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Live, Work, Play: The Prime Time Paradigm of Urban Investment

It’s fueling economic revitalization in cities from San Francisco to Manhattan to Berlin.  It’s driving unprecedented growth from Shenzhen to Sao Paulo.

It’s placing cities at the center of a virtuous cycle that drives development and innovation to trigger wealth creation and higher productivity. And it’s going to require $50 trillion in backing over the next 15 years alone to succeed.

Welcome to the prime time of urbanization. A once-in-a-lifetime trend with real estate investment at its core, riding a mantra of Live, Work, Play across the developed and emerging cities of the world.

Approximately 60 to 70 million people will be added to urban locations each year over the next 30 years. By 2050, two-thirds of the global population will reside in urban areas, according to a recent Prudential Investment Management study.

Some cities will feel the effects of this urban migration far sooner. According to the World Bank, there will be 660 cities worldwide with a population of at least 1 million residents by 2030.

This unprecedented growth will require support in the form of commercial real estate construction; retail expansion as well as warehousing and logistics support, among other things—projects that will require trillions of dollars in backing to succeed, including $50 trillion over the next 15 years.

Determining the cities where real estate investment will ultimately occur requires an examination of each city’s projected productivity. Population growth and rises in economic activity are closely connected to the rise of information technology, and consequently, global connectivity.

As these populations grow increasingly aware of how people in other parts of the world live, their awareness drives demand for new products and services, pulling rural residents towards the attractions of the urban lifestyle.

Handled correctly, these nascent hubs of commerce can lead to a virtuous cycle of growth, providing better opportunities for educated workers, as well as more elevated amenities for those workers to enjoy in their free time.

Live, Work, Play

In the already-developed cities of the world, some of the most desirable real estate investments are in central business districts where developers are converting old properties, such as offices, warehouses and parking lots, into new residential communities where young professionals may forgo their cars and pay for the privilege of having good food, entertainment and retail close to home.

In emerging markets, planning for the eventual uptick in the educated workforce presents a different kind of opportunity. According to the World Bank, an estimated 35 million housing units still need to be built in major emerging markets—a roughly $700 billion opportunity that developers haven’t yet fully seized.

It’s an opportunity investors should not ignore. Even those who would rather not fund the construction of the units themselves may still opt to pick up completed units while they are still inexpensive—if the market takes off, renting those units to urbanites flocking to the city could be an easily turned profit. It’s a risky bet, though, if it is made on pure speculation. Cities can fail to hit bullish demand forecasts, and that can often lead to a lot of oversupply and never see the dramatic jumps in rents like those seen in American cities like Atlanta and Austin or European cities like Munich or Stockholm.

Retail’s Crystal Ball

One way to track the progress of these emerging economies is by taking a close look at trends in retail sales, both online and in-store. It is estimated that hundreds of cities from Central America to Asia will produce 1 billion new urban middle-class consumers—consumers who will make more than $2.3 trillion in online purchases by 2017.

Today, business developers can assess exactly how many people are buying their products to within a fraction of a square mile. Utilizing this level of intelligence allows businesses to project fluctuations in supply and demand with greater confidence, so that expansion plans may be carefully laid even before ground is broken on a storefront.

While the ready availability of casual dining, mid-range clothes and accessories, as well as consumer home goods such as microwaves and toasters, marks the first step that emerging markets take on their way to becoming megacities, even greater opportunities lie in what happens next.

The arrival of luxury retailers is a clear signal that a city has ascended to the global stage. In Brazil, a country where luxury demand is on the rise, sales of high-end vehicles is projected to increase by 45 percent each year.

A boom in retail could have larger implications for real estate demand. Whether virtual or physical, high-end or low, an increase in goods bought and sold necessitates a corresponding increase in warehousing and logistics hubs to support such commerce.

Real estate is ultimately a boots-on-the-ground industry—institutional investors will only be able to choose the most profitable locations in the fastest growing cities with a deep and intimate understanding of the politics and culture that drive each region. What could succeed in India is very different than in China. The challenges Colombia faces are not the same as those faced in Brazil.

Finding the next Shenzhen or Bangalore will not be a matter of just conducting macroeconomic country- or city-level analysis from behind a computer screen—it’s a task that will take extensive neighborhood-level research and insight. The extensive local knowledge of real estate investment professionals, who experience urban growth from the ground up and have the foresight to recognize opportunity early on, will be in the best position to capitalize on this once-in-a-lifetime trend.

Prudential Investment Management is the primary asset management business of Prudential Financial, Inc. Prudential Real Estate Investors is Prudential Investment Management’s real estate investment advisory business and operates through Prudential Investment Management, Inc. (PIM), a registered investment advisor. Prudential, the Prudential logo and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide. Prudential, the Prudential logo, PREI and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.

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About the Author

Peter Hayes is Global Head of Investment Research, Prudential Real Estate Investors.

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