about 3 years ago • 9 mins
Carsten Menke, head of the next generation research team at Swiss wealth manager Julius Baer, joined us to discuss the future of the world’s cities. As the COVID-19 pandemic disrupts our daily lives, far fewer people are traveling to cities for work. And that disruption is creating investment opportunities for those willing to act.
Here’s a transcript of the interview. Hit 🎧 in the app to listen.
Andrew Rummer: So Carsten, here’s the $64,000 question when it comes to the future of cities: will people continue to work from home after the pandemic abates?
Carsten Menke: I think it's fair to say that work from home will be more common because we have realized that it actually works. Companies have realized that they don't need to control their employees all the time, that they are actually self-motivated, self-driven to do their work – without the team head or the supervisor being around. So there will be greater flexibility in that regard. But at the same time, we also have realized, I think, that working from home really blurs the boundaries between private life and work life. The computer is always there in the morning, in the evening, and the kids are around. So this is really a setup which can be difficult to sustain over longer periods of time. I think it worked well at the height of the crisis, because we were aware of the urgency. We were aware that we had to function in this new kind of role. And I would also say that we were so productive working from home, because we were able to use and build on the relationships we had established before with our colleagues, with our clients. And, in contrast to that, I believe it will be much more difficult to build new relations while working from home only over the phone or over video conference. So the longer the situation lasts, the longer we're just working from home without being back in the office, the more difficult it will get.
Andrew: If we take as read that most office workers don’t want to be in the office all the time and, equally, they don’t want to be at home all the time – then how many days a week do you think people will end up going to the office in future?
Carsten: Ha ha! I'd say three. And actually there is also already evidence for that because surveys have been conducted in continental European countries in August. So when lockdowns were lifted in Germany, France, Italy, and Spain, just a third of the people worked three days or more from home. So they seem to be very happy to be back in the office already this summer – even though the COVID pandemic was still around.
Andrew: Has the pandemic fundamentally changed your thinking on the future of the city, or do you consider it just a blip in a bigger long-term trend?
Carten: I'd say it's more of a blip. And this is mainly because we could not find any relationship between urban density and the risk of being infected with COVID. If you look at this data in a scatter plot, the dots are all over the place – which means that there is no relationship. It becomes very obvious when we compare Asian mega cities like Seoul and Tokyo in terms of infection rates to some of the biggest US cities, for example, like New York, Chicago, or LA. So even though these Asian cities are much more dense than the US ones they had lower infection rates. So the risk is not based on urban density, per se. It's really based on our own behaviour. I think this is very important. We've learned that during the past few weeks especially. So, if we somewhat adapt our behaviour and if we are entering a situation where we can be vaccinated against COVID-19 most likely city life will return to normal rather quickly. We are also very convinced that cities will remain the growth engines of the global economy as they have been actually in the past. Because cities have always bounced back from crises. Take New York with the 9/11 attacks or with the great financial crisis. Take some of the old European cities like Paris, London, and Rome – they mastered so many crises in their long histories and they bounced back always stronger. So if you want to bet against this urbanization trend, against the city-centric world, you would basically bet against this centuries-old trend – and we don't dare to do that.
Andrew: If cities as a whole will keep their allure over the countryside – is there still the possibility that people will shun the biggest cities in favor of smaller, perhaps more livable cities?
Carsten: Exactly. My take is really that if you just look at the surface of the urbanization trend, most likely you will not see any changes. People will still flock into the cities. But if you dig deeper, if you analyze the trends of where people are going, most likely the preference will change from these mega cities, to the second-tier cities and third-tier cities.
Andrew: The price of commercial real estate – particularly offices – and the share prices of companies that provide commercial real estate have taken a real hit from the pandemic. Is this a chance to pick up some bargain investments?
Carsten: Well, yes, potentially. There will be a change in terms of the supply and demand of office space going forward. So maybe we are moving more to a buyers market, where the tenant has more bargaining power over the person owning that office property. So this is something we can definitely imagine, also in the sense that you really need to provide top-notch office infrastructure going forward in order to be most attractive when it comes to retaining tenants, or to gaining new tenants. But in the end, once we are past this pandemic, once we are done with the corona crisis – helped by vaccines, helped also by changing behaviour of ourselves – city lives should return very much to normal. So if there are any bargains to be made, most likely, it's rather in the short term not so much in the longer term. We also, I think, need to consider the fact that yes, there might be an oversupply of office space in some cities, but we're still in a situation where there is an undersupply of apartments of housing space. So there is also a chance, for example, with old industrial spaces, to convert these office spaces into apartments and thereby alleviate some of the pressure we still see in the housing market of many big cities around the world. So this is another chance we see where the apparently negative consequences of this corona crisis could be turned into something positive in the long run.
Andrew: Overall it sounds like you’re optimistic about the future of cities, despite this year’s disruption. If people listening to this agree with your thesis, how can they invest accordingly?
Carsten: From our perspective, it all starts with the point that cities are the growth engines of the global economy. So they are really the powerhouses of the world. In order to unfold this power, one important precondition is that the infrastructure of the cities needs to work properly. And historically, infrastructure was, of course, always associated with roads, railways, bridges, trains, etc. So this kind of classical infrastructure is really one area we are looking into at the moment – especially because of the stimulus measures which were introduced in order to fight the fallout from the crisis. So, finally, European countries are putting their budget constraints aside, and money is being channelled into infrastructure. So this is the first area we expect to benefit. The second area is digital infrastructure. And this is where I think that technology really has the potential to transform our cities. And by digital infrastructure, I mean, of course, the rollout of the 5G standard – which is happening at the moment across the whole world, basically. And we should not make the mistake to just associate the 5G rollout with faster mobile speeds, faster download speeds, less latency. Yes, of course, that is going to happen. But the big promise of 5G is basically making our cities smarter in the sense that we're using sensors, we are using cameras in order to collect data. And this data is then analyzed and used to make city life more efficient. For example, when it comes to traffic. So real-time traffic routing is one option. This data can also be used to make the management of the city more efficient when it comes to bus schedules, when it comes to waste collection schedules, when it comes to water management. So this is a key point for us that, in the end, it's not just about making the city smarter through technology, it's also about making the cities more sustainable with the help of technology – which in the end will be a benefit to the people living in the city. And – last but not least – the third element is building technology: making the buildings smarter with the help of technology. And one of the key words here is predictive maintenance. So instead of having a fixed maintenance schedule for the things which are built into your property – like escalators, elevators, access control systems, heating, ventilation, air conditioning systems – you have more of a dynamic schedule as well, based on sensors, which are monitoring this kind of equipment. And only if something goes wrong, if there is some sort of emergency, then somebody comes to fix it. This is interesting in the sense that it makes the whole management of the buildings more efficient. So it raises the value of the property. And it's of course something which is also state of the art these days. And if we come back to the point that there may be an oversupply of office space in the cities, at least in the foreseeable future, then those offices which are top notch in terms of technology, they will be of course more attractive for renters than than others.
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