The Sharing Economy: How Poor Millennials are Impacting Real Estate
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The rise of the sharing economy has caused tidal waves throughout a variety of industries, and real estate is impacted by the entirety of the sharing economy perhaps more than any other industry. While taxis and hotels feel pressure from companies like Uber and AirBnB, real estate and urban design are directly impacted by ALL of these businesses. Changing how people pay for, interact with, and traverse space will drastically alter what is profitable and unprofitable practice in the various segments of the real estate industry. Subsequently, architects, designers, engineers, planners, investors, and developers all stand to gain or lose based on how they identify with and respond to this prolific change in how people are doing things.
So what is the sharing economy, and why is it getting so much attention? In my humble opinion, it has emerged due to the demands of a generation (millennials) living with a record amount of debt while also having access to communication with more people through social media than any generation previously. The combination has resulted in the “sharing economy”, almost by necessity. As an example, cars are parked 95% of the time — why would debt-ridden young people pay for an asset they use so infrequently? By sharing these expensive assets — cars, spare bedrooms, boardrooms — the owner generates revenue to offset the cost, and the “sharer” spends less by paying only when using.
I’m not going to tell you what we all should do in order to adapt to the sharing economy. Instead, I want to briefly touch on what this new mindset might mean for various aspects of the real estate and urban planning world.
I mentioned cars already, so lets start there. Uber is prolific in major cities. People are choosing to more frequently hop in with someone else when a car is needed, and adapt alternate transportation (such as bicycles or public transit) when a car isn’t as necessary. Car sharing programs are also emerging, where you pay a membership fee or a rental rate to borrow a car. Down the road, futurists are already talking about self-driving cars zooming around cities that a user will book in advanced or hail like a cab.
The point is, if we all don’t have our own vehicles then we all don’t need parking. Changes to parking necessity in cities will be the most obvious way car sharing impacts the real estate industry. Residential properties will less frequently require driveways and garages, allowing for smaller, denser homes. For commercial buildings, parking lots can be reduced in size. This means more space to build, it means increased density, or it means improvements to landscape.
Roads as well, will be altered. If there are fewer cars, then there will be less need to invest in road infrastructure. Many roads may become pedestrian only, which may very well alter the use or desirability of certain real estate investments. Certain businesses will target pedestrian-only areas, increasing real estate value on these streets for certain users while decreasing it for others.
Lastly, regulations will change. In St. John’s currently, parking requirements can be very restrictive, particularly when wanting to build, or renovate buildings downtown for new uses. The need to provide a certain number of spaces per resident, or per customer, will not exist. At the very least, the expectation of what this number is will decrease. Parking lots and parking garages will not be as necessary, and developers can be a bit more imaginative in their land use.
Home sharing is embodied primarily through AirBnB. The platform is shaking up the hospitality industry in the same way Uber has impacted cab drivers. From a real estate perspective, AirBnB is going to impact people who are investing in residential, or mixed-use buildings. Primarily, proximity to downtown or to landmarks will increase the value of properties that can alter their use to allow for nightly rentals. AirBnB rentals need to be close to locations that are attracting visitors. If you have that location, then you can expect more revenue from a nightly rental than a monthly rental.
The sharing economy also presents the opportunity for property owners to include a residential component in areas where mixed-use zoning is appropriate. Particularly small businesses who own their own property. Running retail on a ground level with residential above can provide some stability through additional revenue sources. So many upper-stories in St. John’s are used for storage or offices for a ground-level business. These spaces are underutilized, and by adjusting their use property owners could avail of extra monthly revenue.
Lastly, for residential investors outside of desirable areas, the simple fact is that as AirBnB grows in popularity then the stock of rental properties will decrease. With a decrease in supply we can expect an increase in demand — residential investors may have opportunity to increase monthly rents.
Office sharing is perhaps the aspect of the sharing economy that people are most aware of, primarily because it goes hand-in-hand with the prevalence of startup culture and the “sexiness” of entrepreneurship. Office sharing has resulted in a new concept that is worth significant consideration if you are a commercial property owner.
The premise is simple — traditional leases are expensive, and things like boardrooms and kitchens end up unused most of the time. What’s more, private offices are a luxury for many but not a necessity. More and more small businesses are content with simply having a place for their team to gather and work. By having several companies share a space, costs are reduced for each user.
For those with commercial property, the demand for coworking is resulting in a new business where space is subleased. However, opportunity would exist for property owners to cut out the middle man and handle these “micro-leases” themselves. Additionally, coworking has created a scenario where adaptive re-use of older buildings has become an attractive option. After all, new businesses are willing to set up in less-than-ideal locations, and if they can further reduce rent it is a win for everyone. Older buildings actually become very attractive for people immersed in startup culture, since many of the architectural features that come along with these structures allow an opportunity to create some really unique and culture-defining office space. Investors should keep coworking in mind when considering uses for commercial investments, and even consider trying to alter their expectations for lease structure and encourage multiple small businesses, instead of a single large business, in a space.
All of this said, both home sharing and car sharing are facing a lot of pushback from affected industries, with many demanding that some sort of regulation be implemented to address “unfair competition”. Regardless of what happens, expectations of citizens have changed, and societal norms have pushed us in this direction. Real estate investors should absolutely be aware of what the sharing economy is, and continue to consider how it might impact the availability, value, or use of certain types of properties.
Brandon Copeland is an entrepreneur, real estate investor, and urban planning enthusiast. Brandon is the owner and principal consultant at Urban East, focusing on helping entrepreneurs and small business owners understand real estate and urban issues that impact their business plans and balance sheets.