Finding real estate resilience through innovation-led cities
Innovation drives growth and supports the population and wealth needed for well-functioning real estate markets. To quote Professor Nathan Rosenberg of Stanford University: “Innovative activity has been the single, most important component of long-term economic growth.” Amid this global pandemic, it will be innovative organisations, focused on sectors such as life sciences, that will make new breakthroughs, attract new swathes of funding, and generate new demand for space.
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Knowing that innovation often arises out of economic dislocation and that innovation is a key driver of growth means that identifying innovation-led cities (ILCs) becomes ever more important for real estate investors. In the current uncertain environment, it will be these innovation-led locations which attract and retain the population and wealth necessary for resilient, well-performing real estate markets. In real estate terms, this resilience is demonstrated by cities that can sustain tenant demand, support rental levels and capital values, and ultimately returns for investors.
Knight Frank’s research into innovation-led cities has collected over 100 different indicators, including data on almost 100,000 research institutions globally. From a long-list of 750 cities, these indicators have been applied to 288 cities worldwide to determine which lead innovation and growth, and therefore offer the greatest prospects for resilience for commercial real estate investors.
What is innovation and why does it matter to investors?
Innovation can be described as the combination of labour and capital employed in new ways to drive growth or do more with a given set of factors of production or inputs. This is distinct from invention, which is the generation of ideas. Innovation takes those ideas and amplifies them, generating momentum – and in the commercial arena, monetisation.
Tom Grasty, of The Grasty Group explains: “If invention is a pebble tossed in the pond, innovation is the rippling effect that pebble causes.” Knowledge combined with creativity leads to innovation, innovation to productivity and productivity to economic growth and resilience. Innovation rarely happens in isolation and agglomeration effects arise from innovators clustering together. These clusters are often centred around one or more universities. Successful innovation clusters monetise ideas and generate strong local economic growth.
This innovation also attracts and retains the population and wealth needed for well-functioning commercial real estate markets. Gaining exposure to locations which are innovating also helps shield the investor from some of the disruptive effects that largescale innovations can have.
This is because it is the cities which are creating the disruptive innovation that are the ones monetising it. The research also indicates that in innovation-led cities, tech and life sciences businesses are looking for an educated workforce as well as reputable universities that can work closely with industry to innovate and generate commercial benefits from their research.
Find out more in our Active Capital Report