Trends Reshaping Commercial Real Estate

Across all levels and property types, the commercial real estate industry continues to evolve, thanks to both trends that were emerging prior to 2020 and those surfacing as a response to the COVID-19 pandemic. These include shifting investment priorities, evolving space demands, and the continued integration of technology into CRE operations.

Commercial real estate leaders will be challenged in the coming years to respond to and find opportunities among these emerging trends. Those who are able to capitalize on change will be better positioned to achieve success. Below, we examine what these trends might mean for the CRE industry.

Shifting Investment Priorities

In recent years, CRE investors have increasingly focused on environmental, social and governance (ESG) investing, a trend that’s become even more pronounced as the effects of climate change worsen and stakeholders increasingly scrutinize companies’ commitment to sustainability.

Boston Properties’ raising of $1 billion in bond debt for green development projects is a case in point. The fact that Boston was able to raise such a volume of funds reflects both growing interest from investors and the desire of their clients to see the spaces they’re renting and occupying become more sustainable.

Additionally, Schneider Electric, a global energy provider, recently remarked that “In December 2019, 631 investors from around the world, representing some $37 trillion in assets, signed a letter calling on governments to step up their efforts against climate change.”

And perhaps one of the more significant indicators of this trend was BlackRock CEO Larry Fink's annual letter to chief executives, in which he stated that his company would avoid investments in companies that "present a high sustainability-related risk."

Driven by this increasing demand, renewable energy has seen a boom in recent years. In April 2019, renewable energy overtook coal for the first time ever by providing 23% of U.S. power, while the first half of 2019 saw wind and solar combine to account for approximately 50% of the U.S.’s total renewable electricity generation. Meanwhile, midwestern states like Kansas, Iowa and Nebraska are among those leading the way in using renewables as their main energy source.

Despite a pandemic-driven slowdown in the completion of renewable energy projects, observers remain optimistic about the long-term trajectory of the sector. For one thing, lockdowns have led to decreased electricity consumption (the EIA forecasts a 5.7% decline for 2020), altering demand patterns and driving up the use of renewable energy sources. According to a McKinsey report, “Most power system operators are managing increased shares of wind and solar power, making the pandemic a good test case for future grid reliability with higher renewable energy penetration.”

Impact of COVID-19

Pandemic lockdowns are another factor causing a shift in CRE investments. Many companies have adopted work from home policies, with some indicating that this trend may become permanent. A Gallup report from April found that an estimated 62% of Americans worked at home, compared with just 25% a couple of years ago. These developments have clear implications for the commercial real estate industry. Specifically, as businesses see the effectiveness and benefits of having employees work from home, some have begun rethinking their need for office space, potentially driving down occupancy rates and rents.

As a result, industry observers are already predicting big changes in the management of office real estate. A whitepaper by corporate firm Goodwin Law details possible changes office buildings may need to make in order to reopen safely, including tech solutions that manage reservations for desk space, no-touch elevator panels, and sensory technologies that can take employees’ temperatures prior to entry.

Evolving Space Demands

The pandemic is also transforming the way businesses use space. While many employers are mulling permanent work-from-home policies, others are eager to get employees back into the office. For those businesses, several considerations—office redesign, safety precautions, new technologies—will come into play.

Consultancy RSM Global predicted in its recent Industry Outlook that, “The next normal in office space will… require more space per worker, and the main driver for in-office work time will be the need for face-to-face collaboration.” The consultancy also sees “all real estate sectors adopting touchless tech to ensure the safety of staff and tenants,” as well as increasing use of virtual platforms.

Also impacting space demands is the need for enhanced IT capabilities to support increased use of video conferencing and cloud computing, which has expanded the market for data centers. The Wall Street Journal has reported, “The rapid growth of cloud computing is heating up competition for new and used facilities and driving consolidation among data-center operators.” In the first six months of 2019, Synergy Research Group Inc., a market intelligence firm, recorded 52 mergers and acquisitions in the data-center market, up 18% from the previous year.

Retail Industry Transformation Accelerates

In other parts of the CRE market, the pandemic is hastening some trends that were already underway. Despite the acceleration of the transformation of retail, pockets of opportunity have begun to emerge. Brandon Hardin, a research economist with NAR has proposed transforming vacant retail properties into healthcare facilities. Specifically, Hardin elaborates, “Shopping centers, both fully vacant and partially vacant…can handle large cases as mobile hospital units, emergency mask production, storage of basic goods, etc.”

CRE Embraces Tech

From proptech (property technology) platforms to artificial intelligence, CRE firms are increasingly investing in tech solutions.

In its outlook for 2020, New York-based American Investment Properties cited virtual reality as a tech trend likely to impact the CRE landscape. According to the report, “Virtual reality is being used to market real estate to clients,” providing them with “a 3D environment, and allowing them to experience a property without going to the physical location.” Augmented reality, too, enables an interactive experience from a distance.

Says Nick Romito, co-founder and CEO of VTS, a commercial leasing platform, “Virtual tours are just table stakes at this point.” Romito adds, “Eighty-two percent of tenants are not comfortable touring space in person. If you are not able to provide a digital way for people to understand space, you can’t even play the game let alone win.”

The emergence of proptech is another factor driving CRE’s embrace of tech. These technologies—which have been around for a few years—are providing CRE firms with the tools needed to enhance their tenant services and improve leasing and asset management processes. For example, VTS provides property owners and brokers with a centralized location to manage transaction workflow and analyze deals.

Leveraging Blockchain for CRE

Blockchain—the decentralized, distributed ledger of transactions—is also being used by the CRE industry as a way to reduce fraud and streamline real estate transactions. In its report on possible CRE use cases for blockchain, Deloitte highlighted the technology’s potential for “improving property search processes, expediting pre-lease due diligence, easing leasing and subsequent property and cash flow management, facilitating more transparent property title management, and enabling more efficient processing of financing and payment.”

For instance, the often time-consuming, largely paper-based process for due diligence and financial evaluation could be streamlined by employing blockchain to develop a digital identity for properties to keep up with the increased preference for digital transactions. Creating a digital identifier for a property helps to consolidate important information about the property, including vacancy, tenant profile, financial and legal status.

Additionally, blockchain has the potential to prevent real estate fraud. As outlined in a TechCrunch column, the “digital ownership certificates” provided by blockchain would make it difficult—if not impossible—for bad actors to sell or advertise properties they don’t own using forged documents and false listings.

Using Analytics to Drive Efficiency

CRE companies are also increasingly investing in analytics to transform the tenant experience and improve business processes and decision-making. In its 2021 Commercial Real Estate Outlook, Deloitte found that “more than 80% of investors indicated that CRE businesses should prioritize development and use of predictive analytics…to create efficiencies.”

Ten-X Commercial, a commercial real estate technology company, provides an example of this trend. In 2019, the company launched a mobile application that allows different stakeholders, including investors and brokers, to complete transactions and view in one place information about which assets are on sale, what the price is for each asset, and who is bidding on them.

Commercial real estate firms also have begun using AI for a variety of business-related tasks. Skyline AI is an AI-powered real estate investment manager that partners with CRE firms to “to establish a new generation of investment vehicles.” Specifically, the company’s platform “assembles clusters of properties defined as similar according to thousands of signals using a combination of supervised and unsupervised machine learning models. The AI learns and understands the nature of the assets’ inputs and interactions to a degree where it becomes possible to predict their current market value and future rent yield.”

These innovations are likely to continue transforming the CRE landscape.

Preparing for the CRE Market of Tomorrow

The commercial real estate market is ripe with opportunity and the potential for lasting transformation. CRE companies and leaders must be proactive in spotting the trends and changes that can help them meet evolving tenant and end-user needs, as well as modernize and streamline leasing and asset management processes.