Autonomous Vehicles and the Future of Real Estate
Past transportation revolutions, like those precipitated by the steam engine and the automobile, dramatically changed where and how cities were built. The impending revolution in vehicle automation will do the same. The effects of autonomous vehicles (AVs) on real estate can be broken down into impacts to land (where we build) and product (what we build). Both land and product will be affected through direct and secondary means:
• Direct: changes in the interaction between real estate and cars; e.g. lower parking requirements
• Secondary: changes in real estate preferences driven by AV-triggered alteration of behavior; e.g. decreased commute pain leads to increased demand for rural single family homes
It is difficult to predict what real estate will look like in an AV future because land use patterns and values are influenced by so many factors: demographics, regional economics and employment, physical constraints and features, existing neighborhood character, transportation, zoning and local politics, and access to equity and debt. When you add AVs to this concoction the result could realistically be either a more rural or a more urban world. However, a few critical questions will inform which direction we’ll go and even without complete answers, we can still start to form hypotheses about the future.
Land: Where We Build
Almost all impacts to land are secondary. The central question that will determine the future is this: will we use this transportation revolution to double down on cities and make our urban areas even better, or will we repeat the history of the 1950s and have a suburban renaissance? The key questions below together will determine which future we create, and the answers will materially alter not only real estate prices and land use patterns but also our environment, health, happiness, and quality of life.
Even without certainty around the answers to key questions, the following land use and value hypothesis seem likely to come true:
• Demand for core/CBD office product gets even stronger. Locating within the ecosystem of a vibrant downtown is still attractive, and parking becomes less of a barrier for firms.
• Major metro areas and especially innovation hubs will continue to grow. Traditional problems from density (land scarcity within commutable distance and traffic) will be mitigated by AVs.
• Obsolete parking lots create a significant new supply of developable land, which may depress land prices and increase affordability if the transition period to AVs is short. A glut could be compounded by increased density allowances as parking and traffic stop limiting urban infill; however, this is politically unlikely to happen if affordability pressure is already relieved.
Product: What We Build
Both the type and design of real estate products will change with the rise of vehicle automation. Many of the questions outlined above will also impact what type of product is built; in particular, to the extent that land use patterns change, residential product mix will change. For example, if a second suburbanization occurs, then single family home product will be a winner. However, unlike land impacts, product impacts will be both direct and indirect. As such, it is easier to have certainty around certain predictions.
Potential product type impacts include:
• Retail: Demand for warehouse space near urban areas will increase as last-mile-delivery enables even greater growth for e-commerce. Commodity retail will suffer but experiential retail will be minimally impacted and may even do better; similar to the logic for core downtown product, demand will remain but the barrier of driving and parking will be eliminated.
• Driver-centric product: Gas stations, motels, and truck stops will suffer. Assuming that electrification and automation happen in tandem, gas stations will be doubly devastated.
• Parking: Some existing parking lots will become obsolete and repurposed. Subterranean lots will struggle to be repurposed.
Potential product design impacts include:
• More loading zones will be needed. The existing system of ride-hailing cars stopping illegally is unsustainable at scale. Existing parking could be converted to this use and leased to TNCs.
• Less/no parking in core urban product.
• Existing home garages will get converted.
• Urban residential unit size will decrease as offsite storage delivery gets easier and as people spend less time at home and more time in their vehicles or Third Places.
Real Estate Opportunity
Much of the industry is thinking about direct, product-related impacts from AVs, especially whether to build less parking. Few are considering the impacts of AVs beyond product and no funds have been set up to pursue an investing thesis around AVs. This is partly because the answers to key questions are still unclear and because change is likely to be measured in years and decades. Also, land value changes may not be linear: for example, traffic may get worse before it gets better, making suburban home values decline before they increase.
Global real estate is estimated to be $217 Trillion, over 600 times larger than the combined $350 Billion market capitalization of GM, Ford, Honda and Toyota. This means that more wealth will likely be both lost and created by AV-impacted real estate than by manufacturing of the vehicles themselves. While the future of real estate in an AV world is hazy, there is enormous opportunity for those who can make the right bets early.
So, what are you doing about it?