Key Takeaways from the ULI Europe Conference in Brussels

LoopNet attended ULI Europe's first in-person annual meeting in two years from May 11 to May 13, joining nearly 2,000 commercial real estate leaders gathered in Brussels as Russia carried on its assault on Ukraine, energy prices continued to rise, the threat of economic recession loomed and climate targets remained elusive.

The atmosphere at the ULI Europe Conference was simultaneously invigorating and sobering as leaders from mostly large and institutional real estate companies came together in person and shared their views on markets, asset classes and trends against this challenging humanitarian, socio-economic and environmental backdrop.

As is typical at ULI gatherings, keynote speakers, panelists and session attendees spoke candidly about key problems facing real estate investors, operators and tenants in Europe. These industry leaders shared what their own companies are doing, while acknowledging that future objectives, especially in the realm of energy independence, will be both difficult and expensive to achieve.

Several themes seemed to continually recur at the conference, including decarbonization of buildings, the potential for a near-term recession, big data and property technology (known as proptech), and the need to design and create flexible real estate assets.

Limiting energy reliance on foreign countries has become urgent for Europe in the wake of the Russian war on Ukraine, meaning that the move from fossil fuels to renewable energy sources can produce two benefits: energy independence and climate protection.

In support of this transition, Lisette van Doorn — CEO, Europe, Urban Land Institute — opened the conference by discussing a study just begun by ULI Europe called C-Change, which is focused on how to fast track decarbonization for the built environment.

This comprehensive study will highlight potential methodologies to reduce carbon emissions from the heating, cooling, lighting and overall operation of buildings, and it will also examine ways to reduce “embodied” carbon in structures. Embodied carbon is a relatively new metric that measures the carbon emitted during the construction phase of a building.

The study will begin by focusing on two key priorities that van Doorn said “are firmly linked to what we think is central to the work: retrofitting existing buildings.”

The first of what van Doorn calls intervention points “is focused on property valuations, knowing that current valuations do not properly reflect climate risk.”

She noted that government regulations are not yet in place, but they are coming. She added that in anticipation of these regulations, many real estate owners have already begun to make internal assessments, but those assessments “all are based on different assumptions,” van Doorn said.

“To get the market moving faster, we need to build a case to transform existing stock. To do this, we aim to work towards [creating] a common industry methodology to assess climate risks as part of property valuations.”

The second intervention point is focused on the alignment between tenants and landlords. “Both stakeholders are keen to decarbonize, but in practice, they're not yet fully aligned on what this means,” van Doorn noted. The C-Change study will explore practical ways to align and create common goals for tenants and landlords to work together, emphasizing again that decarbonization means adapting existing buildings rather than building new ones.

Sandra Phlippen, chief economist, ABN AMRO Bank, discussed potential recession in Europe by focusing first on the United States, the country with the largest economy in the world as measured by gross domestic product. She indicated that at this point, based on the data and information available, it appears that a recession — of unknown length or degree — is coming and that it will likely be worse in the U.S. than in Europe.

U.S. inflation which “has been gone for the longest time, [has] reawakened and that's really a game-changer for the global economy,” Phlippen noted.

She explained that U.S. inflation concerns are not just about the headline inflation typically reported. The main worry is that inflation is broadening across categories, such as energy and commodities, getting deeply nested and becoming fixed in the economy. This is worrisome, Phlippen said, “because it's actually triggering the second event and that is [rising] wages.”

If wages go up, people have more to spend, and demand is increased. That increases prices again, “which is a new argument for wage increases, and that becomes self-fulfilling,” and deeply problematic Phlippen noted. “And because that is the case, the Federal Reserve has basically no other option, at this point in time, than to hike rates at a pretty extreme pace.”

“Europe has its own inflation problem, but I think it's really crucial that we keep in mind that it's a very different one,” she noted. In Europe, inflation is still, for the majority of people and businesses, about energy. There are inflationary elements related to commodities but those are imported into the Eurozone and not homegrown. “This basically means that the [European Central Bank (ECB)] cannot do that much about it,” Phlippen added.

At the same time, wage growth in the Eurozone is still nonexistent, she noted. Nevertheless, professional economic forecasters, and the population at large, are expecting inflation to go up. And the psychological factor of these expectations is forcing the ECB to take action, even though it knows that this inflation is something that it can't really fight. “But because inflation expectations are increasing, it needs to step up its rates. It will probably start in July with a 25-basis point hike and then maybe another 25 [basis point increase] in September,” Phlippen said.

But she added that some forces may keep rate hikes in check.

Energy prices will stay high and will start to affect other economic sectors, so “if wages are not compensating people's price increases, it means that their purchasing power is going to very quickly erode.”

If this and other factors play out, “this is going to erode growth in about six months until the end of the year,” and inflation is going to decrease, and that means that the room for the ECB to keep raising rates — except for maybe the first two or three times — is very limited.

Continuing to integrate environmental, social and corporate governance policies (ESG) into real estate companies was called for at virtually every session of the conference. In support of these efforts, many attendees indicated that big data and proptech will play key roles.

The notion of comparing big data sets to quickly find patterns, categories and relationships is becoming commonplace among many real estate-related companies.

Conveying an anecdote about data sets that were “crushed” to identify safety compliance in buildings across the UK, panelist Peter Denton, CEO of Homes England, related the story of a “thoughtful young colleague that suggested combining data sets. In less than 48 hours, we crushed 46 million records and we got an entire picture of the whole country. I won't tell you how many people hours might have been [required for] a more manual process,” he noted.

“Data is the new god and data analysts are the chief priests,” Denton concluded.

In a separate session, in what can only be characterized as a rally cry, Gregory Dewerpe, founder of A/O PropTech, commented that “there is not a scenario where we can ignore innovation and technology in this industry.”

“First, there is a role that goes much beyond the [real estate] industry to go and tackle some of the most important problems around climate and social crisis,” said Dewerpe, who leads Europe’s largest proptech venture capital firm.

“Second, there's an economic reality where cap rates are at historical lows and rental growth is bound to become subdued,” he said, adding that the notion of value add is going to depend on technology. “There is going to be a massive change in the way we think about how we value real estate going forward and it has already started.”

Third, Dewerpe noted that “we've shifted from a landlord-centric industry to a customer-centric industry and the only way to service those customers is through technology.”

He called on the audience to change their internal cultures and integrate proptech into their businesses because “real estate not only is the largest industry in the world, it's also the most impactful industry in the world when it comes to climate and it's also one of the most influential industries in the world when it comes to social equality.”

Acknowledging he might not make friends, Dewerpe chastised the industry by saying “there is a legacy mindset in real estate that everything is siloed. We cannot expect leaders [to change] in an industry that is relatively antiquated in its thinking,” and has not been forced to innovate because “everyone has been making tremendous amounts of money,” Dewerpe said.

To foster innovation and integrate technologies, Dewerpe said it starts from within organizations, first and foremost with people. “You need to bring in new types of talent that are going to rephrase the legacy mindset of both real estate and proptech organizations.,” he said.

He concluded by reiterating that entrepreneurs are drawn to “the built world, because they believe that real estate can be one of the most powerful vectors for change around climate, around social inequalities, and other things.”

The notion of flexibility came across in several ways, including of course with the perennial debate about working from home or in the office. Human behaviorist Thimon De Jong, founder, Whetston/Strategic Foresight, noted that if “hybrid” was the buzz word of the past year, “flexibility” will supplant it in 2022. He emphasized that what people seek is flexibility to work in the office when they need to and to work elsewhere when that enables them to be most productive.

“The real thing people want is not two days or exactly three days, or four days, they want flexibility from their employers. And that has to do with an uncertain future,” De Jong said. People don’t know where they will be in the future or what the next crisis will bring. But knowing their employer is flexible gives them comfort that their employer will adapt to changing circumstances.

Flexibility also came up as it related to buildings. Panelist Ger Baron, CTO of the City of Amsterdam, asked the real estate developers in the room why they couldn’t make their buildings more flexible, and why structures are not designed to house different uses over time as conditions in markets and neighborhoods change.

Flexibility also appeared in conversations about reducing energy consumption. Architect, Philip Tidd, principal and managing director at Gensler in Germany, noted that conversions from office to residential may not do much to reduce energy consumption. Instead, mixed-use buildings — with three or more combined uses like office, retail and residential — should be prioritized. This has been the case in China for decades, and he said today they continue to design these mixed-use types of buildings.

There seems to be more interest in this notion of building-level mixed-use as built-environment professionals come to terms with the fact that office buildings are scarcely occupied. As has been noted in many studies, partial occupancy is not a COVID-era dynamic. Even before the pandemic, employees in sales, on vacation, traveling for work, etc. meant that buildings were partially occupied during the workday and empty — yet still requiring energy — at night. Conference attendees suggested that building fewer buildings and filling the ones that exist was a step in the right direction relative to both flexibility and reduced energy consumption.