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The Risk and Opportunity of Driverless Car Technology!
By Marc Bourdages Technical Director, Partner Science & EngineeringEditor's Note: Marc Bourdages is known to many of NAREIM's A&E members and actively particpates in NAREIM's annual A&E conference, which will be held in Boston in October. In June, Marc presented to attendees at NAREIM's 20/20 INvestor SUmmit about how driverless cars may be a disruptive technology to way of life as we know it -- including real estate. History is filled with examples of game-changing technological developments that have transformed society, from the invention of the cotton gin in the early 1800‚Äôs, and continuing through the Industrial Revolution and Information Age. It is important to consider the potential impact that any technological advancement may bring to society, because investors who lead or at least anticipate trends are in a much better position to participate in the shaping of the future.¬†¬† This is certainly true with commercial real estate management: as society advances and adopts new technologies, the buildings and environments it interacts with must also evolve to meet emerging needs, or risk becoming irrelevant or unmarketable through either economic or functional obsolescence. One technology that has the potential to change the ways we use real estate is the driverless car, or ‚ÄúAutonomous Vehicle‚Äù (AV). Although some regulatory hurdles still remain, the technology for AVs exists today, and driverless cars are widely projected to be a reality as early as 2020. Leading developers of AV technology include Google, Apple, Uber and Baidu (China), as well as major auto manufacturers such as GM, Daimler, Audi, Nissan, BMW and Tesla. Recognizing the enormous potential, all parties are actively working with regulatory bodies to create the legal framework necessary for testing and commercialization of the technology. In real estate terms however, the opportunities and challenges of the wide scale implementation of such technology are more deeply pronounced! As the technology develops, driverless cars will change demand for various building types, contributing to functional obsolescence and creating opportunities for adaptive reuse or value-added projects.
The Rise of Driverless CarsThe practical implementation of driverless cars will almost certainly come about incrementally, led by Vehicle to Vehicle (V2V) technology that enables cars to communicate directly with traffic signals, road signs and other surrounding vehicles. The motivation to approve the use of AV‚Äôs is driven by the technology‚Äôs potential to drastically improve driver safety and prevent traffic accidents, which cause between 30,000 to 50,000 fatalities in the U.S. annually, and result in an economic impact estimated at $230 billion per year in insurance claims and lost production. Having a computer control the vehicle can eliminate the driver error or negligence, which accounts for almost 95% of all auto accidents. By early 2017, the US Department of Transportation hopes to publish a mandate requiring V2V communication in all future production automobiles by a yet-to-be-determined deadline date. Mandated adoption of AV technology would allow cars to travel much more closely together, greatly increasing the capacity of our roads. In addition to safety, AV‚Äôs can provide passengers with hands-free productivity roughly similar to riding in a taxi or commuter train, but with the independence, flexibility and added comfort of a private mode of transportation. Car ownership behavior is already changing with the rising popularity of ride sharing services - a trend that will likely to continue as AV technology advances. Private car ownership is incredibly inefficient: according to a Morgan Stanley Research study, cars are presently being utilized only 4% of the time with average ownership costs approaching almost $9,000 annually. Ride sharing services like Uber and ZipCar have become a huge success in a very short period of time by offering a reliable alternative to taxicabs using an efficient and affordable app-based ride-calling feature. But Uber pays 75% of its gross revenues to its drivers, who are an unpredictable element of its business model, thereby driving the company to aggressively develop their own AV technology to capture higher margins. Driverless ride sharing services will improve operating cost efficiencies and lower ride costs even further. Eventually, personal car ownership within metropolitan centers will be regarded as optional, and permanent ride sharing or fractional ownership of a small fleet of luxurious AV‚Äôs will become an effective value proposition to private auto ownership. Over time the establishment of a ‚ÄúTransportation Cloud‚Äù comprised of a large fleet of always-accessible AVs could be made available, capable of picking up and dropping off passengers in frictionless travel, almost completely eliminating the need for parking in urban areas. ¬†Public access to a fleet network may be as simple as purchasing a monthly ride sharing subscription similar to a public transit fee, or could be membership-based for premier fleets and services, similar to fractional ownership of charter jet services. Within the next two decades, the widespread implementation of a transportation cloud may make the concept of private car ownership sound absurd to all but vintage car collectors.
Portfolio and Investment ImpactsSo what does all this potentially mean to developers, owners or professional managers of commercial real estate? Plenty! As the concept of private car ownership transitions from a single-owner status symbol to a shared utilitarian commodity product, the thousands of businesses that feed the traditional automotive supply chain or thrive on aftermarket sales will not survive. Car dealerships will also struggle. For developers, the current cardinal rule for retail, office and multifamily development is that you can build what you can park, but this rule will change as jurisdictions revise density restrictions previously based on parking-centric design requirements. Our buildings and cityscapes will change significantly if parking capacity no longer dictates what can be built. When on-site parking at a facility is no longer a critical occupancy requirement, literally hundreds of thousands of acres of prime urban land previously allocated for parking will become obsolete and vacant, and will create a massive redevelopment boom as a result. As driverless vehicles are programmed to arrive on-call, drop-off, then be redeployed or parked off-site, the demand for parking spaces will be replaced by a demand for safe and efficient passenger pick-up and drop-off zones. This may require significant site and building alterations to some facilities. Perhaps hotels and large multifamily assets may need to offer their own branded AV fleet to residents as an amenity to guests and residents in order to remain competitive. Shopping centers and office towers will no longer require surface lots and parking structures, creating lucrative opportunities for adaptive reuse projects, or a once in a lifetime opportunity for lobbyists and local jurisdictions to add more green space within dense urban environments through new zoning ordinances. Where will all the AV‚Äôs rest that need recharging and maintenance service until they are redeployed? The need for extremely dense, fully-automated parking and charging facilities at strategic locations that provide the software logistics for efficient collection and deployment of AV‚Äôs will become a whole new asset class! Since most all AV‚Äôs will operate on electric power, and fossil fuel-powered AV‚Äôs will be able to drive themselves to a refueling station, gas stations will no longer need to be located at prime city intersections, again presenting great opportunities for redevelopment projects. Importantly, longer commutes to and from work can now become both productive and tolerable, redefining what might be feasible as site locations for both single and multifamily development.
Will YOU Be Ready?The advent of widespread AV implementation is almost certain to occur within the lifecycle of many assets currently within your portfolio. In order to stay ahead of building obsolescence and remain competitive in this fast-moving market, it is vital to consider and prepare for what‚Äôs coming next. Ask yourself and your management team the following questions:
- What tenants are in your current portfolio that will be impacted by this disruptive innovation? How will this affect their credit risk profile? Any tenant business even remotely connected to the automotive industry area is at risk!
- What elements of your portfolio are directly at risk of functional or financial obsolescence from the advent of this technology?
- What investment criteria or models is your firm using now that may need to be updated to account for either this RISK or potential new OPPORTUNITIES derived from the arrival of this technology?
- What developments are currently in the planning or permitting phase that are presently conforming to what will soon become obsolete building criteria? Will the new development become functionally obsolete before construction is even complete? Are there any preconstruction design changes that can be made to facilitate more economical adaptive reuse once the disruptive technology is implemented?
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