In our latest podcast, BlackRock’s head of real estate research Simon Durkin discusses the need to be cautious on evaluating risk in hot sectors like logistics and the opportunities for a new strata of offices to emerge as occupiers reassess their workspace demands.
Speaking with Blackstock Consulting founder Andrew Teacher, Durkin outlines how investors should be navigating current uncertainties. He says: “What we have to try and do, is look through the short-term volatility at those longer-term trends that will drive future performance.”
“If we were to assign a letter to the shape of the recovery it would be ‘K’,” he adds. “It denotes the fact that some geographies will perform better, as will some companies and some industries while others will decline.”
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Logistics, Durkin says, has been the “clear winner” from the pandemic. But although online retail has grown significantly in the UK and Europe, around two thirds of sales still happen in shops. “Physical retail still places demand on logistics,” he says.
Durkin explains that BlackRock remains confident about logistics but says that “we are nearer the top than the bottom” of the cycle. “We are mindful of the risks that exist,” he explains.
Supply risk is elevated, he says, as is the pace of obsolescence – driven by technology and by ESG regulations – and this may not be truly captured in investors’ underwriting.
“I think the electrification of fleets is one of the big unknowns,” Durkin explains. “Logistics operators will have to adapt accordingly. Availability of power will be critical in defining a long term, sustainable location.”
With logistics providers’ increasing focus on the last mile or last hour, there are a lot of opportunities that will arise in urban logistics, he says. Residential in all its guises – from student and multifamily housing, through to later living – will also form a larger part of investors’ portfolios going forward.
Discussing real estate’s “outdated” taxonomy of referring to “offices, retail and logistics”, Durkin says that given “most assets are multi-use”, we need to focus more on “what attracts occupiers to office space”. “It’s as much about what’s happening locally in terms of occupiers’ abilities to attract talent,” he explains.
“ESG is also a critical part of it and we’ll see people making decisions based on the way companies act.”
Comparing the polarisation between “best in class” and “stranded assets” in today’s office market, Durkin believes we could see “another strata in the office market”. He sees the potential for “super prime” offices that can “deliver on the increasing wealth of metrics occupiers demand before taking a building”.
“Assets that are more flexible, most closely located to major transport hubs and which are most likely to be the newest buildings, could attract a premium,” Durkin says.