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Declining Cost of Distance Will Change Everything

Over the next two decades, a new post-urban economy will start to evolve in the US and other technologically advanced countries. This new post-urban economy will give rise to new markets, more innovative businesses, new lifestyles and different career opportunities that could have a profound impact on residential and commercial real estate.

This new economy will be based on automation and artificial intelligence combined with the declining cost of distance. Automation based on artificial intelligence is projected to replace 30-40% of current jobs in the US over the next 20 years. This technology will not just replace factory jobs, a trend that has been well underway for a decade, but will also replace professional jobs from medical and legal to technological and other creative positions.     

The key drivers of where you live and work is beginning to change rapidly as a result of these emerging technologies. For centuries, the cost of distance, which is defined as the cost of moving information, people and goods, has determined where businesses produce and sell and where people live, work, shop and play. The cost of distance has also been the key driver of use and ultimately the value of real estate.   

The Cost of Distance is a Disruptive Force

In real estate terms, the phrase “location, location, location” is in fact a representation of the cost of distance. The cost of distance is the reason why companies, like Amazon, FedEx and UPS place their warehouses and distribution points near major transportation routes and why manufacturers place their factories near sea ports, rivers, rail lines, airports and major highways. The need to minimize the cost of distance is the reason why people and businesses cluster around urban areas. Urban cities minimize the cost of moving raw materials, labor and finished goods.

The cost of distance has defined human culture, demographic trends and politics since the beginning of time. If the cost of distance changes, it can disrupt existing patterns of real estate use and value. The decline of the industrial Midwest in the second half of the 20th Century is a good example of what happens when the cost of distance made it more economical for products made in the US to be made overseas. With that came reduced demand for both residential and commercial properties and a long decline in values. The next phase of the cost of distance story could have even more impact on real estate. 

What if the Cost of Distance Fell Dramatically Thanks to New Technologies?

Over the next twenty years, the cost of distance will decline dramatically according to several studies. The catalyst for this will be multibillion dollar investments in robotics, 3-D printing, delivery drones, autonomous vehicles and low earth orbit satellites that will sharply erode the cost of moving goods, people and information. It’s likely that manufacturers will produce products locally in small batches with 3-D printing and ship short distances by autonomous vehicles and drones to their final destinations.

As you can imagine, this trend could have significant repercussions. Globally, emerging markets that make goods cheaply to ship to advanced countries will become less important. Cities that are monuments to an economic model based on minimizing the cost of moving raw materials, labor and finished goods could decline in importance. As the cost of distance declines, millions of economic actors will rethink where they invest resources, set up businesses, work and live.    

What if Technology Makes Location Irrelevant?

New technologies that are reducing the cost of distance will likely lead to a situation where location is no longer the primary driver of where people live, work and shop. If you’re a real estate investor, you need to be thinking about what impact this trend will have on real estate usage and future value. Where will businesses want to locate if location is no longer dependent on reducing the cost of distance? Where will people want to live if being close to their jobs is no longer necessary? Who and what locations will benefit and what places will be the losers?

The answers to these questions are likely to revolve around quality of life and affordability. Most major cities today have issues with traffic, crime, overcrowding and unaffordability. As a result, the quality of life for most people is not great unless you’re one of the wealthiest one percent. But in North America, there are many secondary and tertiary cities and rural areas where the cost of living and doing business is quite low and access to quality recreation and other amenities is quite high. These could be clues to where the next high growth areas for real estate investors.