing climate resilience services to local communities.Embed digital in everythingReal estate was once an industry years behind in digital capabilities,19 but it is now catching up.Today,the largest owners are collecting and harnessing the power of their vast data troves to make better

54、 decisions and build applications that serve asset managers,tenants,and residents alike.The next phase of the industrys digital transformation requires improved change management and fundamentally new ways of approaching the business.It also calls for investments in new types of talent(including dev

55、elopers,engineers,and data scientists)to build,maintain,and enhance the tools that the transformation requires.Traditional valuation methodologies rely heavily on comparable sales.Greater uncertainty in the demand for commercial properties,the macroeconomic environment,and the impact of climate chan

56、ge on valuations all render these less effective.Players using nontraditional data and advanced analytics to value properties and negotiate leases can often move more quickly and confidently,winning more deals and paying the right price.Advanced analytics and climate analytics can both confirm exper

57、ienced-based knowledge and create new insights(Exhibit 5).In one digital-analytics-powered model we built for a US West Coast city,for example,we learned that proximity to a gas station had a negative impact on the growth of rents,but proximity to a high number of five-star Yelp-reviewed restaurants

58、 had a strong positive effect on it.Applications are not only using data to improve decision making but also making the lives of residents and tenants easierfor example,with Today,the largest real estate owners are collecting and harnessing the power of their vast data troves to make better decision

59、s.19 Gabriel Morgan Asaftei,Sudeep Doshi,John Means,and Aditya Sanghvi,“Getting ahead of the market:How big data is transforming real estate,”McKinsey,October 8,2018.8Six new imperatives for real estate playersonline rental platforms,maintenance request forms,and community engagement apps.20 Other t

60、ools can help make operations more efficient:digital implementation can increase net operating income(NOI)by 10 percent or morea dramatic improvement on traditional levers.21 Its not surprising that property technology(proptech)companies have been highly attractive for venture capital and private eq

61、uity investors:investment topped$50 billion for the first time in 2021.22 The most advanced operators are doing more than merely buying or subscribing to proptech applications:they are building their own and transforming their processes to maximize the value created by the tech they build.Focus on o

62、perating efficiency,not just on incomeInput costsincluding labor,materials,and financinghave grown rapidly.Meanwhile,inflation exceeds previous norms for contractual or episodic rent increases in commercial real estate.To keep pace with the changing economics,owners and managers must act on both cos

63、ts and revenues.On the cost side,building resilient supply chains and controlling operating costs can offset potential NOI margin declines(Exhibit 6).Large owners in a given market can,for example,centralize leasing teams and give them digital tools that help make value-creating leasing decisions.Ow

64、ners can Exhibit 5Advanced analytics real estate illustrative dashboardStatistics calculated based on US Postal Service address change data.Advanced analytics can unearth real estate opportunities by using dynamic nontraditional data.McKinsey&Company E-commerce warehouse property searchTraditional d

65、ataSubmarketRent per square foot(sq ft)Rentable area per sq ftBuilding class ratingYear constructedNontraditional dataHousehold incomePopulation densityPeople aged 2235 inflowAverage annual payroll growth Average change in furniture spendingAverage distance to truck stopsCargo flights at nearest air

66、port,annuallyAttractiveness scoreProperty AWaterfront$9.4156,251B/31929$37,60063,16212%9%8%0.21 mile22,8357.3Property BWaterfront$14.0058,000B/31930$46,93958,3703%2%5%0.58 mile15,5232.4ABCatchment areas20 Stefanos Chen,“Covid pushes real estate into the future,”New York Times,November 13,2020.21 McK

67、insey analysis.22McKinsey analysis of Pitchbook data.9Six new imperatives for real estate playersalso consider consolidating and renegotiating contracts for energy and maintenance services across a portfolios properties.With financing costs higher,maintaining high credit ratings,finding low-cost cap

68、ital,and refinancing regularly will also be necessary to produce returns.On the revenue side,current market conditions require greater leasing intelligence.Commercial rents can match rising prices if operators flex all their levers(including leases with duration and escalation clauses)and tools(incl

69、uding advanced analytics and superior market research).Real estate has long been considered an inflation hedge for limited partners;to deliver on that promise,general partners must keep pace to ensure that commercial rents match the rising price environment.Sea changes in behavior and mindsets,as we

70、ll as current economic conditions,are converging to create an era of change in real estate.Those who embrace the challengesrethinking what the market demands,which technologies are required,and how to use new talentwill position themselves for success.Competitors who fail to adapt may be left behind

71、.Build the real estate that tenants want,and provide the experience that employees,shoppers,and residents need,and they will indeed come.Scan Download PersonalizeFind more content like this on the McKinsey Insights AppExhibit 6Web Exhibit of Estimated savings potential as a share of existing cost,%R

72、eal estate operators can reduce property-level costs in key categories.McKinsey&CompanyMaintenanceOfceMultifamilyCleaningOther(eg,insurance)20301520810203025810Designed by McKinsey Global PublishingCopyright 2023 McKinsey&Company.All rights reserved.Sophia Braes is a consultant in McKinseys Stamford

73、,Connecticut,office,Daniele Chiarella is a senior partner in the London office,Aditya Sanghvi is a senior partner in the New York office,and Brian Vickery is a partner in the Boston office.The authors wish to thank Brodie Boland,Sudeep Doshi,Anna Fu,Ryan Luby,Jan Mischke,and Robert Palter for their contributions to this article.10Six new imperatives for real estate players