We are witnessing the emergence of new kinds of real estate players

"First-mover advantage" is a term that will increasingly resonate in the international real estate community. We are witnessing the emergence of new kinds of real estate players; occupiers and investors keen to capture the energy and potential of the world’s rising urban stars. As the world urbanises at a pace unequalled in recent history, evidence is already emerging of growing interest in cities that would have been "unconventional" only five years ago - cities where untapped potential and attractive performance prospects are being uncovered.

As yet, only a handful of investors, developers and occupiers have tuned into the new dynamics of these emerging rising urban stars, but others will need to widen their radar to catch the pulse of these new century cities. We, at Jones Lang LaSalle, have developed our World Winning Cities research programme to assess contemporary city competitiveness, and to predict the next generation of rising urban stars.

Figure 1: Jones Lang LaSalle Offshoring Index, 2004 10 Lowest Cost Cities

In this article we identify the types of rising urban stars, and profile some of the cities we believe will be likely to attract active interest from the real estate market in the near future. Some of the cities are already well known, are growing rapidly and boast active real estate markets; many others are not currently in the consciousness of international real estate occupiers and investors. We believe they all will be in the near future.

But before we show you some of our predictions of the types of cities that are likely to be winners, lets look briefly at what recent history can tell us about city success. In the first phase of our research we took a look 10 years back.We wanted to know which were the rising urban stars of the past decade; those that had already created a compelling blend of attractions, which will earn them a place in the future roll call of world cities. Of 100 cities analysed, five cities stood out above the rest, and epitomised city success of recent years:

• Dublin - the "Celtic Tiger" has been Europe’s most successful economy over the past decade.
• Dubai - the rapidly expanding Emirate city-state has emerged as a leading economic, trading and leisure hub of the Gulf States and Middle East region.
• Las Vegas - the world’s most successful leisure economy, and the fastest growing large city in North America.
• Shanghai - the financial and commercial engine of the Chinese economy.
• Bangalore - which has recently emerged as the IT offshorer’s favourite.

There are common themes characterising all five cities, but different models of success. For both Dubai and Shanghai, it has been about realising a vision to be a truly world city... about an obsession in creating a favourable business environment, and importantly in providing the physical infrastructure to match. In both Dublin and Bangalore, success has been built on access to a flexible skilled labour pool at an economic rate - and in contrast to the other two cities, the creation of the infrastructure has lagged economic growth.

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What is clear is that the established world cities are increasingly being challenged by a growing band of cities that have not historically been on the radar screen of the real estate sector. What do these cities tell us about future growth cities? What are the future drivers of success? To answer these questions, we need to understand how each wave of change is impacting on the new world order.

And the next wave of change is already here in the form of offshoring, which is helping to create a new generation of rising urban stars. Offshoring has been a feature of the manufacturing sector for decades, but the service sector location patterns are now undergoing a global shift, as companies seek out the next low cost location, with a strong skill base in a growing market.

To capture the dynamics of offshoring, Jones Lang LaSalle have created a Global Offshoring Index. Figure 1 shows some of the cities that offer among the world’s most competitive environments for offshoring facilities.

Undeniably the global job shift is putting new largely untapped cities on the map in Asia, Latin America and Central Europe as new "skilled-intensive" locations start to make their mark.

For the time being at least, India remains the hot favourite for IT services outsourcing by North American and European companies, and the list of multi-nationals with a presence in India is rising by the day. The focus of occupier interest is on Mumbai, Delhi and Bangalore, but these three cities do not have a monopoly on low cost labour skills, and competitive pressures are leading companies to look to India’s second tier cities, where costs are lower and competition for labour is less intense. Chennai, Hyderabad and Pune lead the pack, and have already seen sizeable deals.

A host of trans-national companies are also establishing operations in China, not only to serve global markets from a low cost base, but also to provide a bridgehead into the world’s largest growth market. China’s phenomenal economic growth is resulting in the rapid evolution of a network of second and third tier cities, as companies start to look beyond Beijing, Shanghai and Guangzhou. Our analysis has identified a number of rising urban stars in China, with notable clusters around the Pearl River, Yangtze River, North-East China, as well as inland China - facilitated by the national government’s "Go-West" policy to open up inland China through infrastructure development and market reforms.

The phenomenal growth of Chinese cities is being driven by a combination of rapid urbanisation, low labour costs, market reforms, infrastructure investment and high FDI. But with 90 cities in China with populations over one million, there is strong competition for global attention, and each city will need something extra to stay ahead of the competition. Cities such as Dalian, Suzhou and Shenzhen provide good examples of cities with strong potential to succeed. Each has developed a niche in securing a critical mass of investment from another Asian country, and is capitalising on the success of their larger city neighbours. Significantly these cities are moving up the value chain and developing as high-tech industrial and service sector clusters. Both Suzhou and Dalian also have a good culture and environment offer, a key advantage in a country where environmental degradation is a key concern. China’s road to prosperity is unlikely to be smooth, and so these cities that have the most robust fundamentals are more likely to offer long term sustainability.

But while China and India are capturing the headlines and forecasts of an Asia Pacific Century are infiltrating business strategy, in Europe this year we have had a number of Central and Eastern European countries joining the EU club.This is likely to be one of the key influences on Europe’s urban economic geography over the coming decade, providing a viable low cost "skill-rich" alternative for European companies.

The region as a whole has over 300 million people and the opening of Europe’s Eastern frontier is putting a new array of cities on the European map, and creating new networks of cities. One city network that strands out from the crowd is the Tri-City region of Budapest, Bratislava and Vienna. This city-region of 8 million people bridges the old west-east divide, has strong historic ties and notable strengths across a broad range of functions, pointing to strong long-term growth potential.

But not all of the world’s urban rising stars are in emerging and transition economies. North American, Australasian and West European each hold some of the most dynamic cities worldwide, and a number of our rising urban stars are in mature economies, serving to highlight the nuances of city growth.

Despite the technology shakeout of the last few years, technological richness is re-asserting itself as a key competitive advantage for both mature and developing city economies. During the 1990s we saw the emergence of "technology- rich" cities particularly in North America and Western Europe. Helsinki, Austin and Raleigh-Durham best illustrate the characteristics of "winning cities" driven by technology. These cities combine the strengths of high value knowledge intensive industry linked to a strong research and education infrastructure, and offering a high quality of life to retain and attract highly educated knowledge workers.

However, whilst these cities have a head start, competition from technology hubs in transition and developing economies is intensifying, as multinationals seek to outsource increasingly non-routine IT functions to lower cost offshore locations. Cities such as Bangalore, Budapest, Tallinn and San José (Costa Rica) are very markedly using their growing reputations for technology to provide a new kind of virtual critical mass to catapult them on to the world city stage.

The quality of the urban environment is also becoming a more important determinant of city competitiveness. Issues surrounding urban sustainability and quality of life are rising up the agenda, and will increasingly influence corporate location decisions. Canadian, Nordic and Australasian cities, such as Calgary and Copenhagen are among the best placed to offer the advantages of a sustainable development model, combining economic growth and a high quality of life.

But issues of sustainability are clearly not just the preserve of mature economies. Issues of sustainable development are also gaining in profile in many developing countries. In Latin America this is filtering through to the way cities are governed and even branded. Alternative models for urban sustainability, such as in Porto Alegre (Brazil’s fourth largest city) are being watched closely by urban economists.

Cities are making substantial efforts to improve their urban landscapes and their cultural and entertainment offer, recognising that they are key ingredients to retain and attract footloose well-educated knowledge workers, as well as stimulating tourism. We have seen how the "leisure factor" has contributed to the massive growth of Las Vegas, but the same formula is being used in both Macau and Australia’s Gold Coast.

Cities such as Barcelona and Cape Town are using that compelling cocktail of culture, coolness and climate to attract the global tourist and knowledge worker. Barcelona appears on our winning cities list as it epitomises the movement for cities to create a sense of place, by combining urban regeneration with powerful city branding to attract new investment, talent and tourists. Barcelona is certainly the darling of city strategists and marketers worldwide.

So, the drivers of success are diverse and complex.We have identified a number of themes that resonate with the developing images of rising urban stars.

• The economics of cost and skills competitiveness, which is driving growth in many Asian cities such as Chennai, Mumbai or Shanghai.
• Technology, in providing a new kind of virtual crucial mass for both advanced cities such as Helsinki and developing cities such as Bangalore.
• The growing importance of environment and sustainability, with Canadian and Nordic cities leading the pack.
• And culture and creativity; with cities such as Barcelona projecting their cultural offer and urban cool to attract new investment and talent.

This list of rising urban stars are merely exemplars of potential future winners, and clearly none of these groups are mutually exclusive, but it highlights that city success will come in many different sizes, shapes and geographies. The evolution of cities taking advantage of technology and global job shifts will no doubt lead to some surprises for the international real estate community over the coming years.

Biography

Jeremy Kelly is Associate Director at Jones Lang LaSalle. He is responsible for the research underpinning the Jones Lang LaSalle "World Winning Cities" programme. The programme aims to draw together the essence of contemporary city competitiveness, and to predict the winners and losers in the battle for world city status.

Mr Kelly has worked in the research team of Jones Lang LaSalle since 1985, and has extensive experience in commercial property market analysis having worked on a wide range of projects in the UK, continental Europe and Australia.