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A series of experiments carried out in an Illinois factory over eighty years ago created a blueprint for the 21st century Global City. The lessons for real estate are huge.

This year’s Global Cities report looks at what constitutes best-in-class across all aspects of property: building design, occupier trends, place making, investment strategy, and mix of uses. However, success in real estate is often achieved by being on the ground where economic growth is strong, raising the question: what does a best-in-class city economy look like?

The answer is increasingly about having the culture, diversity, lifestyle, and opportunities necessary to draw talented people. While employers can provide a micro-location – the workplace – where these factors are brought together, they must similarly exist at a city level to generate the critical mass of skilled and creative people that are necessary to feed growth for successful firms.

To find out how this is achieved at a city level, we need to look at a study which occurred in an American telephone factory.

❝A city has to inspire and contain as much wow-factor as a Google office, if it hopes to draw firms of that calibre.❞

The Hawthorne Effect 

Between 1924 and 1933, researchers from Harvard University ran tests on workers at the Hawthorne Works near Chicago, which made telephony equipment, to establish how changes in the workplace environment impacted productivity. In one part of the factory brighter lights were installed, in another they remained the same. The researchers expected to observe higher worker productivity in the better lit area. To their surprise, productivity increased in both the test areas.

A separate test room was then established, where different aspects of the workplace were changed. Yet, every variation brought about higher productivity than when workers were on the factory floor. When they left the test room, returning to the ordinary assembly lines, the workers’ productivity gradually receded again. The experiments were then followed up by interviews with the workers involved, which revealed that being in the test room with University academics showing an interest in their work made them feel special, but also conscious of being observed.

Moreover, the interviews seemed to have the greatest impact on productivity, as the workers revealed insights on how they thought the factory could increase efficiency. The academics also began to deduce that the workers had their own informal groups or cliques that were unrelated to the teams the firm had assigned them to. The approval of their fellow clique members was more highly prized for Hawthorne workers than that of their bosses.

This phenomenon of workers becoming more productive when they are made to feel special and under the spotlight is known as the Hawthorne Effect.

Workers ‘on stage’

Hawthorne showed workers are more productive when they are ‘on stage’ in front of an audience. Wanting to impress the boss is part of the effect, but so is the sense of elevation that comes from being a focus of attention. Nor is it always the boss that workers want to excel in front of – the opinions of their informal network are important. Also, being moved into a special environment (the test room in Hawthorne’s case) provides a novelty boost, and encouraging open discussion delivers further productivity gains.

The modern workplace reflects the findings of the Hawthorne experiments. The move from cellular to open plan offices placed workers centre stage; in full view of their informal group and the boss. Activity-based working, with more table-top work areas and fewer upright panels to hide behind, has enhanced the effect. Peppering the office with break out areas, cafés and buffets, has ramped up communication, and allowed the informal networks to thrive.

The attempts to make the workplace special have dazzled. Yoga areas and running tracks on the roof for tech firm offices are the extremes that grab the headlines. Yet, tower offices with panoramic views, or relocating from a non-descript business park to a trendy downtown location, are also part of the drive to make the workplace feel special.

The Hawthorne City

However, on average nearly 20% of our working day is actually spent away from the desk according to Loughborough University, and 80% of our total week is the free time outside of work. With so much of our lives occurring outside of the office, to be truly globally competitive, the Hawthorne Effect needs to stretch across the city as a whole.

A city has to inspire and contain as much wow-factor as a Google office, if it hopes to draw firms of that calibre. It must be integrated into the informal networks that thrive in today’s Global Cities – tech geeks, foodies, LGBT, culture vultures, and the craft beer crowd. A city must now provide the ambitious with a stage they want to succeed on, as for some people impressing their bohemian friends in the cool part of town is more important than pleasing any boss.

The cities that genuinely achieve this are those in the front rank of the Global Cities; locations that cannot are losing businesses, jobs and investment to places that can. Fairfield, Connecticut, last year lost GE’s headquarters to Boston, with its famous universities and innovation culture. Despite the uncertainty of Brexit

Flexible office markets

This drive towards informal networks, and a fluid business and cultural environment, is being reflected in the rise of new districts and different office formats. From London’s Southbank to Silicon Beach in Los Angeles, alternative Central Business Districts (CBDs) are thriving, as they combine work and lifestyle, but in a different cultural environment. Firms now move to where they can obtain the right quality office in a local setting that appeals to staff, rather than hugging the traditional hubs of their industry.
Similarly, the coworking office provides a platform for informal networking among entrepreneurs. This is the real estate manifestation of the ‘gig economy’, whereby more people work on a freelance basis, in a world of fluid teams that come together on a project-by-project basis.

WeWork is now approaching 190 centres in 12 countries, while Blackstone is acquiring The Office Group, a flexible offices firm in the UK, demonstrating that co-working space is becoming an established feature of the real estate landscape. There are even examples of financial and professional firms setting up incubators or accelerators, to act as a bridge between their own businesses and the new wave of start-ups.  


Tech Revolution

Unquestionably today, the cities who are successfully achieving this urban Hawthorne Effect are those at the forefront of the tech and creative revolution, which is demonstrated by economic growth. Since 2007, the GDP of Berlin, with its thriving technology scene, has expanded by 19.0%, whereas in finance-oriented Frankfurt output grew by just 5.9%, according to Oxford Economics. Similarly, in the US we see tech and R&D oriented cities like San Francisco (17.6% GDP growth since 2007) and Boston (15.2%) outperforming locations like Chicago (6.2%) and Miami (6.6%).  


However, note the level of growth seen since 2007 in cities like London (21.2%) and New York City (11.5%). Both were finance-led cities back in 2007, which successfully re-weighted towards technology and creative industries in the last decade. This arguably makes adaptability a greater strength than a large tech exposure. If the technology sector moves into a downturn we will find out whether Berlin can quickly reposition itself towards the next rising industry. To a property investor London and New York City offer the security of having proved themselves capable of reinvention. 

In this regard China’s larger cities are displaying encouraging signs. Shanghai, which back in 2007 was thought of as a manufacturing city, is growing fast as a tech centre. The top ten ranking of global internet firms based on revenue contains three Chinese firms - Shenzhen’s social media giant Tencent, online retailer Alibaba of Hangzhou, and Baidu, a search engine from Beijing. 

This demonstrates that some of China’s leading cities are evolving away from exporting cheap manufactures, and moving up the value chain. This will focus attention upon India, where the rate of GDP growth is forecast by the IMF to outpace that of China, and whether it can build on the success of Bengaluru and develop more tech clusters.

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