08.11.2017 by Prof. Dr. Andreas Pfnür FRICS

Companies will be renting more often

Manufacturing and production-related companies are on the threshold of a massive structural change that will significantly affect their real estate requirements. This is the result of an empirical study by TU Darmstadt and the IREBS Real Estate Business School on behalf of the real estate developer Aurelis Real Estate. Several factors play a role here:

  1. Companies are facing significant changes due to digitization.
  2. Competition is intensifying and becoming international due to globalization.
  3. Sociodemographic changes are affecting sales and labor markets.
  4. Around the world, as well as in Germany, manufacturing companies are transforming from product providers (e.g. car manufacturers) into providers of integrated solutions (mobility service providers).

The study shows that all of these drivers of change affect every third company in Germany. Another third is “affected by globalization” and just under a quarter is “demographically driven.” Only every eighth company is not – according to its own assessment – affected by the structural change. In principle, the larger the company and the higher the share of production, the greater the impact of the structural change will be.

The study was followed up by a round-table discussion with a panel of twenty experts under the direction of TU Darmstadt. The panel consisted of leading representatives from manufacturing companies and real estate companies; they assessed the drivers of structural change and their impact on the real estate industry. The panel issued the following statements: 

  • Pure production areas will be downsized in the future and supplemented with additional office and service space.
  • Digitization is enabling the return of labor-intensive production from abroad – with an uncertain impact on space requirements.
  • Companies are investing in the development of disruptive business models and technologies. It is hard to predict how space requirements will change as a result.
  • It is only possible to derive rudimentary requirements for production buildings and their infrastructure, including for digitization.
  • Quickly responding to customer needs and physical proximity to customers are becoming decisive competitive factors in many markets. This results in more and smaller production sites.

Space requirements will thus change more often and quickly. The panel of experts expects the real estate strategy of production-related enterprises to undergo increased change.

However, given the high levels of ownership, there is widespread concern about falling behind in global competition. 86 percent of production space in Germany is owned by the manufacturing company itself, compared to only 30 percent in the USA and 20 percent in Asia. Companies in Germany thus first have to establish the necessary flexibility by themselves in terms of the real estate market. A survey conducted last year by the Real Estate Department at TU Darmstadt had already shown that 88 percent of decision-makers surveyed in German companies believe that they are not well-positioned for structural change in terms of the real estate market. These results were confirmed by the panel of experts in Darmstadt.

The low level of resources is particularly alarming. Apparently, two thirds of manufacturing companies lack the personnel, expertise, and data transparency to deal with the structural changes described above. This is accordingly increasing the pressure to seek outside help in order to continuously adapt real estate inventories to new requirements at short notice.

A paradigm shift is thus underway: Companies are more often interested in purchasing real estate management as a complete service and renting the space in the medium term instead of owning it.

The Darmstadt expert panel sees this as a good solution that will ultimately benefit the capital market as well. After all, if areas were provided quickly and flexibly from a competent source, their adaptability for use by third parties would inevitably also continue to increase. And that would be good news for risk-sensitive investors who have discovered a promising asset class in this area.

Prof. Dr. Andreas Pfnür FRICS, Director of studies for real estate and construction management at Technische Universität Darmstadt
Susanne Heck
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