How Disruptive Tech May Shift Property Valuations

There is no shortage of research to highlight the growth of flexible space on the office market. JLL, for example, recently noted in its publication The Investor that flex space could increase by more than 25% in 2018 after rising 29% in 2017. Furthermore it is not just tenants and landlords that are taking note of the flexible space story: As it becomes more mainstream, lenders and investors are starting to see the benefits of moderate exposure to flex space as part of a well-diversified tenant roster, according to Alex Colpaert, Head of Offices Research at JLL EMEA. In short, as JLL wrote, buildings with a high percentage of flexible space are increasingly seen as viable investment propositions.

“With a growing demand for innovative environments and unconventional design, some secondary assets are in a prime position to be revamped – unlocking opportunities for investors,” Colpaert said.

This is a point also found in Deloitte’s 2019 Commercial Real Estate Outlook, which said that these newer opportunities may be more ideal for investors. “Investors seem to realize that their investments should be tied to the changing nature of work and tenant preferences,” Deloitte wrote in its report. “As such, the new capital commitment is unlikely to flow entirely into traditional CRE.”

Deloitte found that over half of investors it surveyed have plans to invest or increase investments in properties with flexible leases, and 44% plan to do so for flexible spaces. In general, survey respondents specializing in mixed-use and nontraditional properties plan to increase their capital commitment by a higher percentage than those focused on traditional properties.

The irony is that another, entirely separate, wave of disruption could make such investments less appealing in the long run.

Considering Property Valuations

Long-term considerations about a property’s valuation needs to be taken into account as certain technologies come online, says Lee Menifee, head of Americas investment research at PGIM Real Estate.

“Historically we’ve prioritized and paid more for locations that gave us convenience,” such as apartments that offered shorter commute times or offices located close to amenities such as restaurants and retail. Now, the distance to a physical workplace is growing less important — thanks to such developments as mainstream co-working, which often is accompanied by the trend of remote work  — he tells GlobeSt.com, which could eventually have an impact on valuations.

To be sure, this effect will be a subtle one and Menifee says these changes will be more evolutionary than revolutionary. “We think there will continue to be a premium for locations near transit. You’ve got infill neighborhoods that develop up around transit infrastructure and the value of those neighborhoods are more than just access to the transit infrastructure — there is also the amenities and the critical mass of people.”

In short, Menifee says, “we would not bet against density.” Longer term, though, the picture gets murkier as such technologies as self-driving cars enter the mainstream, which will perhaps have even a greater impact on work patterns than co-working and remote work. Even here, though, the impact is not necessarily a straightforward one. Self-driving cars means that people could be living further out from work, which could devalue suburban office buildings, but then that doesn’t take into account the strong trend towards amenities, the lack thereof also is devaluing suburban offices, he says.

Autonomous Cars and Real Estate

CBRE has come to similar conclusions in its study on the affect self-driving cars will have on commercial real estate. “Real estate values have typically been highly coupled with public transit locations and proximity to businesses,” David Eisenberg, senior vice president, Digital Enablement & Technology, CBRE told GlobeSt.com in an earlier interview. “With the infiltration of AVs, real estate premiums, related to location, will go down because location preferences are going to change. What will become more valuable are building specific amenities and the walkability of the surrounding neighborhood.”

“Autonomous vehicles may have the greatest impact on US real estate markets since the mass adoption of the car and expansion of the federal highway system,” says Andrea Cross, Americas Head of Office Research, CBRE. “They are poised to change people’s preferences in where they want to live in a profound way.”