LONDON REPORT

The evolution of global cities

Far from spelling the end of the global city, the Covid-19 pandemic is creating exciting opportunities for dynamic, resilient urban hubs such as London to evolve and meet the future needs of business, investors, workers and residents.
Written By:
William Matthews, Knight Frank
12 minutes to read
Categories: London Report The Case for Cities
  • Larger cities have been disproportionately impacted by the Covid-19 pandemic due to their symbiotic relationship with commuters
  • City populations such as that of London are set to continue growing as a result of inward migration, as well as demographic trends that are not easily reversed
  • The flexibility that challenged office-based employment in 2020 will be one of the very factors that enables cities to recover rapidly in 2021

Why activity will resume

Of all the concepts and conventions written off as obsolete in the wake of Covid-19 that of the city is both one of the more troubling, and the more obviously misguided. Ultimately, we believe that cities will continue to exert a magnetic attraction on businesses, talent and populations more widely, allowing them to fulfil their roles as facilitators of innovation, culture and prosperity. Yet even their greatest advocates appreciate that the pandemic has highlighted a need – and an opportunity – for cities to evolve, if they are to continue to meet this brief.

Capital cities have faced a particularly severe shock from the pandemic. A combination of workplace closures, reduced business travel, and weakening tourism has meant that large cities, normally full of people and vibrancy, have felt more obviously affected than smaller towns or suburbs. Google mobility data bears this out, as illustrated below, with all settings, with the exception of homes (residential) registering substantial drops in people traffic, relative to the 6th January, 2020 baseline.

Similarly, restaurant reservation data from Open Table shows the impact of the Covid-19 pandemic on restaurants in London and New York. London in particular, which is heavily reliant on commuter traffic, has been especially hard-hit by the UK’s various lockdowns.

Some commentators have suggested a more permanent shift might be at play. In the UK, we have previously explored in detail the growing interest and practicalities of hub-and-spoke office models, whereby some staff relocate from central HQ offices to peripheral satellites in suburban locations. Meanwhile, Knight Frank’s real-time residential data showed a growing propensity for home movers in London to consider more rural locations in 2020.

Read: Rethinking residential

“The UN expects 68% of the world’s population to live in urban areas by 2050, up from 55% in 2018.”

The question is whether these observations really do support the idea of a structural city de-population that has become fashionable since the onset of the pandemic. After all, city populations can ebb and flow over time, with many in Western economies reaching a low point as recently as the 1970s and 1980s as the post-war trend towards suburban living played out. In our view, however, the answer to that question is “no”. One reason is that mathematically, city populations such as that of London are set to continue growing. This is the result of inward migration, as well as demographic trends that are not easily reversed.1 Globally, the UN expects 68% of the world’s population to live in urban areas by 2050, up from 55% in 2018.

London’s resilient population growth

London’s population will continue to swell, despite the impact of the pandemic and the end of the EU transition period. That is the conclusion from the most recent population forecasts produced by the Greater London Authority (GLA), released at the end of 2020.

The central scenarios show that despite these disruptions, London’s population will continue to grow steadily over the coming years, from a current level of just under 9 million people, to between 10.5 million (+17%) and 10.9 million (+21%) by 2050. Taking account of the pandemic, this projection envisages a temporary reduction in population growth to 50,000 per annum until 2022, from a recent annual average of 88,000.

The analysis highlights the relative resilience of London’s international inward migration in recent years. It notes that, despite a number of significant shocks to London’s economy, the past 20 years has seen annual international migration to London of between 69,000 and 124,000. Reviewing the projections, an expert panel assembled by the GLA emphasised the unpredictability of future population flows, with Hong Kong SAR cited as one example of a location from which significant migration could, potentially, flow. Longer term, it was considered that a greater share of migration is likely to come from non-EU countries but that equally, there may be a reduced flow of emigration from London to EU countries.

Perhaps the most important conclusion for the office market is the projection of growth in the working age population. Currently, 68% of London’s population is of working age, equating to over 6 million people. In the high growth scenario, that demographic could expand by 1.3 million people, to reach almost 7.5 million by 2050. Part of this growth trajectory is dependent on the balance of inward and outward migration, but natural change – the difference between births and deaths – is also a key driver. London’s comparatively young population means that a significant degree of population growth is already “baked in”.

“London’s recovery will be accelerated by the fact that its workforce is disproportionately young.”

Another factor to consider is that as the global economy returns to growth, cities are well placed for a rapid recovery. True, the successful mass adoption of remote working contributed to a short-term emptying out of cities, but it also provided the continuity and flexibility that allowed businesses to survive and staff to remain employed. When conditions allow, these businesses and their staff will be able to return to the offices they temporarily vacated, with an ease not enjoyed across all sectors of the economy. The flexibility that challenged perceptions of office-based employment in 2020 will be one of the very factors that enables cities to recover rapidly once restrictions on movement are eased.

London’s recovery will be further accelerated by the fact that its workforce is disproportionately young, compared with the rest of the UK. Younger employees are likely to be particularly keen to return to the workplace. Often living more centrally than other colleagues, they have benefited less from the elimination of a commute, and have typically had to contend with less appropriate work settings than those in more spacious suburban homes.

Reshaping cities in the ’20s

Our conviction is that cities will ultimately be re-energised by a return to the workplace, the reopening of cultural draws and the ongoing work of educational institutions. However, we also recognise that there is a generational opportunity to reshape them: to fully support a new and more flexible working culture; to maximise their roles as engines of economic growth; and to address rising sustainability concerns.

Indeed, we are entering an exciting period in which significant consideration is being given to solutions to these issues. If acted upon, the concept of the city will emerge from the pandemic in better shape. What’s more, with governments pledging significant stimulus measures to kickstart growth, the monetary backing to realise these ideas is in greater abundance than usual. Globally, a number of common themes are in the ascendency, promoted by stakeholders from academic institutions, think-tanks, governments and developers. These include:

  • The creation of smaller self-contained, amenity-rich districts, as a counter to the sprawling, “unlivable" mega-city.
  • A call for city infrastructure to support businesses as they transition to post-Covid working patterns.
    The need to foster and protect the kaleidoscope of talent, finance, education, technology, culture and diversity that contributes to both community and innovation, whilst fuelling economic growth.
  • A recognition that wellbeing and sustainability have become even more important considerations for all stakeholders, from businesses to employees and inhabitants.

Some cities, such as Paris, have adopted the 15-minute city approach as a direct target, while others are implicitly following this line of thought with improvements to cycle networks and other forms of mobility, or investment in city-centre residential projects.

Investment in transport infrastructure features heavily in city recovery plans, but so does the recognition that unnecessary travel should be minimised, or at least managed in a more sustainable way. Some cities are aiming to reduce food mileage while others are promoting localism. Improvements in digital infrastructure also feature heavily, with many cities aiming to accelerate their adoption of “smart city” technologies, such as the digitisation of public services or investments in connectivity.

“Cities are also integrating the Covid-19 recovery into the updates of their longer-term development strategies.”

Cities are also integrating the Covid-19 recovery into the updates of their longer-term development strategies. For example, Amsterdam, Barcelona, Tallinn, Vienna and Utrecht are using the UN’s Sustainable Development Goals to guide their city development strategies (e.g. Utrecht's Healthy Urban Living strategy, Vienna's Smart City Wien).

How should London respond?

So, what steps should London take to ensure that it can maximise its value to stakeholders, and what are the roles and opportunities for real estate in this evolution? Which of the myriad ideas and schemes proposed in different cities would best apply to London?

Theme

Real estate implication

Real estate opportunity
Harnessing innovation as the driver of growth Innovation is widely regarded as a fundamental driver of growth and fostering it a key role of cities. London is uniquely placed to leverage innovation given its leading position.
Consequently, London will remain a dynamic, resilient economic hub with a clear, well-understood growth story.
  • Demand for flex space to accommodate start-ups, and continued attraction as HQ location.
  • Continued demand for development of highest quality space to support globally leading businesses.
  • Ongoing investment liquidity enhanced by investors targeting innovation theme.
Cities as country ambassadors on the global stage Key cities act quite literally as gateways to countries. Promoting cities on the global stage can lead to enhanced foreign direct investment (FDI) inflows, bolster trade and enhance “soft power”. The promotion of London as an independent financial centre and leading global innovation hub will help attract both talent and businesses and ensure that London remains a leading destination for real estate inflows.
  • Scope to piggyback government efforts to promote London overseas – either in terms of attracting businesses, highlighting investment opportunities, or channelling development finance to London projects.
Embracing the “green” recovery Most major cities already had “green” strategies in place, but the pandemic has sharpened the resolve to see them through. Understandably, the focus is increasingly coming to include wellness. As a significant contributor to overall energy usage, real estate in cities will come under increasing scrutiny. Businesses see their real estate as a very visible commitment to the environmental, social and governance (ESG) agenda and will become increasingly demanding of their assets. London is well positioned for this shift as it is already home to the largest number of “green” rated buildings amongst global cities.
  • The ESG agenda has aligned interests between investors, business leaders, staff, suppliers and customers which means that the scope for profitable development and investment in “green” buildings is rising quickly.
  • Redeveloping London’s large stock of “brown” assets into “green” ones will be a significant, generational, task. 64% of office stock was built before 2000.
Championing the 15-minute city The idea that cities can provide a full range of amenities within a short walking distance is gaining traction globally and is particularly relevant to London. London’s multitude of concentric “villages” provides a strong starting position. Mainline hubs that have a full range of amenities within a 15-minute radius are likely to become hotspots of activity. Dormitory/commuter towns may go into decline as a result/ become less popular.
  • Investment and redevelopment in a smaller number of key locations.
  • The pursuit and identification of “next locations”.
  • Greater need/potential for mixed-use development.
Creating mixed use accommodation that supports a diversity of demographics and life stages Space constraints mean cities often struggle to provide enough accommodation for all life stages and demographics, thus encouraging some groups to leave. By providing a better range of accommodation, cities can promote a more balanced mix of inhabitants. There is social and political pressure on city leaders to deliver a greater range of accommodation, with different ownership structures and at different price points.
  • A structural need for greater provision of living accommodation, underpinned by solid demographic trends.
  • The opportunity to adapt product to meet new demands, e.g. homes with workspaces, or provision for various types of care.
Accelerating infrastructure improvements that address changes in city usage From changing commuter patterns to increased reliance on digital connectivity and demand for cleaner electric vehicles (EV) logistics facilities, infrastructure will be crucial to the recovery. Some cities are promoting greater space for pedestrians and reducing reliance on combustion engine travel. London’s buildings will need to continue to be adapted to support rising connectivity expectations. They may need to cater to different vehicle types, such as electric scooters and e-bikes. Power could be a greater consideration than previously.
The long-awaited opening of Crossrail in late 2021 or early 2022 will provide a major boost to mobility in London and add vibrancy to stations along its route.
  • While overt environmental factors such as energy usage may increasingly be catalysts for redevelopment, consideration will also have to be given to transport methods.
Promoting culture and leisure as a reason to return As commuting populations have increasing choice and flexibility over their time spent in cities, cultural and retail offerings will play an even more important role in attracting them on a daily basis. London will retain a need for a diverse range of city centre real estate. Real estate in general will require greater co-ordination and curation and could become more management-intensive as an asset class. The creation of campus/village strategies will be beneficial in this regard.
  • The successful curation of high-quality mixed use environments has plenty of precedent in London

Read: Rethinking residential

Conclusion

Over the coming years, major cities around the world will face a common need to reconfirm their purpose and value and, on a practical level, to encourage working populations to return en masse. Those that have used the experience of the pandemic to evolve, reshape and become more appropriate for their users will clearly be at an early advantage.

London has a rich history of evolution to draw upon, and has an exciting future ahead. Reinvention and re-invigoration sit at the heart of London’s adaptability and resilience. The pandemic has to an extent forced a reset in thinking; however with a sharpened focus on issues ranging from sustainability and wellbeing to talent curation and attraction, London looks set to roar into the ’20s with a new post-Brexit position in the global economy to promote, while enjoying the full support of the UK government to help re-establish its credentials as the world’s most desirable city for people, businesses and investors.

1. ONS