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.
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.
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.
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.