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Futures Cut

Sign up for a personal view of the evolving role of real estate in a world of technological, social and business change, by Richard Pickering, Head of Innovation, EMEA.

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Sustainable Cities

Welcome to this week’s blog. If you’d prefer to listen to an audio version, click here for the podcastExternal Link

The concepts of the future and sustainability are inextricably linked. It’s quite simple: if the future is to look like the present, then current activities need to be sustainable. Of course, they rarely are sustained in the long run and that’s not necessarily a bad thing. Perhaps the old way wasn’t serving us particularly well. Or perhaps we found a new or better way to do things - it’s in our nature to seek out innovation and strive for progress. The challenge arises when the departure from status quo is not a choice, but rather an externality forced upon us with negative consequences.  

Many such departures arise due to resource depletion. For instance, if you’ve mined 90% of the gold in a gold mine, then future mining will not be indefinitely sustainable. Against the desire of the mine owner to extract profit forever, that is clearly not possible. In other situations, the outcome is more influenceable and less clear cut. These typically involve a trade-off. For instance, in the face of rising costs, the current operations of the NHS might no longer be sustainable. There are of course solutions, for instance raising taxes or diverting funding from other departments, but that will mean taking pain elsewhere. Perhaps the trade-off will mean that another activity, such as your weekly meal out, or the current cost of your season ticket is no longer sustainable.

The challenge of our times lies in one of these very difficult trade-offs. We either reduce carbon emissions, or we incur what might be devastating impacts of global warming. This could be formulated as a Hobson’s choice (i.e. one which in truth only has one answer) - but it isn’t. Whereas the impacts of climate change are manifest, the sacrifices associated with carbon reduction are no walk in the park either. For investors, they include a significant premature write-down in asset values due to functional and regulatory obsolescence, and for everyone else, they mean a reduction in consumption and a curtailing of lifestyles. The reality is that every day we implicitly determine this trade off in our behaviors and commercial activities. The choice is real and we are making it. And on balance, we are choosing climate change.

The actions (or inactions) of governments around the world and all of us as consumers put us on a course that is going to be very difficult in the longer term. Who knows, maybe we will innovate our way out of this trade off. However, the likelihood is that we will probably now bear both the penalties of obsolescence, the cost of new infrastructure and also the impacts of climate change. This is the terrible middle ground that results from a half-hearted trade off; and it is going to be hugely influential on the future of our cities. If that was all there was, then it would be more than enough to deal with. However, the truth is much scarier. There is a raft of sustainability challenges hitting our cities across multiple domains, of which the environment is just one.

The city is the most complex human ecosystem. Against epithets such ‘eternal’ and timeless, cities are often finely balanced networks that can be subject to significant change. They require many resources to sustain them, many of which are neither infinite nor renewable. Whilst people do tend to have a habit of staying where they were born, this trend is decreasing, and cities are reliant on the continuation of sometimes capricious demand. People and businesses need to enduringly want to participate in the outputs and activities of their city; whereas increasingly urbanites are mobile and have choices to move if their city no longer services their needs.

Environmental sustainability is front page news, but in the city context, economic sustainability is perhaps equally important. Indeed, this broader definition is recognised in UN Sustainability Goal 11, which describes sustainable cities as ones which are dedicated to green sustainability, social sustainability and economic sustainability. But it is also other things: sustainability of energy and food supplies, reliance on external supply chains, sustainability of biodiversity, sustainability of land use and infrastructure, and the impact of inequalities on social sustainability.

Over time urban theorists and practitioners have evolved their thinking on how to promote sustainability and wellbeing in the city context. Starting in the early 1900s with an agenda to clean up pollution and slums, we saw the codification of land use and the introduction of a planned approach to development. The next wave was about personal space; including Ebenezer Howard’s Garden City concept, the Australian ‘quarter-acre plot’ and the push into suburbs like ‘Metroland’. This addressed contemporary issues, but created new ones which set the agenda for modern urbanist approaches. As big cities grew and sprawled further outwards, so the time to move around them, and the cohesion of local communities suffered. Particularly true of the modern North American cities that were free from the confining shackles of their medieval European cousins, personal space meant urban sprawl – perhaps the single biggest problem faced in modern urbanist thinking.

Out of this new challenge came the New Urbanist movement, and cities that promoted density, walkability and active frontages. Alongside New Urbanism we have seen the emergence of Smart Growth principles in the 1970s, and more recently, Eco Cities, Smart Cities and now 15-minute cities. The modern focus is very clearly anchored in sustainability, social inclusion and the efficient allocation of resources. Collectively, this feels very obvious thinking today and is built into most contemporary policy; however, the legacy of urban sprawl is very hard to unpick. The majority of cities is about what has already been built under a different regime, rather than the annual delta of new best practice, and the degree of effectiveness of new interventions also often gets lost under the weight of new economic and resource pressures.

Perhaps as a consequence, the UN Environment Programme assesses that most cities are on a path of environmental degradation, have inadequate infrastructure (and overreliance on cars), and suffer from a lack of basic services. Cities suffer from unsustainably low levels of housing delivery (particularly at the bottom end); commute times are getting higher, homes are getting smaller, we have less and less external amenity per capita, and crime and mental health challenges are growing disproportionately in our cities. Otherwise put, cities are getting worse. They are getting worse because the standards of living and other quality factors determined in a previous age are no longer sustainable in the modern environment. This, along with climate change, is perhaps one of the biggest issues of our times; one that touches all of you, and one which has a bearing on how we use and invest in real estate. Suburbanisation hasn’t worked; but it looks like densification isn’t doing too well either. Is it time for a new approach?

This topic is far too big to crunch into one blog. However, I’ll try to set out below a 101 of the headlines that you need to be thinking about in this hugely important area:

Land use - Only 9% of land in the UK is urban (3% globally); 28% is used for grazing animals and a significant percentage of the rest has no role in our commerce or supply chain. So, we aren’t even close to running out of land. However, we are running out of land where it counts. There are vast tracts of land in the world with very low population density (either they are inhospitable, or they are distant from population nodes), and then there are super dense population centres that have grown into economic hubs. Over the past 200 years this has become more and more polarised due to industrialisation and urbanisation. The pressure is now being felt in these dense centres, whereas other areas of the world are wasted. We need to reopen thinking about creating new towns rather than adding to those already under significant strain. 

Infrastructure – In theory, density is a good thing; it reduces travelling and makes resource consumption more efficient. However, density also puts pressure on amenity ratios. Density is typically achieved through height, and so as we get denser, the ratio of people to ground floor space and amenity (like parks) increases, and everyone gets a bit less. This includes roads, which get more congested (and therefore polluted) and travel time increases. Density also increases the marginal cost of delivery (every time you dig a new tube line, you need to dig a bit deeper, and every time you build a taller skyscraper, the incremental costs get higher). The value of increased density is therefore asymptotic, and many cities around the world have got to a tipping point where further density is not sustainable. We need to acknowledge the limit of densification, and shift growth focus to cities that still have capacity to densify.

Industrial Diversification – Some cities are poorly diversified from an industrial perspective, which creates significant risks to economic sustainability. The classic example is that of a mining town (like Bodie, California, or Hashima Island, Japan). When the mine dries up, the mining company leaves, the city loses its purpose and spirals into economic decline. The other example would be a ‘company town’ where one business dominates the local economy. If the company leaves or goes bust, the town fails. There are also risks in the case of strong agglomerations. For instance, if a city is built on the fossil fuels sector, and that sector is regulated out of existence, the city will likely fail. Or if a city is exposed to a specific function (like call centres) that are disrupted, then that city will face challenges. A sustainable city is one that has a well-diversified and future focussed industrial strategy. 

Self-sufficiency – If any ecosystem is reliant on externalities, then it is less sustainable than one which is not. To take an extreme example, we on earth are 100% reliant on the sun. If the sun blows up, we die, and there is nothing we can do about it. At a city level, some cities are reliant on external financial subsidy, say from central government. This is often subject to political whim, and therefore presents a risk to economic sustainability. At a macro level, the UK is 80% reliant on external supply chains for food and many commodities. Contrast this with say Shanghai, where 63% of food consumed is created in the city limits. Of course the topic of the day is energy self-sufficiency, and this puts ever more pressure on building economically sustainable renewable supplies. A sustainable city is one that has a high self-sufficiency.

Commercial sustainability – Every market is subject to supply and demand variations, but since they tend to swing to equilibrium, this does not create sustainability challenges. However, where there is either a sharp structural correction, or a one-way trajectory for demand, then the sustainability of commerce is threatened. Over the past 20 years for instance, we have seen a fairly linear progression of e-commerce adoption, which has meant that former volumes of retail space are no longer sustainable. Similarly, the removal of weekday footfall from city centres associated with new work models has left businesses that rely on regular daily footfall, or train operators that rely on 5 days’ worth of peak travel unviable. The work model shift has the potential to be the biggest disruptor of the economic sustainability of our cities in the next decade. 

Positive commercial shocks – Sometimes good news can also be bad news. The arrival of a large corporate occupier in a city should be good news. If, however, the occupier is dominant on a segment of the economy and attracts new roles that are outside the structure of the existing employment market, then the transition period can be painful for local residents. A classic example is the arrival of a large tech occupier, paying big wages which attract in-movers. Whereas the hope is for trickle down benefits for all, often the housing market can’t adjust quickly enough, with the effect that locals are priced out and gentrification and two-tier markets emerge. The former economic balance is no longer sustainable and existing residents (particularly renters) get pushed out. A sustainable city is one that can absorb positive economic shocks effectively; which means it needs to have quick and responsive decision making and the ability to accelerate land supply.  

Inequality – In the long run, inequalities are theoretically unsustainable. For a few people to hold the majority of the resources, common goods and advantages in cities is both unfair and liable to change pressures. In general urban economics promote inequality, in that land is allocated with preference to the rich and the profitable. Land ownership has been proven to widen the wealth gap, and result in other socio-economic challenges. For instance poorer people are priced out of central and desirable areas, which reduces their opportunities and increases their inconvenience. Poorer people tend to live in areas of greater pollution, worse health outcomes, less access to green space and weaker infrastructure. Sustainable cities are ones which create inclusive growth, and balance effectively and fairly the needs of multiple stakeholders. 

Environmental –For most cities around the world, flooding is the biggest environmental risk. Cities are disproportionately exposed to these risks because historically many were founded in coastal areas or near major water courses. For some cities around the world, 3 degrees of global warming (1.5m sea level rise) would put them underwater. Some of our biggest global cities (New York, Miami, Tokyo, Osaka, Ho Chi Minh, Kolkata, Amsterdam) would be very seriously affected by sea level rise; whereas many smaller towns and cities will also suffer greatly from increased storm surge in the road to 2040. For some cities, this may mean extinction. In preparedness for this, many cities need to start taking action now to safeguard their future (e.g. Jakarta is spending $40bn on a sea wall). Sustainable cities have a clear plan for how they will manage climate change.

Population Change – Set against the explosion of growth in South Asia and Africa, many cities around the world are now losing population. Many countries in Europe (Greece, Italy, Portugal, Balkans) are already population negative (as with China and South Korea), and most of Europe might well be population negative by 2040. Population growth is one of the biggest determinants of GDP growth, inward investment and economic sustainability. Without it, multiple challenges emerge: including economic sustainability, financial stability, social cohesion, and personal wealth reduction – we see some of these in Japan following a period of population decline. Offsetting population decline in the West is high levels of migration, which have the potential to increase dramatically if climate effects exacerbate. Sustainable cities of the future will need to develop strategies to manage both population increase and decline. 

Urban Greening – Modern cities have been built on asphalt and concrete. We see a continued reduction in biodiversity in cities and city fringes as habitats are threatened. A secondary consequence of urbanisation is the ‘urban heat island effect’, with urban materials attracting and absorbing larger amounts of thermal energy than extra-urban locations. This in turn creates thermal pollution in urban water-courses, damaging ecology and increasing air pollution. Asphalt cities also increase the risk of flash-flooding, whereas loss of ecology and green space (12% of Brits don’t have access to private external space) has been shown to damage mental health. For all of these reasons, a sustainable city is a green city.

In combination these factors are all very real ones. As well as the obvious social impacts, they each have a bearing on the future value of assets within these cities. In some cases the glide path and risk profile is much steeper than others. However, these principles and challenges are ubiquitous, and will sit at the core of investor decision making over the next decade.

Is all hope lost for cities? The outlook certainly appears challenging, but thankfully there are a number of innovations (urbanism, technology, policy, data) that offer positive news. The next edition of Futures /Cut will be dedicated to those. In the meantime, why not check out our vision for the Future of Cities, on our interactive Future of Cities website, by clicking the image below.

Future of Cities - A Vision for Cities in 2040



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