Erez is a real estate investor, author, and entrepreneur. He co-founded Urbium Property Group and has been involved in over 12 million square feet of real estate construction with a value of over $3.5 billion. Erez is a board member of the Urban Land Institute, where he was awarded a Rising Star. He graduated summa cum laude from Manhattan College and received his MBA from the Wharton School at the University of Pennsylvania where he was a Bucksbaum Fellow.
Is Focus on Location a Thing of the Past?
Most people will pay a premium to live near their workplace, a bustling city center, or within reach of major public transit centers. But will the advent of driverless cars turn the old real estate adage “location, location, location” on its head?
October 22, 2018
Nearly every major car company is experimenting with driverless transportation, also referred to as autonomous vehicles. In fact, Google expects to have its first autonomous ride-sharing service on the roads as early as the end of this year. Apple isn’t far behind and is regularly seen testing its vehicles on public roadways.
Autonomous driving is classified over six levels, from 0 to 5, where level 0 represents a car with zero automation and level 5 is fully automated. Only cars driving at levels 4 and 5 are truly autonomous. But Tesla’s Enhanced Autopilot feature is already on the road, providing consumers with a self-driving experience somewhere between levels 2 and 3. Coming soon are level 4 vehicles, which will be self-driving only over terrain that has been thoroughly mapped out in 3D. Level 5 vehicles will be able to drive on unmapped terrain.
Though all new technology is most expensive to its early adopters, driverless cars will be prohibitively so for the individual car owner. It’s likely that level 4 driverless cars will first be rolled out to commercial services rather than individual car owners. But even if Americans don’t own their own autonomous vehicles, these cars have the potential to change real estate patterns.
Uber CEO Dara Khosrowshahi said in January that he wanted his self-driving cars to be picking up passengers as soon as next year, and that 20 percent or more of its fleet could become driverless. Ford has already partnered with Domino’s and Postmates to deliver packages and pizza in a car that appears to be self-driving. If we can get where we need to go and have goods quickly delivered no matter where we live, is location still as important as we think?
It is too early to know the effect of this new technology on the real estate market with absolute certainty, but we can read the clues revealed by current trends.
Different Cars, Different Use Cases for Commercial
According to the eTravel Report 2018 compiled by consumer data firm Statista, 17.8 percent of individuals currently use rideshare services, which is predicted to grow to 23.1 percent over the next four years. If, as expected, most driverless cars are rolled out as part of a transportation or subscription service, individual car ownership is expected to decrease.
This decrease in car ownership will have a ripple effect on parking lots. To get an idea of the size of this market segment, consider that Andy Cohen recently estimated in a Gensler report that “America’s parking footprint, estimated at 500 million parking spaces, consumes more land than Delaware and Rhode Island combined.” Consulting firm McKinsey & Co. estimates that “autonomous vehicles could reduce the need for parking space in the U.S. by more than 61 billion square feet.”
These 61 billion square feet of newly available real estate have the potential to flood both the commercial and residential real estate markets, as many of these spaces in urban areas will likely be converted into multifamily apartments and condominiums, feeding the population shift toward urban centers. The increase in supply could drive real estate prices down in some cities.
Redefining Residential Demand
These changes in transportation patterns go far beyond where and when we park our vehicles, however. With driverless cars, people can live much farther away from their jobs, and can use their commute time to conduct business undistracted. Autonomous vehicles could also allow people to stay in their homes longer, especially the elderly, who are often compelled to move closer to city centers or to full-service communities when they can no longer operate a vehicle safely.
Some industry watchers say this is already changing the calculus for where Americans settle. MetLife recently released a report that found San Francisco residences that used to command a 21 percent greater rent due to transit proximity leveled off to a 15 percent premium after the introduction of Uber and Lyft. “People are already willing to pay slightly less than they were before for the same level of transit access, because they now have this complementary transit system,” Adam Ruggiero, head of real estate research at MetLife Investment Management told Bloomberg.
But before we throw the adage “location, location, location” under the bus (or driverless car, so to speak), it’s worth noting there’s one factor driverless cars have little effect on, and that will always demand a premium in real estate: time. While it can be argued that passengers in driverless cars use their time more productively, commutes still equate to time that could be spent doing other things, namely leisure, sleep, and most importantly, time spent with loved ones. After all, time is the one commodity that can never be replaced.
A couple of years ago, statisticians at fivethirtyeight.com analyzed the prices of Manhattan real estate in relation to its distance from public transportation, and found that New Yorkers were willing to pay an additional $56 a month per minute shaved off of commute time. Though driverless cars have the potential to turn any location into a transit access point, time has a price, which people will always be willing to pay. But the desire for a great location isn’t merely about commuting to work. As FiveThirtyEight’s Carl Bialik notes, “Places with short commutes are also often places with other desirable characteristics: restaurants, nightlife and convenience.”
Because location is a true place, and not just a node in a transit system, it will take more than autonomous vehicles to knock “Location, location, location” off its perch in the lexicon of real estate professionals. Driverless cars may modify the real estate landscape, but at least for the short and middle term, location will still drive real estate value.