Chapter 13: The Role of Real Estate Development in Urbanizing Cities

Greg Clark
Greg Clark is Hon Professor, and co-chairman of the advisory board at the City Leadership Initiative, University College London, and the author of 10 books on global city and regional development.
Tim Moonen
Tim Moonen is director of intelligence at The Business of Cities, an advisory firm based in London, and specializes in the governance, financing, and comparative performance of cities.
Doug Carr
Doug Carr is a New York–based vice president for Jones Lang LaSalle in the Public Institutions Group, focused on providing real estate planning and development advisory services on behalf of government, educational, and nonprofit organizations, with a particular expertise in public-private partnerships and transit-oriented development projects.

Introduction

The world is more than halfway through a 200-year cycle of population growth and urbanization, at the end of which close to 85 per cent of humanity is projected to live in cities. Leaders, planners, and policymakers in cities and urban regions are increasingly recognizing the accelerated pace of urban change, and in particular the challenge of spiralling demand coupled with supply-side constraints. City leaders must cope with unprecedented enthusiasm for urban living and urban jobs, but with limited fiscal tools, institutional frameworks, and political will.

Urbanization and economic growth are major drivers of real estate markets; the rate of building construction is currently faster than at any time in recorded history. There has been an enormous increase in demand for private capital investment for real estate and surrounding infrastructure in emerging cities, due largely to the pace and scale of urban migration, and the rising pool of middle-class and middle-income consumers (as shown in Figure A).1 In more established cities, where the pace of change is usually slower, shifts in technology, demography, and sustainability imperatives have also become important drivers of real estate change.

City leaders must cope with unprecedented enthusiasm for urban living and urban jobs, but with limited fiscal tools, institutional frameworks, and political will.

Figure
A
:
Institutional-grade real estate by region, 2004–2020
Figure A

The current era is notable for several global phenomena vis-à-vis urban development and real estate:

  • The urbanization of capital, with over half of all sovereign wealth funds (SWFs) investing in real estate, the proliferation of real estate–focused asset management (AM) companies, and increasing investment from pension funds, insurance companies, and high-net-worth individuals
  • The emergence of very large-scale, professional real estate managers, builders, and investors
  • A wider range of risk and return, from low-risk/ low-yield opportunities in established cities to high-risk/high-yield potential in emerging cities
  • Increasing cost of urban land assets per square metre and scarcity of developable land, resulting in increased urban density, demand for smaller apartments, and pressures to optimize space
  • Increased role of next-horizon technologies (e.g., prefabrication, modular units, 3-D printing) enabling faster, more affordable, and more sustainable developments
  • Disruption to production and consumption models that is changing the demand for real estate

Private and institutional investment offers a number of important benefits and advantages to cities pursuing long-term goals. First, these investors are critical suppliers of capital in the context of under-in-vestment from the public sector. Second, their experience and interest in long-term value creation means they provide access to valuable financing and development expertise. Third, they can help signal the maturity of financial/banking systems, which can result in lower long-term interest rates. Fourth, international capital adds diverse perspectives, ideas, and solutions to city development, which can influence other important areas such as city design, education, and industrial development. And fifth, such capital is often patient, seeking long-term returns and income to support pensions and insurance systems or underpin diversification from national assets.

This chapter examines the role real estate development plays in emerging cities. It begins with a discussion of the merits of managed urban growth. It then discusses how cities can use planning and asset management to create and capture value.

The chapter next discusses the emerging role of city growth planning and the need for analytical frame-works for intelligent planning. This is followed by an overview of the role and value of coordinated land use planning. The chapter then explores ways in which public authorities can attract private capital co-investment, which is followed by a discussion of the need to acknowledge underlying issues that often affect real estate investment in developing cities. It concludes with an examination of the role of real estate planning and development in making cities competitive.

Managed growth versus unmanaged growth

Cities today rarely face a choice between having growth or not having growth. Rather, the real choice is between whether growth is managed and complemented by investment, adaptation, and infrastructure, or whether it is unmanaged and stresses the existing infrastructure and natural and built environments.

As cities grow, the myriad challenges facing them sometimes lead analysts to be critical of mismanaged growth.2 Yet for many cities, the challenge has become one of dealing with externalities associated with success and prosperity, which can stress housing markets as well as infrastructure networks. For example, housing demand is a reflection of cities’ attractiveness, and increased demand can present issues of affordability while also taxing existing infrastructure capacity. Congested infra-structure results when high employment density is not properly aligned with public transport and other infrastructure systems. Yet these phenomena are a reflection, usually, of urbanizing cities experiencing consequences of unmanaged growth. City leaders are increasingly facing pressures of balancing quality of life and sustainability with productivity and growth. This requires a shift towards a managed growth model, which leads to more sustainable long-term development and improved quality of life, which is a key indicator of city attractiveness and health. Attention to cities’ progress towards these goals is one reason for the rise of city benchmarking and index exercises around the world.3

Features of more managed cities and metropolises include their ability to:

  • Meet the needs resulting from new and sustained population growth and recognize the long-term character of this growth and the need to plan differently and adopt a new planning paradigm
  • Grasp opportunities and compete in a globalized system of trade and investment and participate in sectors that are increasingly traded globally
  • Address investment deficits resulting from institutional weakness or lack of coordination at the city, regional, state, or national level
  • Withstand and bounce back from shocks that result from vulnerability to events such as extreme weather, terrorism, public health epidemics, and civil unrest
  • Adjust to a change of circumstances or perceptions about existing patterns of development and employ innovative approaches to new problems

The consequences of mismanaged growth are exacerbated by trends and forces of urbanization. Poor planning and decision-making are magnified and become costlier as population densities increase. In contrast, steady management resulting from a methodical approach to property and land development can provide a measure of stability, which is a key to attracting private capital and external investment. This presents the best opportunity to leverage and maximize government investments, by exploiting synergies with real estate development opportunities.

Managed growth is critical for cities to compete in an era of globalization and to achieve broader economic development goals. These goals present new imperatives for cities to optimize their assets and leverage private investment for improving sustainability, growing entrepreneurship, creating critical mass in new sub-centres, and increasing housing supply.4

  • 2. Paul Kantor, Christian Lefèvre, Asato Saito, H. V. Savitch, and Andy Thornley, Struggling Giants: City-Region Governance in London, New York, Paris, and Tokyo (Minneapolis, University of Minnesota Press, 2012); George Ritzer and Paul Dean, Globalization: A Basic Text (London, Wiley, 2015).
  • 3. Jones Lang LaSalle and The Business of Cities, Bench-marking the Future World of Cities (Chicago, Jones Lang LaSalle, 2016); Jones Lang LaSalle and The Business of Cities, Globalization, Competition, and The New World of Cities (Chicago, Jones Lang LaSalle, 2015).
  • 4. Jones Lang LaSalle and The Business of Cities, Bench-marking the Future World of Cities (Chicago, Jones Lang LaSalle, 2016).

Using planning and asset management to create value

The objective of real estate development and investment is value creation. The public sector plays a key role in value creation, whether through land use approvals using planning and regulatory tools, infrastructure and utilities provision, environmental improvements, or creating a business environment conducive to commerce. The private sector, including real estate professionals, may also add and unlock value, first during the process of assessing project feasibility, undertaking design and development management, defining a targeted tenant mix, and beginning dialogue with potential tenants, followed by the stage of direct investment in new buildings and facilities, comprehensive master-planning, and destination branding and marketing.

A key challenge for cities is therefore how to increase, and capture, asset value so it can be put to use for the public good. One way for cities to optimize their assets is value capture finance (VCF). VCF has emerged as an important tool for driving sustainable urban development because its finance mechanisms, when properly structured, share both the risks and rewards of urban projects among public and private actors.

VCF can take on many forms and transaction structures (such as public–private partnerships and joint ventures), but the ultimate goal remains the same: to identify a way to capture and leverage increases in land and property values. The public sector captures enhanced asset values, whether in the form of land transfers, local taxation and tax increments that enable revenues to be reinvested, development levies and infrastructure tariffs, local service agreements, or private-led local amenity provision and enhancement. Then, the captured value (in monetary form or “credit” to leverage in-kind contributions from the private sector) can be recycled or reinvested in the same development scheme for the public good.5

There have been many examples of using value capture to finance urban projects over the past 20 years. Most commonly it is used to finance rail projects, as has occurred frequently in Japan, Hong Kong, Canada, Germany, the United States, and the United Kingdom.6 Beyond transport, value capture has also been employed to fund other urban infrastructure and public space improvements, most notably in Latin America, where betterment contributions and development rights charges are increasingly common.7 Reviews of value capture in developing countries show it is often very effective in cities that have an inadequate property tax system.8 Value capture holds great promise, although many other parts of the world have not yet recognized the opportunity associated with these finance models, partly due to political opposition, regulatory opacity, and the technical and operational complexity of these projects.9

Urban planning plays an essential role in the urban growth management process and the successful creation and capture of value.

The emerging role of city growth planning

Urban planning plays an essential role in the urban growth management process and the successful creation and capture of value. Planning plays a pivotal role in regulating urban land use and development, but also has a key “place-shaping” role in the built environment, which is a source of value and benefit to real estate developers. Confidence in a city’s urban planning approach can reduce planning and development risks, which are key factors for private investors as they assess risk/ reward opportunities. The ability of planning to manage the components of the built and natural environments so that they work together properly is at the heart of how developments can achieve efficiencies, cost-effectiveness, and added value.

Planning is not just the means to zone land and to identify what is desired or permissible in a certain location. It plays a key role in upholding the value of investment in real estate by protecting it from unforeseen or unplanned competition or from unwanted neighbouring uses. It encourages development that meets economic market demands, as well as public demands, to ensure planned uses are absorbed and put to productive use. For investors, planning is the main means to ensure that the market in which an investment is made remains stable.

The role and esteem of urban planning systems around the world varies. Planning is sometimes viewed as unnecessarily slow, restrictive, and costly.10 But there is a growing sense of the imperative to recognize the potential and benefits of joined-up planning to support physical and spatial change in cities. Over time it has become recognized that the management of a largely built-out urban landscape in a sustainable manner requires collaboration between urban planners and real estate professionals. This collaboration is key, since interactions with real estate professionals can offer insight into the private sector’s approach to risk evaluation and mitigation. The fundamental perspective on how to approach property development and land valuations can be helpful when evaluating a variety of development proposals.

  • 10. Royal Town Planning Institute, Fostering Growth: Understanding and Strengthening the Economic Benefits of Planning (London, RTPI, 2014). Available from www.rtpi. org.uk/media/1020786/rtpi_fostering_growth_june_2014.pdf.

Analytical frameworks for intelligent planning

Increasingly, cities are engaging real estate professionals to assist throughout the planning stages, and in part to ensure development initiatives represent optimal uses of land. This type of analysis, often referred to as a “highest and best use” study, can offer an analytical framework to help understand value and make informed decisions about issues such as zoning changes, resource allocation and prioritization, development phasing, and accommodating public sector needs. Figure B illustrates a typical approach to large-scale development planning, and the steps involved when analyzing a development’s highest and best use.

Establishing an analytical framework based on market data—where various development proposals and scenarios can be evaluated and compared— can help urban planners and city leaders better understand project values and potential. Urban planning best practices show that taking a disciplined and analytical approach to urban planning and development can help preserve and maximize development values. Overall, strong property and land values stand to benefit both public and private sectors alike.

Figure
B
:
Typical approach to performing a highest and best use study
Figure B

The role and value of coordinated land use planning

It is common in many cities for haphazard land use patterns to emerge from ad-hoc and informal deci-sions about where to locate new developments, or whether or not to consider re-zoning requests. The integration of these decisions into a coherent vision, considerate of broader development initiatives, is one of the most important tasks for cities today. Coordinated land use master planning is an important means to this end.

Planning and local government: Key tools for shaping managed growth

Master planning and land use coordination has been a key spatial planning objective in many parts of the world. In European cities especially, the concentration of spatial development within “activity centres” or “opportunity areas” has been an important enabler of redevelopment and densification. This is especially important as policies, plans, and regulations proliferate in a complex environment. Meanwhile master planning powers may reside with municipalities, or with separate planning authorities in place of municipalities, which can provide a “one-stop shop” for 

investors and developers seeking advice and planning permission. Among the most successful examples of citywide and metropolitan master planning are Hong Kong and Tokyo. These cities have clearly identified rail systems as the backbone of urban development, designated satellite centres accordingly, and formulated plans for future corridors and nodes based on market demand, developable land availability, and long-term transport investment. They also have prioritized public transport–oriented policies and investment throughout sector plans and local master plans.11

Land assembly is a core element of how land use is coordinated, and is often a necessary precursor to initiating large-scale development. Local governments usually have land acquisition authorities, and can serve as a catalyst to spur complex and large-scale development projects. In addition, a government’s ability to establish and regulate zoning can be a mechanism that can drive financial value and feasibility.

The utilization of zoning to permit and encourage new uses is a key trigger of redevelopment and adjustment in cities. It is common in many cities to find exclusionary zoning that forbids rezoning from industrial purposes in order to preserve a certain mix of uses that may no longer be viable. The existing use designations of public land can sometimes delay attempts to adapt sites for new uses and development. Equally, re-designation can provide permission for taller buildings, while form-based zoning to regulate form rather than use is also popular, as it allows the market to select the most appropriate use.

A clear delegation of land use powers to local and city governments has become important to cities because it allows different actors to take a strategic approach to future land uses. Many cities have also benefited from more flexible development planning techniques that accept inevi-table changes over a 20–30 year development cycle and seek to build an infrastructure framework that supports long-term development. It is important to emphasize that comprehensive master planning efforts are not intended to be a static exercise. Devel-opment plans should be dynamic and responsive to evolving market conditions. Figure C illustrates the iterative nature of the master planning process. The analytical framework (step 1) is used to evaluate performance of master plan concepts, and can be adjusted to respond to changing variables and market conditions to provide sensitivity analyses of various scenarios, which are used in turn as inputs to refine and optimize subsequent versions of the master plan (step 2). This process can be particularly useful when developing specific project plans for execution such as an acquisitions plan, phasing strategy, infrastructure needs assessments and projections, and financing plans.

Land use planning is likely to play an increasingly significant role in the New Urban Agenda because of its capacity to deliver coordinated development and overcome ad-hoc incrementalism that can lead to sprawl, social and spatial segregation, and lower quality of life. Land use planning is most effective if it is flexible in the face of changing market conditions, and when alignment among different levels of planning and across different agencies is achieved, thereby enabling the simplification of complex developments and the sequencing of them with other infrastructure and services.

Land use, infrastructure, and amenities: Getting the basics right

In addition to coordinated land use master planning, other tools and other provisions also play an influential role in the development process for cities. Planning often supports a multi-faceted and organic process supported by other public sector interventions and investments.

  • 11. Hiroaki Suzuki, Jin Murakami, Yu-Hung Hong, and Beth Tamayose, Financing Transit-Oriented Development with Land Values (Washington, World Bank, 2015).
Figure
C
:
The master planning process
Figure C

Perhaps most important among these is infrastructure investment. Infrastructure systems are the backbone of city competitiveness and long-term success and are critical especially in emerging cities, where metropolitan infrastructure is often the most severe deficit.12 For example, rail transport with rapid links to residential and employment districts, and to nearby port and airport infrastructure, is perhaps the most potent catalyst to unlock new development and densification. Integrated public transport and road connections can spread demand across a city and improve access for different communities. In addition, upfront capital investment in digital and utilities infrastructure provides an importance source of attractiveness and long-term efficiency that is a solid platform for future development.

High-quality amenity investments are also central to place shaping and development. Investment in public spaces and parks, waterfront development, and environmental improvements is necessary to provide a welcoming environment for businesses and workers, and can open up new or under-used sub-centres in cities. Amenities improve the relative attractiveness of city areas but also encourage more mixed-use and “live/work” neighbourhoods, which have other knock-on effects including a reduction in peak travel demand, lower energy use, and smaller environmental footprint.

Together, infrastructure and amenity investments can help improve land values by providing sites with key competitive advantages, thus increasing site desirability while also offering broader social and environmental benefits.

District development agencies are also created in many cities to manage the complex process of economic transition and building re-use. Development agencies help build a consistent brand and identity for areas, as well as offer professional management of key assets.

Additionally, district management has become an important element of maintaining the attractive-ness of areas. Street-scaping, security, marketing, and business partnerships are increasingly specialized and influential activities. Business improvement districts (BIDs) are a common model that has played a very important role in many cities, especially in North America and Europe, but also in South Africa and Latin America. BIDs have even become statutory consultees on local planning. They also provide leadership, place-making management, and even small-scale capital investment.

Relocation incentives or negotiations to persuade the relocation of “urban anchors” such as univer-sities, teaching hospitals, airports, stadia, or high-profile companies are also noted catalysts of development. Coherent branding and messaging of neighbourhoods is also an important function that can bring international visibility and activity to an area.

Benefits of strategic, proactive planning

Effective and strategic planning can have a number of important social and economic benefits over the long term. In addition to achieving a balance of environmental, economic, and social interests, the benefits of planning include:

  • Minimizing uncertainty: Planning adds certainty to the market, by stating within local plans and other guidance the kind of development that may be planned and built. This includes identifying areas of opportunity or intensification, preventing oversaturation of a certain use class, or offering reassurance about what may be built nearby.
  • Coordination: Planning helps coordinate and sequence effectively with other kinds of development.
  • Cost management: Planning can help reduce high upfront infrastructure costs, which may act as a barrier to development.
  • Balanced, mixed-use centres: Planning helps minimize housing and job mismatches and the social and economic costs these create.
  • Catalyst for social amenities: Planning triggers investment in social infrastructure, helping to create communities that are attractive to residents and businesses, thereby raising value.
  • Increased competitiveness: Planning can enhance an area’s competitive advantage as businesses cluster to benefit from supply chains, skilled labour, and competitors.
  • A metropolitan perspective: Planning can encourage growth decisions to take place at the functional economic level.
  • Cross-sector partnership: Effective planning can improve cooperation and a sense of duty and responsibility between public and private sectors.

The consequences of poor development planning

The effects of poor development planning include:

  • Oversupply: A common planning failure of city governments is the failure to protect investments made by retailers and retail property sector companies, by embracing multiple retail parks and shopping malls. This causes oversupply that limits yields and leads to investor frustration and withdrawal.
  • Overly hasty lowering  of  barriers for  new businesses: Loose planning can assign locations that later become obsolete or detached from cluster formations.
  • Short-termism and  lack of flexible  space: There are many examples of when cities fail to consider how commercial sites will evolve over a whole business cycle, denying start-ups the ability for future growth.
  • Lowering   of    environmental    standards: Zoning for industrial investment can have negative environmental externalities, which aside from the immediate impact on local populations, also leave strategic sites unattractive and subsequently constrain growth when cities try to move up the value chain.
  • Inefficiencies: Poor planning can result in inefficient travel patterns, higher costs, and diseconomies of agglomeration.
  • Fiscal disparities: As business activity and tax retention is concentrated in a small proportion of municipalities, fiscal disparities can result.
  • 12. Jones Lang LaSalle and The Business of Cities, Globalization, Competition, and The New World of Cities (Chicago, Jones Lang LaSalle, 2015).

How public authorities attract private capital co-investment

For cities around the world, the sources and systems of investment in real estate, infrastructure, and other hard assets have changed quickly and dramatically. Cities must negotiate this new pattern of investment with different risk and return patterns from the past, and with investment cycles that have changed time frames and dynamics. These changes require them to become more focused on the conditions that will attract investment.

What is an investment-ready city?

Investment-readiness has become an important attribute to ensure flows of investment can achieve wider social and sustainable development goals. Investment-readiness has been defined as:

“The demonstrated capacity of a city to prime itself towards the needs of external investors, by providing a credible and efficient framework and process for external investment, coupled with a development pipeline of bankable propositions and opportunities that meet the specific process, asset, scale, and risk management requirements of the investors”13

Investment-ready cities cultivate a reliable supply of opportunities for inbound capital. To accomplish this they prepare the opportunities and assets to meet investor funding demands and risk/scale appetites, and seek to understand how different forms of investment capital need to be structured. It is critical for city leaders to plan ahead and prepare an analytical framework that will help understand the implications of various capital structures and trans-actions structures. Similarly, in public–private partnership transactions, where there is some form of shared ownership stake between public and private entities, it is imperative to understand both investment perspectives, and the meaning of partnership, to structure mutually beneficial arrangements. Working with experienced real estate professionals throughout the planning and partner solicitation phases can streamline the project financing and development phases. Once a city is investment-ready, they then look to maintain conditions to ensure projects are bankable.

Governance framework and transparency

The quest for cities to become ready for investment has invited concern that they are engaged either in a destructive race to the bottom, or in a pursuit of a quick windfall that does not protect business and investor interests over the longer term. There are certainly many instances where cities have inadvertently compromised their ability to compete across whole cycles or multiple cycles by impulsively accepting business investments of all types, in any requested location and at any time. 

This raises the question of the right governance framework for cities to be effectively investment-ready. City governments have to be mindful of the investment demands of today’s firms, so that core framework attractiveness can be complement-ed with real channels for capital to find its way into the city. They also need a full understanding of the market and market evolution, and how it can be shaped over whole business cycles.

Investors are responsive and supportive towards coherent city visions that provide a clear and evidence-led pathway for sector and spatial growth. Credible leadership at the city level is almost always a key concern. The experience of cities such as Manchester and Brisbane shows that cities need to have not just a clear plan and vision but also a “chief negotiator” who acts as a high-profile single point of contact and is able to reach a binding agreement with an investor or locator that produces durable benefits on both sides.

For a city to have hard assets that are invest-ment-ready, it tends to need:

  • a stable, predictable, transparent, and consistent environment for external investment, with planning that minimizes the risk of oversupply, or firm cannibalization;
  • a process for investment characterised by low risks and predictable costs;
  • attractive risk-adjusted returns for different classes of investors; and
  • the ability to leverage its own assets, including public land and contracts.

Cities cannot achieve all of these outcomes by themselves. The national system remains pivotal for providing the transparency, political stability, and legal predictability to attract rather than deter investment. Any overlap and friction between city-level and national-level policies can create serious regulatory complexity, especially if it is accompanied by governance misalignments. The challenge is for cities to be strategically open for investment while maintaining consistency and coherence among the legal, regulatory, and legislative institutions at the local and national levels. Cities whose governance and institutional frameworks have been rated most highly for business and investment attractiveness include Singapore, Vancouver, and Auckland.14

Developing a pipeline of bankable projects

The potential of investors to commit capital hinges on the availability of investible sites and on the regulatory and planning frameworks that support and enable such investment to take place.15 Many cities have developed an investment framework that identifies and prioritizes a pipeline of commercial and physical projects according to a wider growth strategy and measurable impact. A robust pipeline of financially viable propositions and opportunities is one that meets the specific process, asset, scale, and risk management requirements of investors, including institutional investors (e.g., pension funds). This means that cities need the technical capacity to mount their own programme of development.

How to capitalize on private capital’s interest in diversification

Diversification is widely viewed as a hallmark of a strong investment portfolio. Long-term investments in urban real estate are opportunities to diversify a portfolio of stocks and bonds, and pool risk. This option is also pursued by smaller scale investors who may prefer to invest in real estate investment trusts (REITs), limited partnerships, mutual funds, or exchange-traded funds. Today institutional investors rarely allocate more than 10 per cent of their portfolio to real estate.

Investors also increasingly prefer to diversify their own real estate portfolio. Diversification is achieved by location, property type, tenant, sector, or lease term. This allows different investment strategies to take form whereby capital is deployed accord-ing to different combinations of risk appetite. As this diversification approach takes hold, more cities have an opportunity to benefit from real estate investment.

Busan, Korea

Underlying issues

It is crucial to acknowledge underlying issues that often affect real estate investment in developing cities. These include spatial development in fast-growing cities, densification, technology, and metropolitan areas with multiple jurisdictions. Adapting plans to take into account these often-unavoidable realities is essential.

Spatial development in fast-growing cities

With the global population currently growing at a rate of 75 million people a year, urban populations are accommodated in a number of different ways. The default mode is sprawl and metropolitanization, with cities expanding into a regional hinterland developing a new polycentric and dispersed growth pattern. Over the last two decades most cities in the world have become less dense because they are growing outwards. Cities in developing countries, where almost all urban growth will take place, are expected to triple their land area between 2005 and 2030. Urban footprint growth is expected to be almost as significant in industrialized countries (2.5 times overall growth), despite overall slower rates of population growth.16

Especially in Asia and the Middle East, it is also common to plan and construct new cities or districts from scratch in order to absorb part of the urbanizing labour force. However, there is increasing consensus around the need to accommodate more people and activities through an increase of density within existing boundaries. When thinking carefully about how to support population growth, the preferred choice is well-managed and well-serviced densification, especially among those cities that have not yet reached their natural sizes, or matched previous population peaks. But many cities struggle to accommodate their rising population growth, and do not easily find space for new housing, schools, amenities, and parks. They resist density and additional population, and they fear over-crowding, loss of privacy, or the insecurity of a more anonymous city.

Intensification, densification, and mixed use

It is widely agreed that densifying cities can accommodate population growth within a contained environmental footprint, and that they can enjoy better connectivity, amenities, open spaces, and social interaction. (For an overview of the outcomes of good density versus those of bad density, see Figure D.) A joint ULI/Centre for Liveable Cities report notes that the lower-density cities of the United States use about five times more energy per capita in gasoline than the cities of Europe, which are in turn about five times denser on average. 17 Dense cities in principle are able to become more productive and host innovation. Significantly, dense cities are also more investment-ready because of their ability to assemble and package large sites to institutional investors and other sources of capital.

Cities with a rigorous framework and plan for densification can:

  • Achieve density through mid-rise projects, without having to build extremely high throughout the inner city
  • Offer lifestyle benefits to a range of different income and demographic groups
  • Reduce congestion, carbon footprints, and inefficiencies by minimizing time and distances to work and leisure
  • Offer more amenities and opportunity in areas that have been under-invested
Figure
D
:
Outcomes of good density versus bad density
Figure D

Cities can do a number of things to densify success-fully and attract capital:

  • Create a citywide framework for density and compact development
  • Utilise PPPs in order to establish and finance projects at the local level
  • Concentrate efforts on prioritized areas to create critical mass in less-developed districts, allowing streamlining of time and resources and focusing investments in targeted areas
  • Ensuring that density is accompanied by liveability and attractiveness

Technology, real estate, and urban development

Most commercial buildings in larger, established cities around the world were designed for the industrial or corporate economy. They were constructed, owned, and managed with older business models in mind. But technology, the innovation economy, and their spin offs, such as the sharing economy, co-working, and the digital economy, are major disruptors for the real estate industry. Real estate developers and investors are now responding quickly to meet the needs of firms in innovative sectors such as digital media, IT, life sciences, clean tech, and others.

The rise of high-tech, innovation-led industries is a disruptor across the spectrum. At the macro-scale, the innovation economy is fuelling the demand to locate in cities. Cities are the 21st century “laboratories” for commercial innovation and cross-fertilization. They bring together a wide range of sectors, deep international networks, customer and client opportunities, and cultural and artistic quality. At the meso-scale, areas or neighbourhoods are being re-built to serve innovation as part of a broader process of re-urbanization and re-densification. The management and design of real estate have therefore become key ingredients to support and leverage this process for shared benefit. And at the micro-scale, many of the existing buildings in cities need to be re-purposed to fit the needs of new occupiers. For the innovation economy, workplace is a key enabler of organizational success, talent attraction, and company brand.

Innovation in particular sectors today has specific real estate requirements. In pharmaceutical and biotech, for example, the rise of independent research and development (R&D) providers means there is demand for wet and dry lab space. Almost all occupiers will have exacting technology needs, including high-quality fibre broadband connectivity and power systems. These new requirements are no longer solely the demands of innovators, as their influence is now stretching to more traditional occupiers in business and financial services firms. In short, the innovation economy has kick-started a revolution in real estate demand.

Meeting the new demands of the innovation economy (and increasingly of other sectors that are following its lead) presents challenges for the business models of real estate owners and land-lords. The real estate industry—developers, investors, owners, and planners—has had to re-think spatial form and business models. Many are making project and property adaptations to enhance the attractiveness and utility of their real estate assets to innovation firms—workspace innovations, new kinds of commercial space, adaptable buildings, and advice and support for start-ups. As part of real estate’s shift towards providing stewardship, management, and services in addition to the raw asset, real estate is becoming more active to create a more supportive operating framework for innovation, for improving finance and access to capital, and enhancing city- and district-wide attractiveness by managing housing, social infrastructure, and civic and public space.

The overall impact of technological change on real estate is that the industry is beginning to adopt more of a service-provider mindset and align interests and transparency between owners and occupiers. New imperatives have emerged to ensure commercial buildings have a robust technology platform, that routes to capital for growing firms are clear, encourage collaboration with mature institutions, and grow value over time through involved property management.18 These needs align with those of cities more broadly. Cities that seek to become centres of innovation require high-quality IT and utilities infrastructure. This will help universities and knowledge systems attract and support innovators and the next generation of technology-oriented workers.

Multi-jurisdictional metropolitan areas and real estate development

Real estate does not only look for investable sites and willing development partners in cities. The typical investor also looks for particular qualities in their public sector partners. They look to invest in cities that act in predictable ways—that have a well-defined long-term vision, clear planning frameworks, and rational land use policies. Cities that have good infrastructure that is appropriately supported by revenues are desirable, as are places that can leverage their own assets, including publicly owned land. And although clear frame-works are essential, investors will inevitably favour cities that have the ability and desire to be flexible in their approach to planning in order to reach their development goals. Finally, cities with competent, efficient, and investment-savvy management teams make strong partners.

Most cities do not yet represent this “model” partner. They may have opaque spatial policies, or inefficient processes for investment that can lead them to act unpredictably or unproductively. They may be limited by underpowered or inexperienced decision-makers.

For cities that embrace a “managed metropolis” approach, there is the promise of improved tools to promote urban development and attract property investment. These tools can include:

  • A move towards spatial development strategies and longer-term planning that provides greater vision and clarity to future development. Cities that are empowered to develop and deliver their own long-term strategic plans have a mechanism through which to crystallize clear and defined, spatially and sectorally integrated options for the future. Long-term plans can act as an investment prospectus for private sector sources of investment capital.
  • Elected mayors with increased land use planning decision-making powers and roles in housing, transport, and economic development. Strong, visible metropolitan leaders, elected with a clear mandate, can provide reassuring certainty to investors as a single “go-to” accountable figure, as opposed to the opacity of local authorities.
  • Better-integrated   capital   investment   budgets. Fiscal devolution can lead to a greater certainty of funds for local governments, enabling integrated capital investment budgets and long-term capital planning. Integrated budgets make the use of single appraisal frameworks possible and facilitate prioritization of projects in line with strategic objectives. In this way devolution can be an important catalyst for cities to develop their capacity to manage their funding and become more competent partners for private finance.
  • Better integration of transport investment with land use planning. Transport and land use planning under centralized systems are too often subject to silo-based thinking, with individual ministries creating rigid frameworks for local decision-making. Devolution of responsibility provides the potential for a more joined-up approach, which can result in efficient transport systems that are a major factor in quality-of-life assessments and a city’s broader attractiveness to talent and firms.
  • Greater coordination of public land portfolios for development. Devolution of powers can enable local authorities to proactively assemble land parcels of the necessary scale to stimulate the market and create attractive projects for investors. Hafen City in Hamburg is one of many examples of autonomous local authorities creating attractive mega-sites for private sector investment. A city or metro’s devolved powers might also include the ability to designate special development corporations for major parcels of redevelopment land that can be more nimble partners for the private sector.
  • Increased access to business rates and value capture financing techniques. Retaining business rates at the local level both incentivizes local governments to grow their economies, which in turn can encourage them to take more strategic development decisions, and can also provide greater freedom as to how funds are spent on local development (e.g., pooling for major projects). Equally, the opportunity to participate in value capture financing techniques such as tax increment financing, planning gain supplements, local taxation, or development levies can help local governments to leverage their assets in innovative ways, enabling developments that may not be possible under a system of hand-outs from higher tiers of government.

Any one or combination of these tools can help metropolitan areas to become more competent partners for real estate, providing them with the ability to make their city more investment-ready. The types of reforms that metropolitan leaders can make using enhanced powers may include:

  • Densification of land/increased brownfield development
  • Promotion of polycentric land-use patterns
  • Promotion of mixed-use development
  • Reform of planning policy/design codes
  • Infrastructure expansion to support development of new nodes
  • Development of long-term strategic city development plans19
  • 18. Greg Clark and Tim Moonen, Technology, Real Estate and the Innovation Economy (London, ULI Europe, 2015).
  • 19. Rosemary Feenan, Greg Clark, Emily Moir, Tim Moonen, Metro Governance, Devolution and the Real Estate Friendly City (unpublished, 2016).
Kuala Lumpur, Malaysia

Role of real estate planning and development in making cities competitive

Cities have a number of distinct imperatives depend-ing on their size, prosperity, economic strengths, political roles, quality of life, and spatial development patterns. They can be grouped into many different classifications based on these attributes, as work by Jones Lang LaSalle in 2015 shows.20 These groups of cities tend to share imperatives, and this section identifies ways in which real estate can play a shaping role in addressing and solving the respective challenges of three of these groups (see Figure E for an overview).

 

  • 20. Jones Lang LaSalle and The Business of Cities, Globalization, Competition, and The New World of Cities (Chicago, Jones Lang LaSalle, 2015).
Figure
E
:
Strategic imperatives for three different kinds of world cities
Figure E

Established World Cities’ imperatives

Established world cities (e.g., London, New York, and Paris)—the large globalized cities that have experienced significant international demand from people, firms, investors, and visitors—face a number of critical issues as they look to manage their growth. Most pertinently, they need to boost new supply in housing markets and confront opposition of existing asset-owners to new development, if they seek to avoid becoming prohibitively expensive to the younger workforce. The role of real estate here is multi-faceted, as they are valued partners in the effort to increase the rate of housing supply in collaboration with public authorities. Real estate can drive a diversification of ownership models, and institutional investment can increase the viability of long-term rental.

Real estate also has a role to play in densifying to bring forward mixed-income and mixed-use developments, and for undertaking redevelopment efforts to shift from old to new modes and recycle land effectively. And for this group of cities to maintain a competitive business climate and affordability for new entrants, it is important real estate provides innovative, affordable, and flexible office solutions for the growing innovation sectors. Finally, real estate will be a critical partner in the process of infrastructure modernization for these aging cities, and for undertaking integrated projects that span several jurisdictions in those established cities that lack a proper metropolitan leadership.

Emerging World Cities’ imperatives

For major cities in emerging economies (e.g., Shanghai, Sao Paulo, and Mumbai), a very different set of challenges is visible for which real estate will play an important role in addressing. This group of cities urgently relies on a more managed approach to population growth and to rural migration. Real estate planning has a big contribution to make in terms of the provision of mass housing, and place-making and renewal in monolithic suburbs and ribbon development. These cities also experience severe polarization of income and service access, and here real estate planning requires projects that build in public amenities and social infrastructure (child care, schools, health), and which militate against enclave urbanism.

Real estate development must also support these cities’ attempts to reduce vulnerability to climate change, flooding, and earthquakes through first-mover adaptation to resilient and sustainable building design. The sector also has a role to play to improve transparency, and to establish these cities’ identities so that they live up to and exceed their promise to international markets.

New World Cities’ imperatives

The most recent cycle of globalization since 2008 has seen a large number of cities become more intentionally global in their economic orientation. These “new” world cities (e.g., Auckland, Tel Aviv, and Vienna) are usually medium-sized cities, with a small number of distinct specializations, and a reputation for high quality of life. Their challenges revolve around increasing their connectivity to international markets, and creating a more metro-politan approach to adjust to increased scale, become more polycentric, and manage the externalities of growth.

Real estate planning and development can help these cities create critical mass in new sub-centres by sequencing infrastructure, amenities, and housing to achieve the necessary level of vibrancy and demand. Because these cities rely on their capacity to host entrepreneurship, real estate planning can also play a role in ensuring avail-ability of housing in inner-city locations, near the main “innovation districts.” The need for these cities to cultivate expert specialization in innovation, digital, and science means planning should promote synergies among universities, civil society, and firms. These cities also take an active leader-ship role in terms of energy efficiency and mix, and low pollution and green economy initiatives, and real estate planning has to accelerate the shift to compact growth within a wider strategy.

Conclusion

The process of urbanization is one of the most significant trends of the 21st century, and is inextricably linked to land use, property development, and real estate markets. Cities now influence social, political, and economic relations at every level and are major factors in creating land use agendas and priorities. Employing a coordinated, disciplined approach to planning across both public and private sectors, and supporting those efforts with a transparent regulatory environment, are fundamental factors in reducing development-related risks and attracting investment capital. Managed growth and effective planning approaches can positively impact and preserve a balance of key social, environmental, and economic interests.