Four Trends That Could Be CRE Game-Changers

Eckenrode: “Eckenrode: “Physical stores may remain, but form and functionality may evolve to fulfilment and distribution centers, which could replace the more traditional retailer.”

SCOTTSDALE, AZ—Our industry may see major fundamental change over the next decade thanks to the sharing economy, last-mile delivery, disintermediation in brokerage and leasing, and the war for talent, the Deloitte Center for Financial Services’ executive director James Eckenrode tells GlobeSt.com. Eckenrode will be delivering a keynote presentation session titled, “Commercial Real Estate Redefined: How Exponential Change will Disrupt the Industry” at NAIOP’s Commercial Real Estate Conference here on September 27. We spoke with him exclusively about these four disruptor trends and how he sees them impacting commercial real estate in the next 10 years.

GlobeSt.com: How do you see the sharing economy impacting commercial real estate in the long term?

Eckenrode: Certainly we see that there are a lot of different trends emerging around the collaborative economy, including Airbnb, co-working spaces, retail pop-up stores, shared distribution logistics and on-demand driving systems. This has the potential to reshape demand for CRE use in ways that have to do with demand impact, flexible space, optimized rental rate and increased competition.

When it comes to flexible space, in many cases traditional firms may find it challenging to manage existing real estate with traditional approaches because of varying tenant demand for space. WeWork is a great example of a real estate business that has adapted to each tenant’s needs. This also affects the time dimension, since incumbents will need to scale their space requirements in the short- or intermediate-term.

In terms of optimized rental rate—which is similar in many ways to what I just talked about—long-term leasing of large office spaces will change with the growing preference for flexible work. An estimated 40% of the working class will be contract workers, and we could see the evolution of multi-tier leases. There could be a cluster of tenants who sublease spaces, which could create a broader subleasing phenomenon that changes the way rentals work and the way space is used.

Lastly, traditional real estate brokers may face competition due to individual real estate owners using online marketplaces to rent physical real estate space.

GlobeSt.com: What impact will last-mile delivery of goods have on the current use of commercial and retail space?

Eckenrode: I think there are a number of different factors that come into play here. For example, you can’t discount the growth of online retailing, which continues to lower barriers to entry and fragment the industry. Three-dimensional printing and additive manufacturing will also emerge and allow customization of on-demand production; this may result in reshoring of manufacturing facilities, which could be built to order, rather than built to stock, to allow for sales directly to consumers. Retailers will also have to develop flexible delivery options such as same-day or next-day delivery to differentiate and adapt. Along with Amazon Prime, we may have sidecar deliveries to pick up the slack and automated lockers like Amazon Lockers where individuals take control of the delivery of their purchases. They may have to consider drones and driverless cars as a delivery option. There’s potentially a transformation of—or really a merger of—retailing and wholesaling infrastructures. Physical stores may remain, but form and functionality may evolve to fulfilment and distribution centers, which could replace the more traditional retailer.

GlobeSt.com: How will online services and crowdfunding platforms continue to change the way commercial real estate transactions are done among the brokerage community?

Eckenrode: It’s interesting because what we see happening is that technology underpins all of what I’m talking about. Broker and leasing tasks using technology are impacting the broker and leasing value chain as well. These sorts of activities drive increased transparency as the Internet of Things and other technology arise to change building configurations and other dynamics—which brings down barriers between users and owners. Social media data is creating more real-time availability of property information and is moving activities online, which could disrupt the brokerage model. Everything is more transparent; there’s more information for the tenant, thanks to geospatial technology, the application of analytics, Artificial Intelligence and cognitive technology that can automate tasks that formerly only humans could do—technology that allows for the ability to scan property flyers, analyze data and provide property information to market itself.

GlobeSt.com: How will the war for talent shift the way office space is developed and leased?

Eckenrode: If you trace the evolution of the workplace over the years, a lot of it has to do with technological development. Trends in the early days of portable laptops, video conferencing and telecommuting have transformed work experience and uses, whether we’re talking about seat utilization, work schedules, productivity-tools development or managing the workspace more efficiently and effectively. The whole live/work/play among younger generations will impact the way CRE is used, but also the way it’s designed. There will be a greater need for lifestyle centers that cater to this mantra: more flexible, open, co-sharing spaces. Many firms are already doing this, and per-employee office-space requirements are likely to shrink. What was 250 square feet per employee in the year 2000 may be half that next year. And it also as relates to the locational aspect—the demand for knowledge workers and locations where those kinds of workers are found will influence choice in terms of location as well.

Three major technological developments or trends are driving forces in the evolution of office space use: 1. The Internet of Things and all of the ways that firms can take advantage of the greater amount of information available associated with physical objects: in an analysis we did of IoT-based sensors across financial services, the real estate industry has taken advantage of the greatest amount of IoT to build and manage properties; 2. Self-driving cars, the smart cities or cities of the future movement: cities are developing more efficient or effective intermodal transportation and are using CRE for parking and infrastructure at the city-street level, which will impact the industry greatly; 3. Cybersecurity: interconnectedness and an increased reliance on technology and all the influences it will have on industry come with increased risk, and the attendant need to focus on cyber risk management will become a really important factor as we see these trends emerge over time.