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Market Intel, Forecasts & Strategies

Deloitte's Outlook

Michael Bull, CCIM

We’re heading into a metamorphosis over the next decade according to the 17thannual Deloitte outlook report, Commercial Real Estate Redefined. This year is the first time that Deloitte is reporting on a 10-year outlook, (instead of a 1-year outlook as in year's past), and describes how evolution in technology and consumer behavior will transform commercial real estate.

To discuss these impending changes, Robert O'Brien, Global Real Estate Sector Leader for Deloitte joined us to discuss the macro view and what investors should be considering for 2025.

“We’ve been talking about technology and disruption for a while now, but this is only the beginning”, warns O’Brien. “Buckle up as the changes really begin take hold over the next 10 years.”

Deloitte identifies four macro trends that could impact commercial real estate over the next ten years:

THE COLLABORATIVE ECONOMY

The way people use office space today is different than it was 5 or 10 years ago,” said O’Brien. Specifically,collaboration has revolutionized office design. We’ve all seen the single-person closed-door offices, file cabinets, and even bookshelves become unnecessary. Nowadays, space is created to enhance collaboration and there is a general recognition that collaboration can drive value for a business.

But it’s more than just the office. The sharing economy is also changing how other spaces are used. e-Commerce has changed how retailers operate, how they use real estate and what makes retail real estate successful. The Pop-Up shop couldn’t exist 15 years ago, because social media drives the audience.  

It’s not necessarily the technology used by real estate companies but the technology available to the ultimate consumer. Today’s consumer is more aware and empowered

Companies like Uber, Lyft and ZipCar all saw an opportunity to use an asset more efficiently. These companies capitalized on the large percentage of time that a car goes unused which ultimately drives cost down for consumer. AirBNB is doing the same thing in the hospitality world.

Can you apply that principle to the real estate space? Yes. Today’s real estate businesses innovate and create solutions for real business problems. Venture capital is watching, and when the potential is there, they get interested. They are looking to back businesses that are looking to disrupt the real estate industry.

Liquid Space recognized an opportunity in the idea that a business’ need for space is not fixed and will fluctuate over time. So what if businesses had access to extra space or were able to downsize as needed? Your staff travels 80% of the time? Why pay for space that you don’t use?

Another example of shared spaces is Vornado Realty Trust, who took a chance on WeWork. That’s the firm that’s successfully marketing shared or temporary space for multiple tenants, like start-ups. WeWork markets to a very different type of tenant than major landlords used to dealing with. But this tenant type is hardly in short supply. By partnering with Vornado, WeWork has become one of the largest leaser of NYC office space over the past 2 years.  Renting shared space for multiple tenants

Tenants expect more flexibility in leasing so owners of real estate need to create flexibility. The big opportunity for the landlords is getting higher rates faster, not waiting for a lease to run its course.  

The recommendation to existing players in the real estate industry is to get to know these industry innovators, understand where they are focusing, and look for opportunity to partner. Keep your finger on the pulse.

TECHNOLOGICAL DISINTERMEDIATION OF BROKERAGE & LEASING

Traditionally, the brokerage business has been about connecting owners to users. But new forms of networking are definitely invading this territory. New tech is supremely capable of gathering and providing data about what’s available, and traditional brokers are at risk for getting left behind.

Disrupt or be disrupted: How can real estate companies take advantage of this new environment?  It’s necessary to become more of a relationship-oriented business than merely transaction facilitators. The value-add of our experience and guidance is what makes the difference. Our tenant rep business has become a consulting business.

Firms like Hubble and 42 Floors are driving this change with clean new ways of displaying data, collaboration and sharing.

Tech firms CompStak and DealX are crowdsourcing lease information… providing crowd sourced lease comps with incredible detail, providing information that brokers once held exclusive access to.

It’s critical to understand the new leasing environment full of rapidly emerging new tools and sources. The challenge is to develop strategic affiliations and find ‘disrupted’ ways of doing business with today’s clients and properties. In short, find ways to do business in different ways.

TALENT WARS MAKE CRE A STRATEGIC WEAPON

The job market has recovered but Deloitte is forecasting significant shortages of STEM (Science, Technology, Engineering and Math) graduates by 2025. Based on the numbers of Millennials heading to college, we’re guaranteed a shortage of 23 million knowledge workers. Qualified STEM graduates will have definitely the upper hand when it comes to employment. And employers will be scrambling for talent.

Millennials, 70% of the workforce by 2030, prefer an open and flexible work culture that allows them to work anywhere, anytime.  They are more likely than their predecessors to be independent contractors or solo entrepreneurs. By 2020, 40% of the workforce will be independent.

The war for talent will have meaningful impact on commercial real estate. “Companies are going to want to locate their jobs where people want to work.” We’ve seen the beginning of this trend in rapid urbanization responding to Millennials demand for city life. Companies need to plan now for the future with flexible space, flexible work, virtual and shared employees.

Can immigration help? The war for talent isn't just between companies; it’s also between countries. Immigration laws will need to change in order for the US to compete successfully in the growth economy. This impending worker shortage is certainly one of the best arguments for immigration reform. We have the best schools in the world and students worldwide want to come.

GOING THE LAST MILE

In industrial and retail, the “last mile” to the consumer is a critical. We’re already seeing the lines blur between industrial and retail – expect more of this as changes in delivery, manufacturing and shopping behavior continue.

The expectation of consumers for same and next day delivery is getting increasingly competitive. Amazon Prime and Google Express are acting as disruptors, demonstrating the ability to deliver rapidly. One of the ways they are doing that is by building warehouse and distribution facilities closer to their customers. In the past, regional distribution centers convenient to highways and railway networks were how goods were delivered to a store. Now, consumers are expecting quick delivery to their homes and so what you are seeing is smaller facilities.

Sidecar and UberRush are leveraging driver networks for same day delivery.

As 3D Printing becomes more prevalent, custom made goods brings manufacturing closer to the consumer. Not only customization, but other manufacturing will continue to reshore as build-to-order replaces a build-to-stock supply chain.

Fragmentation of warehouse space will continue as smaller and closer-in spaces meet the need for more efficient delivery options. Brick and mortar stores will remain significant for product which require ‘touch & feel’ for purchase decisions. Analysts expect 50% of American malls to close by 2030.

THE FUTURE IS HERE

The convergence of technology and consumer behavior is causing the physical and digital worlds to blur. Technological innovations are both causing and curing business challenges. There’s no doubt the commercial real estate landscape is being remolded.

Disruptive forces have the potential to redefine the current property market segmentation of primary, secondary & tertiary, and consequently, valuation.

When the old ways of working won’t work, we need dynamic strategies to respond to the rapidly changing business climate. Companies need to figure out optimal ways to organize and access talent. Ultimately, the most valuable tools in this disruptive climate will be the strength of client relationships.

Michael Bull, CCIM, is an active commercial real estate advisor and managing broker licensed in nine Southeast states with Bull Realty headquartered in Atlanta. Michael is also host and executive producer of America’s  Commercial Real Estate Show, enjoyed my millions around the country on iTunes, YouTube and show website CREshow.com. Michael is also a speaker on agent productivity and senior instructor with Commercial Agent Success Strategies. You're invited to reach out to him at Michael@BullRealty.comTwitterLinkedIn or 404-876-1640 x 101.