How Tech, Strategy, and Personal Preferences Are Reshaping Real Estate and Cities

In a recent talk of MIT CRE podcast titled "Shift to Non-Linear World", Dror Poleg discussed how real estate and urban development are shifting from a predictable, industrial model to a more unpredictable one—where input and output are no longer as predictable and linear as before—driven by technological advancements, strategic changes, and evolving personal preferences. The following points are the main takeaways from the talk.

Technology applications are reshaping the way we work, leading to a transformation in real estate with the emergence of branded operators.

The nature of cash flow and nature of real estate asset is undergoing a fundamental transformation, because:

1. There's a significant shift in the relationship between economic inputs and outputs, with intangibles—such as intellectual property, brand value—gaining prominence. Intangible assets now account for around 18% of GDP and balance sheets, rise from just 3% 70 years ago, and are even more dominant among S&P 500 companies. This trend reflects deeper changes in what landlords prioritize, what employees seek, and how retail customers behave, all of which are reshaping demand for real estate and redefining the functional role of cities.
2. Companies will require significantly more flexibility in leasing and are spreading their workforce across various locations. The fundamental assumptions that support office markets in specific cities—assumptions about career paths and investment decisions—are no longer valid. Employers face uncertainty about their long-term needs, and with technology making it easier to find the right talent, they can now distribute hiring across multiple cities and bigger labor pool, rather than concentrating solely in major urban areas. Consequently, office demand is expected to decline, as fewer people will be needed to generate higher value.
3. Given the abundant options, people willing to pay for office space are becoming more demanding and fickle. Employers now require more amenities to attract employees, such as healthiness and amenities, optimize operations to encourage people to return, and require more flexible leasing options.

Abundance in office choices leads to scarcity in areas like healthiness good services. These scarcities create potential for new revenue channels and highlight the need for specialized operational capabilities to succeed in the evolving market. Value can now be generated through unique branding and experiences—lower-cost inputs compared to traditional capital investments, like adding more marble to the lobby. The operational logic for offices may increasingly resemble that of the hotel industry, where intangible assets drive profits, much like Marriott profiting from brand and social connection. Investors may shift towards investing in strong operations. Similar to the commercial sector, companies like Blackstone focus on specific client segments willing to pay a premium for unique characteristics.

Branded operators trend impacts all asset classes, not just offices. Firstly, offices influence where people choose to live, how goods are distributed, where shops open, and ultimately which cities thrive; thus, they are interconnected with other property types. Secondly, operating brands are already emerging in the industrial sector as well, whether in cold storage, data centers, or specific types of logistics. Finally, the application of new technologies can easily disrupt low-operation properties, transforming real estate into an increasingly hands-on, specialized operating business.

AI and technology won’t have a structural influence within the real estate sector. The cost of real estate is still mainly determined by the cost of land and other factors, as there is not much room for change in the cost structure of the real estate sector. The biggest impact on real estate will come from the real estate market itself and people’s preferences. However, AI could potentially streamline processes, offer better interfaces, and create new revenue channels. AI and big data would also allow algorithms to perform more analysis, collect more data, and enhance user experiences.

A cut in Fed rates wouldn’t change the long-run transformation logic of the real estate market. Lowering rates could potentially prolong the denial of adapting to a new real estate market structure, but might also blunt the urgency to take action, allowing commercial real estate to survive in its current status for a few more years. However, it cannot actually bring people back to the office or make the value of the assets economically viable because it doesn’t change the nature of the evolving process of the economy.

Source: World Intellectual Property Organization (WIPO)

How cities could bring back people and maintain infrastructure and services: enable more flexibility.

The attractiveness of cities is changing due to technology. The three reasons people think cities are irreplaceable would be challenged if technology is good enough: Firstly, people need to bump into each other to foster innovation; however, the internet allows for quicker communication with anyone. Secondly, educated and creative individuals, on whom the economy depends, prefer to live in cities because of the restaurants, theaters, and proximity to one another. With online communication, people could live even further away while still exploring their preferences and desires in their local area. Thirdly, from an economic perspective, cities represent large labor markets with a higher likelihood of matching people’s skills and demand; however, employers can now hire talent from around the globe instead of being limited to only the biggest cities.

Cities need to double down on what only cities can do. In addition to converting empty office spaces, cities should offer a healthy, walkable, dense, and diverse environment, providing great public goods and experiences to attract people back. Cities should be places where people can have flexibility and cheaply experiment on themselves--experiment of fitting into the non-linear and specialized economy. This is similar to the role of coffee shops, where people bump into each other at a low cost and where important innovations have historically occurred. Successful examples include the founding of the New York Stock Exchange and the first global insurance firm, both of which were established in coffee shops. Once an idea is formed, it can lead to the establishment of a company and a physical location anywhere in the world.

It is important to loosen zoning and planning regulations. Regulations should allow for more experimentation and adaptation. Uncertainty about the time frame and cost of conversions can deter investors and lenders from making transformations and trying different survival strategies. Regulation should be based more on the impact of noise pollution and other externalities rather than strict prescriptions.

Author comments:
From Dror Poleg’s talk, it’s clear that the shift in real estate and urban development is not solely driven by the pandemic but by technological innovations, changes in production models, and increasing productivity. The pandemic acted more as an accelerant, speeding up trends that were already unfolding. From the rise of flexible workspaces to the emergence of branded operators, technology and evolving demands are reshaping the relationship between cities and real estate. Embracing and leading these changes will determine the future trajectory of real estate and urban development.