I was asked to take part in a judging panel recently: one of the categories was for deal of the year and one contender was a large modern logistic enabling facility (or shed as we used to call them) which sold at an eye-wateringly low yield. Some judges argued this should win as it had set a new benchmark for capital values in the area. I argued against it: while it was a great deal for the vendor (particularly given the timing), it had to be a real dog for the purchaser. A bit later I checked the MSCI numbers and noted that they were reporting a 25% fall in industrial capital values between the deal date and end-2002 driven by substantial yield increases. Oh well, perhaps our logistics facility bucked the trend and was special, “all properties are unique” after all.

Yet the overall yields around that time were hard to explain in terms of economic logic. If we think of the yield as the required return less the long-run expected rental growth then, given the bond yields really could only move in one direction, to make the returns that were being promised, rents would need to continue to rise strongly. The story was that there was an increasing demand for space and the pandemic had reinforced the need for more warehousing and logistics. Well, maybe.

But that demand would need to be sustained and supply would need not to respond, even though development would look very profitable. For all the constraints, inertia and lag, supply responds (it’s just a shed, remember!). When I politely raised this, I was told that I didn’t understand the market, there was structural trends and “a new paradigm”. Echoes of 2006.

Well, I am a dinosaur, and these are times of extraordinary market and societal change, with innovation in working practices, production processes, financial markets, information and communications technology which, allied to the shocks that act as a catalyst and accelerate these trends, will transform the market. It’s just that we always seem to live in revolutionary, transformational times – which very often turn out to be much the same as before, at least in terms of market fundamentals.

Consider this scenario: a major financial centre has extended its lending internationally, helped by market deregulation and is highly exposed to land, real estate and infrastructure loans. These loans provide the collateral for bank borrowing and capital raising and a number of financial products have been created that rely on the bank debt and the underlying loans – these have been distributed widely across other financial markets and centres. New communications technology brings news of problems in the underlying projects which then erodes the value of the loans and the products backed by them. One bank in particular is highly exposed and faces liquidation as it is unable to borrow or to sell its own securities, but this leads to a general liquidity crisis. The new social media carry news and rumours of problems, which spread rapidly to other institutions and markets. The central bank intervenes, joined by other central banks including those of political rivals, to provide emergency guarantees and liquidity, but the wider impact is substantial not just on the financial sector but on the real economy, with banking and economic crises in countries on four continents.

Does this seem familiar? Well, that’s the 1890 Barings crisis, triggered by problems in Argentina with the Bank of England’s rescue mission supported by the central banks of France and Imperial Russia, news travelling by the increasingly effective transatlantic and transcontinental telegraphs and rumours and panic spread in the new financial press. The interlinked financial products and international markets ensured contagion in money and bond markets and the impact on lending and interest rates transmitted the financial crisis to the real economies in Latin America, Australia, South Africa and the US. Plus ça change.

Well, that’s finance not real estate: what about the fundamental transformation of employment that the pandemic has wrought, with working from home and hybrid models, that will forever alter the demand for office space and undermine those critical agglomeration economies that justify firms locating in city centres? Here’s what a well-known urban planner says on the topic (I paraphrase): economic and social proximity is no longer dependent on spatial proximity. With technology we will increasingly see interest communities linked together by flows of information, but in diverse locations. The greater the specialisation, the more widely spread the interest groups. This will drive a move away from dense urban centres transforming the city from a place to a web of interactions at varying geographical scales. Yes, that’s Mel Webber writing in 1963 (and the paraphrase is drawn from my PhD in the early 1980s).

In the sixty years since Webber wrote “Order in Diversity”, the fortunes of city centres have ebbed and flowed but the fundamental agglomeration economies and interactions that are the bedrock of those centres remain. In that time there have been many challenges – the hot-desking / office hotelling / flexible space shift that was going to erode demand for offices, the shock of 9/11 and the prediction that space in city centre skyscrapers would become unlettable, the impact of pandemics (what was the long-run implication of SARS on Hong Kong’s property markets?). Cities as economic entities are about information exchange and innovation and about the network of interactions that are part of that. Some of this is formal and Gen Z and their successors are more adept than I will ever be in making this work digitally. But a lot of it is informal, serendipity, that chance conversation or finding someone who can solve a problem there and then. As one of my graduates noted during lockdown “no-one is at a disadvantage working from home when no-one is in the office: but as soon as some are, then you can miss so much being remote”.

There is something inherent that makes us always think that our times, the now, is different and unique – and, of course, it is. But there is also a deep continuity and, at least in market economies, a set of fundamental drivers and principles that we ignore at our peril – particularly in making investment decisions. The danger is reacting, over-reacting, to the moment. Back to the big shed in the opening paragraph: the lesson here is, surely, that the rules of supply and demand continue to apply. Supply will adjust, demand will vary. That is, of course, true too of whatever the latest on-trend alternative real estate sector is (I’m looking at you, life science space) – late movers beware.