Transforming urbanization

Urbanization promises greater prosperity for an increasing share of the world’s population. And yet it historically is associated with widened income inequality and degrading the natural environment.

The journey to urbanization

2009 was a tipping point for the world population. That was when the majority became urban dwellers. Today, an estimated 57.9% of the population lives in urban areas and that is expected to rise to 68.4% by 2050, according to the United Nations. 

Prior to the mid-19th century, less than 10% of the world’s population lived in urban areas. The Industrial Revolution changed that. Technological advancements increased the economic output of cities, enticing the rural population to them. Meanwhile, modernized sanitation in cities helped lower mortality rates in more developed nations. 

From automated machinery for agriculture and manufacturing, to today’s innovations in areas such as generative artificial intelligence, urban areas have continued to evolve through the 20th and 21st centuries with advancements in communication, automation and transportation. 

The threshold for what is considered urban is relatively low and varies across nations. Controlling for this by measuring the growth in urban population greater than five million is revealing. In 2000, there were 46 cities with populations exceeding five million. The combined population of these cities equaled 555 million, or 9.1% of the world’s population at the time. 

By 2035, the number of cities over five million is expected to nearly triple to 121. The combined population would exceed one billion and would represent 13.6% of the world population, a 50% increase in 35 years.

Asia stands out. It is home to more than half (67) of these mega cities, with a projected combined population of 817 million (equivalent to 9.6% of the world’s population) by 2035. In contrast, all the other regions’ mega cities combined would represent just 6.3% of the population. 

Africa is expected to experience the biggest projected gain in urban populations, growing from just three cities with over five million in 2000 to 24 by 2035. The mega city population will grow nearly tenfold from 27 million to 234 million.

Urban vs. suburban

In high-income, developed nations, populations are already heavily urbanized but recent decades have seen migrations to lower density suburban areas, adjacent to cities. While considered urban by most definitions, this lower density development pattern has led to greater dependence on personal and commercial automobiles, the carbon intensity of which is contributing to increased greenhouse gas (GHG) emissions.  

Lower density areas affect the availability of land, forests and farmland per capita more than denser urban development. Conversely, highly urbanized areas with modern infrastructure can move people frequently and efficiently by way of mass transit, provide stable renewable energy, clean water, efficient waste removal and modern sanitation, that are less detrimental to the environment than suburban sprawl.

What has changed? 

The covid pandemic had a significant negative impact on urbanization. Foreign direct investment decreased 15% between 2020 and 2022, compared to levels in the previous decade¹, which caused severe delays to city-based construction projects. Additionally, supply chain issues caused by the pandemic, and rising global tension have worked to disrupt and stunt the full potential of a sustainable urban future.

The pandemic was also a catalyst for many people migrating away from mega cities. A more lenient view on working from home has meant being located close to city centers is no longer as crucial as it was pre-pandemic. That said, most employers require in-office attendance for at least part of the week, meaning that workers do need to live within a commutable distance to their offices.

And so, the steady march towards urban living continues. The disruptions caused by the pandemic are easing, and different challenges remain in focus. None more so than climate change. 

Cities generate about 70% of the global GHG emissions and remain particularly vulnerable to climate-related risks such as frequent and prolonged heatwaves, droughts, flooding or water scarcity. The mixture of concrete, metal structures, asphalt and minimal green areas make urban areas absorb heat, turning them into heat islands. The EU’s Copernicus observation program discovered that temperatures could be up to 10°C higher in urban areas compared to rural ones. 

Persistent changes in climate have a long-term negative effect on economic growth.² Urban areas need more ambitious adaptation measures to avoid such economic losses. These measures can substantially decrease climate-related losses, but only if implemented quickly and efficiently.

Implications and opportunities for real assets 

Real estate

Growth and change have always been an impetus for real estate demand. The world’s population continues to grow, and the continued migration from rural to urban areas presents opportunities for increased demand across core and alternative real estate sectors globally. 

Retail and industrial: A rising, and increasingly urbanizing population, especially in Asia and Africa, should lead to explosive growth in consumption, mirroring the growth achieved in the developed world at even greater scale. Increased density and rising incomes will create thousands of attractive retail trade areas not currently in existence. 

Housing: A growing population will require more, better and diversified housing options. Increasing household incomes typically lead to smaller household sizes and a demand for a variety of housing options, presenting many development opportunities. Most mature markets face a housing crisis with low inventory and increasing prices. Denser, more efficient urban housing can help ease the supply/demand imbalance, helping to reduce living costs.

Office: Developing areas should see economies shift towards a greater share of workers in financial, professional and technological services as more of the population becomes highly educated. Mature urban areas will present opportunities for existing office space to be rehabilitated or demolished and replaced by new or refurbished properties that have been decarbonized.

Infrastructure 

Creating a sustainable and resilient urban future will need renewable energy, smart grid solutions, energy-efficient systems and various other technologies. To reach a carbon-free future, it will take a collaborative effort from governments, investors and policymakers to craft supportive policies to drive this transition. By focusing on these strategies, we can build cities that are not only greener and more livable but also economically vibrant and resilient.

Energy transition: Currently, urban areas consume 78% of the world’s energy and account for over 60% of GHG emissions.³ As cities expand, energy consumption, CO2 emissions and grid infrastructure will face unprecedented demands, driving the need for innovative and sustainable energy solutions. 

The expanding global urban population will push additional demand for electricity, necessitating more renewable energy sources. Solar, wind, battery storage and hydrogen will be crucial to meet the emerging power needs. As the cost of these technologies continues to decline, they are becoming increasingly competitive compared to traditional fossil fuel-based power generators.⁴

Smart grid technologies will be critical in the transition to a low carbon economy, enabling efficient management of peak loads while providing flexibility and resilience. The influx of new renewable energy sources and the surge in demand from electrified lifestyles will test the current grid's capacity. For instance, the growing popularity of electric vehicles (EVs) will put significant strain on the grid, necessitating a substantial investment in new infrastructure to meet the increasing demand for electricity. 

Digital infrastructure: The growing urban population’s high demand for data will drive the growth for digital infrastructure including mobile infrastructure, data centers and fiber. Increased power demand from digital infrastructure alongside growing economies are stressing the current systems, providing opportunities to partner across subsectors. Constraints on the power grid and access to spare capacity will influence data center site selection and drive development opportunities.

Waste removal/reduction: As urbanization accelerates, a primary challenge will be managing the increasing amount of waste produced. In the future, cities could harness the power of methane emissions from landfills to generate electricity. And to take it further, carbon capture and storage technologies should be a game-changer in reducing CO2 emissions.

Most technologies needed to make cities carbon-free are already available and simply need to be deployed. Urbanization will drive clean energy policies as citizens demand solutions that enhance their quality of life. Governments must respond by creating public policies that encourage investment in these new technologies, offering attractive returns for investors and companies willing to take on the challenge of deploying and operating low-carbon infrastructure. 

Natural capital 

Urbanization has both supply and demand impacts for land-based natural capital investments. On the supply side, urban and suburban growth can reduce the availability of land for agricultural production. On the demand side, urbanization is a major driver of building materials, like timber. Development linked to urbanization that negatively impacts ecologically significant wetlands, streams or habitats must be balanced with restoration of similar areas. 

Farmland supply: Urban expansion in many parts of the world often leads to the loss of farmland. According to the 2022 Census of Agriculture, the U.S. lost over 14 million acres, nearly 4%, of its farmland from 2017-2022. 

The drivers of land-use change are diverse and vary by region, but development pressure is a common theme. The loss of farmland has global implications for food production, the economy and environmental systems such as biodiversity and carbon storage. From an investment perspective, loss of farmland also increases pressure on the existing farmland to become more productive to meet demand from a growing population, an ongoing trend that drives farmland values higher over time.

Timber demand: New home construction and residential improvement are among the most important end-use markets for a wide range of timber products, from lumber to flooring. 

In the U.S., the residential building market accounts for 75% of all wood product consumption (FEA, 2024). In addition to traditional wood-based residential construction, the growth and development of mass timber technology in recent decades has led to constructing low-rise, mid-rise and industrial buildings with wood. Substituting wood for more carbon-intensive materials in buildings can significantly reduce emissions from the building sector, which currently accounts for about 40% of global GHG emissions annually.⁵

Timberland investment can help unlock this climate mitigation practice and may provide added value for investors with climate or portfolio decarbonization targets.

Balancing development with restoration: In several investment geographies, laws require balancing the negative environmental impacts of development with the restoration of similar natural areas. 

In the U.S., a market-based system of credits from restoration projects and debits from development ensures no net loss of ecologically important, federally protected areas.  

Demand for restoration credits tends to be strongest in areas where there is significant residential and commercial development, transportation and public infrastructure projects related to urbanization. Land-based investments that actively enhance or restore areas of wetlands, streams or endangered species habitats can earn credits and generate revenue from the sale of those credits. 

Urbanization is changing in more ways than one

The progress of urbanization was thrown off course by the pandemic, compounded by rising geopolitical tensions and international trade disputes. The pandemic has also seen people migrating from city areas as working restrictions eased for some jobs, moving out to suburban and rural areas.

Despite these disruptions, we believe urbanization remains in a strong position, touching opportunities across real estate, infrastructure and natural capital. 

Real estate should benefit across regions, as growing urban populations, especially in Asia and Africa consume more goods and services, creating opportunities in retail and industrial sectors, while housing will continue to offer varied development opportunities. Mature urban areas will continue to evolve through rehabilitated or replaced buildings with more sustainable designs.

Infrastructure will continue to pivot as environmental goals become increasingly important to governments and developers. A greater dependency on renewable energy will pave the way for smart grid technology having a critical role in the transition to a low carbon economy.

Natural capital will continue to face some challenges, primarily through the expansion of cities threatening the availability of farmland. However, timber demand should increase as urban development seeks to use alternative, greener construction methods. 

How cities are built and which economic hubs attract workers are shifting. As we look to the future, urbanization seems to be steadily coming back to full strength following a period of disruption.