Real Estate’s Role in the Rise of iCities

New technologies are giving rise to the creation of '"Smart Cities," and real estate developers and investors will need to adjust how they approach development and design, argues John Thomas, Squire Patton Boggs' global real estate practice lead.

John Thomas High ResReal estate development has traditionally been the ultimate bricks-and-mortar business, but that is changing. Local governments across the U.S. are preparing for a blitz of new technology that will change the way we go about our daily lives, as well as how cities themselves are organized, public services are delivered and real estate development is planned.

Smart Cities—the all-encompassing term including everything from better use of big data to target public service resources, to Internet of Things (IoT) connectivity and autonomous vehicles preparedness—are beginning to spread across the country. In order for cities to ‘smarten up,’ new investment partnerships will be required to fund such improvements. Some real estate developers and investors are already considering these changes in their strategic planning, but others will need to quickly follow suit in order to be prepared for the rapid transformation many cities are about to see.

Public-private partnership prolfiration

Technological innovation is pushing the development of Smart Cities, but real estate will need to be their backbone. Driverless cars will hopefully significantly decrease collisions, encourage the mobility of the young, elderly and disabled, and ease traffic congestion, among other benefits. IoT, which allows device-to-device communication, looks to increase efficiency through automation and monitoring. City governments are incorporating technology and data analysis in a variety of ways, but consistent among them is the proliferation of public-private partnerships (P3s).

The federal government is working to encourage the development of these Cities through P3s. In December 2015, the U.S. Department of Transportation launched the Smart City Challenge, with nearly eighty cities submitting plans on how they would incorporate technology into future projects.Columbus, Ohio, was crowned the winner. In addition to a $160 million pledge through the National Science Foundation and National Institute of Standards and Technology (NIST), the Challenge also leveraged P3s, in which private firms have promised more than $20 million in software, services and equipment.

There are various partnership and delivery models for Smart Cities. Peña Station Next, an area northeast of Denver was selected from a list of 22 to be Panasonic’s new hub for Smart City capability. This development will be a testing ground for new technology and real estate projects. San Diego has formed corporate partnerships to roll out an extensive IoT network, with more than 3,000 sensors integrated into city infrastructure aimed to optimize parking and traffic, as well as enhance public safety and living standards. Las Vegas is working with an automotive company on a traffic-light countdown system, while the Nevada government is working with Nexar to build systems for vehicle-to-vehicle communication. The state of Ohio has partnered with another automotive giant to build a ‘smart road’ on a 35-mile stretch of US 33 that will incorporate highways sensors and expand fiber-optic networks. These are just a few examples. Real estate considerations will run right through all of these and questions are beginning to percolate.

Impact on real estate

Smart Cities raise many other questions concerning land usage. Transportation has always been a major driver of real estate development, be it access to highways, airports, water or mass transit. What impact will autonomous cars have on transportation patterns, and consequently, real estate development? What will become of the parking garage? As much as one-third of urban centers are currently taken up by parking spots, covering an estimated 3,590 square miles across the country, so such a change could have a dramatic impact on real estate value. Zoning laws will have to change to reflect this new reality.

As the development of Smart Cities proceeds, many real estate investors are requiring developers to ‘future proof’ new developments. In L.A. and D.C., underground garages at large residential communities are being designed to eventually be repurposed. For example, some are building flat parking garages, rather than slanted, so they can be easily transformed if and when parking garages are no longer as necessary.

In addition, real estate and technology companies are forming joint venture partnerships. Retail developers are working with technology firms to create ways to better automate the shopping experience—from drop-off to pick-up.

Other issues that real estate developers and investors alike will have to consider is how they will safeguard against cybersecurity incidents. So-called “smart buildings” and the increased inter-connectivity of management systems make real estate assets a target for cyber attacks. The Department of Homeland Security and NIST are now partnering on a handbook as part of the Smart and Secure Cities and Communities Challenge “SC3” initiative. This initiative is aimed at bringing stakeholders together in order to ensure that data privacy, cybersecurity and privacy controls are built into smart cities, creating ‘privacy by design.’ Developers will increasingly be a part of these discussions, and governments at the local, state and federal level will increasingly require safeguards be addressed when planning permission is sought.

While some people might see technology as being the main issue when creating smart cities, including ‘tacking on’ to existing infrastructure, in reality the real estate industry has led the way in integrating smart technology into many of its new designs. This progression, however, does raise many questions for the real estate industry and investors, from how to build cybersecurity protection into their architecture to the redevelopment of existing city infrastructure. The movement to ‘iCities’ will increasingly encourage P3s and collaboration between different industries and market players.

John Thomas leads the Squire Patton Boggs’ global real estate practice group, comprising more than 150 lawyers worldwide.