Deloitte recently surveyed 500 commercial real estate investors to determine which factors are most influencing their CRE investment decisions for 2019. The outlook for real estate investors was sunny, with most seeing strong economic growth over the next two years.
Investors’ chief concerns were in the areas of new business models, technology, and changing tenant expectations.
Bullish indicators for commercial real estate trends
Commercial real estate remains attractive to investors, with warehouses and apartment buildings leading the way. Also, forward-thinking investors are focusing on what market experts expect to provide the largest returns in 2019:
- Secondary markets
- Tertiary markets
- Second cities
- Suburban areas
- 18-hour cities
Much of the demand for housing in these markets comes from millennials, who are moving in droves to “hipster bias.” The enormous growth of online delivery businesses, like Amazon, is taking a bite out of retail space demand while fueling the heavy demand for warehouses.
The economy and commercial 2019 real estate forecasts look strong, so commercial real estate investors continue to scout for the best options. The Deloitte study found that this optimism extends to 2020, with the respondents from the United States planning to increase their capital commitments by 13 percent through summer 2020.
These very bullish signs shouldn’t lull CREs into complacency. The commercial real estate market remains highly competitive, and this is a time of rapid change. Keeping up with these changes requires adaptation of new business models, effective deployment of new technologies and adjustment to changing tenant expectations.
Changing tenant expectations
In the old days, commercial landlords focused on cost and location. Tenants were generally happy if they could rent space in the area they regarded as most profitable, without the rent negating the location advantage.
In previous eras, office tenants expected:
- A mix of a cubicle and private office space
- Meeting rooms
- A break room
- A cable internet connection
- Long-term leases
Most figured a business needs stability to prosper, so changing locations after a short time didn’t fit into their plans. Flexibility has fast become a buzzword in 2019. Business changes so rapidly that tenants have a good reason to fear long-term leases.
Many are unsure what their needs for office space will be in the next few years, or even if their company will exist in its present form. Being tied down by a long-term lease could cost them dearly if they suddenly need more employees than anticipated or must reduce staffing in an effort to stem losses.
The flexibility focus goes beyond lease terms; it extends to space itself:
- Turnkey leases are out.
- Tenants want landlords that work with them to create a more productive space that gels with their corporate culture.
- Open spaces are all the rage.
- Tenants demand communal areas.
- Tenants assign workspaces based on functionality rather than status.
- Space must be adaptive.
- Tenants want landlords to provide space-planning services.
- Tenants want the open space but may need a few adaptations to make it practical, such as phone booths where employees can have private conversations.
In today’s market, tenants are able to demand terms. They expect landlords to respond quickly to their needs. Though this adds expense for the landlord, most property owners find it’s worth the cost. Studies show that tenants are willing to pay a premium for these services.
Executed correctly, these added services mean higher returns. The tenants of today also expect property managers to anticipate their needs and wants, so understanding changes in commercial real estate priorities is essential.
In a marketplace that shifts rapidly, understanding commercial real estate tenant expectations require the latest technology.
The power of technology
The Deloitte study shows that 80 percent of investors believe CREs need data analytics. With tenants expecting CREs to anticipate their needs and wants, it’s not difficult to see why analytics is taking on more importance.
The full utilization of data makes it possible to see into the customer’s mind. Data collection opportunities continue to multiply.
Data sources include:
- News feeds
- Satellite imagery
- Geospatial information
- Robotic process automation
All of these technologies are providing new data sets, and investors are recognizing the power of these new data sets. 62 percent of those surveyed by Deloitte prefer to have access to IoT data for their CRE investment decisions.
Advancements in technology and increased analytic data will have the greatest impact on older properties. Legacy buildings, for example, can be redesigned and modernized. Analytic data, such as IoT data, tells property owners what improvements are most popular and profitable.
Analytics help CREs gain all types of valuable information, such as:
- Benefits of short-term leases
- Tenant convenience
- Space design effectiveness
- Retail center traffic
- Employee usage data for offices
New business models
Data analytics and customer expectations are just two drivers of new CRE business models. CREs are also grappling with economic and migration shifts and the need to change how retail space is used. Investors expect CREs to adapt their business models to profit from these trends.
The boom in technology has led to migration to cities that were ill-prepared for rapid population growth. San Francisco, for example, resists high-rise construction despite the lack of space to build apartments. This has led to a housing affordability crisis. CREs have responded to this demand by supplying high-end units, which does little to alleviate the affordable housing problem.
With an estimated increase in the demand for rental units to 4.6 million by 2030, CREs will need to shift their business model away from high-end units to more affordable housing. These new, affordable living spaces must be located outside already saturated city centers, requiring a shift of focus to tertiary and secondary markets.
Data analytics can shed light on where to build, how to make the properties desirable, and what tenants are willing to pay. The continued decline of the retail sector requires a new model for shopping center space.
As retailers like Sears fold and fewer, new players enter the industry, empty retail space makes some shopping centers look like ghost towns. Re-purposing these spaces is likely to become increasingly important. New types of businesses, such as fitness centers, health clinics, and restaurants, can occupy many of these spaces. Data analytics provides an in-depth understanding of the commercial real estate marketplace never before available.
CREs face the challenge of prioritizing investment in technology. Most are not currently looking for enterprise-wide solutions, though the ability to collate technology across a global real estate portfolio provides tremendous opportunity.
CREs who integrate their technology, use it to manage tenant expectations and shift business models profitably gain the largest returns for their investors.
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If you’re interested in investing in Phoenix commercial real estate opportunities, contact LCI Realty. We are happy to help!