Innovation Drives Economic and CRE Growth

Digitalization has moved from the realms of a science fiction future just a few decades ago to a significant economic driver. According to JLL, the economy’s digital segments currently comprise 15% of global economic output, including software development, hardware manufacturing, space tech and genomics.

Also impacting the economy – as well as commercial real estate and the built environment – are what JLL dubbed “the ubiquity of innovation.” To that end, JLL’s third edition of Innovation Geographies clarified the concept of the evolving innovation landscape and its economic and CRE impacts.

So, What is Innovation?

Backstepping a bit, “innovation” is a pretty broad term. What, exactly, does it entail?

Phil Ryan, JLL’s Director – City Futures, Global Insight, told Connect CRE combines innovation output and talent concentration. Going further, “innovation output considers patent generation, foreign direct investment, venture capital funding, start-ups and R&D spending,” he said. Talent concentration focuses on educational attainment, high-tech employment and university presence and publications. Also involved with this area are “working-age population growth, net migration and GDP per capita,” Ryan commented.

The Secondary and Tertiary Cities

In its report, JLL pointed out that “secondary cities are competing with the world’s largest innovation hubs” in areas including talent, corporate presence and investment.

“Secondary and tertiary markets are seeing sustained growth due to increases in the migration of innovation and talent to affordable and lifestyle-centric cities,” Ryan explained. He added that this talent is also pushed to secondary and tertiary markets due to increasing home prices and expensive real estate.

This, in turn, is shifting innovation hubs to different cities; the report noted that Austin emerged as a global hub for innovation. Additionally:

• Human capitals include Denver, Stockholm and Sydney

• Business facilitators are Dallas, TX, Dublin (Northern Ireland) and Hong Kong

• Secondary specialist cities include Cologne (Germany) and Nashville, TN

• Affordable accelerators include Brisbane, Queensland (Australia), Calgary, Alberta (Canada) and Rotterdam in the Netherlands

• Next frontier markets include Pune (India), Las Vegas, NV and Lille (France)

Ryan explained that population migrations to areas like Austin, Brisbane, Raleigh, NC, Phoenix and Columbus, OH, have generated talent increases. This, in combination with area universities and research institutes, “has helped to create a virtuous cycle of growth in innovation,” Ryan said.

But Don’t Forget the Larger Cities

The gateway markets are still important in the overall area of innovation.

The report noted that global leaders and builders remain in the San Francisco Bay Area, Beijing, London, Los Angeles, Munich and Shenzhen. “Gateway geographies are still critical to the global innovation ecosystem, and this is unlikely to change in the near term,” Ryan commented. He said the “global leader” markets received more than $655 billion in venture capital funding over the past three years, totaling 55% of the global total over the same period.

As such, “combined with the scale and depth of talent pools, they will still be essential for both occupiers and investors to have footholds,” Ryan said.

The Outlook and Considerations

The report stressed that the rapidly expanding digital economy requires responses from companies examining their location strategies. It also means that “location strategy will also be key for owners seeking to attract high-growth occupiers.

“The pervasiveness of innovation and its outsized contribution to economic growth further underlines the importance for cities to cultivate specialized clusters and boost their skilled workforces,” Ryan said. “Those that do will be rewarded with not only greater overall returns but will also have a higher likelihood of being the home of pioneering technologies in the future.”

According to the report, the above requires the following:

• Occupier and investor footprint and portfolio diversity

• Co-location between institutions, corporations, talent and infrastructure

• The need for a rapidly evolving innovation ecosystem

• Collaboration between public authorities, corporate occupiers and real estate investors

Furthermore, innovation touches all sectors, not just the obvious, like technology and AI.

“Finance, law, accounting and media companies are all incorporating and even developing industry-specific technologies, which is leading to new needs when considering talent, workspace design and other facets of site selection,” Ryan pointed out. “Investors and developers need to consider how the traditional tenant base will adjust to the changes brought on by innovation.”