by Brianna Crandall — May 4, 2018 — Major shifts are taking place in the commercial real estate space, says IREM (The Institute of Real Estate Management), an international affiliate of the National Association of REALTORS that has served both the multifamily and commercial sectors since 1933. Speakers at IREM’s Commercial Summit did a deep dive into changes in technology as well as shifting market fundamentals.
Real estate as tech industry
Technology is reshaping the way commercial real estate practitioners and their occupants interface. That was one of the major takeaways from an in-depth presentation by Steve Weikal, head of industry relations for the MIT Center for Real Estate. He focused on three areas of intense change: Real estate fracking, the UI/UX of real estate, and blockchain.
#1 – Fracking
Fracking, Weikal said, is “breaking up the use of the asset into smaller pieces and reconfiguring it into higher-value combinations.” He also described it as “real estate as a service” or “real estate on demand.” Just as Uber and ZipCar unlocked value in transportation by optimizing vehicle use, coworking sites and Airbnb do the same for CRE. There are no fewer than 20 companies offering some take on real estate fracking, aside from coworking, including LiquidSpace, which can book private office space for short-term, third party use — via one’s cell phone.
#2 – The UI/UX of real estate
The UI/UX of real estate, Weikal explained, focuses on the user interface/user experience and “the huge shift in value from physical assets to user experiences.” Implications for management include tracking how people are using the space, including what desks sit empty. For the tenant the implications are broad as well, with their ability to flex space to their needs, such as “energy management and security alerts.” There are also developing technologies for crowdsourcing to rate building performance, what he called a sort of “Yelp for office buildings.”
#3 – Blockchain
Blockchain, according to Weikal, has implications far beyond currency. Calling it a secure, digital ledger, blockchain data is shared, restricting one member in the chain from making changes to existing documents — other than adding an addendum, thus making the data more secure. Digital leases and financing documentation are prime examples of uses that blockchain can facilitate.
Of course, technological changes to the industry aren’t limited here, and Weikal also pointed to the impact of everything from autonomous vehicles to machine learning.
Neil Mandt, founder and CEO of Mandt Media, followed up with a discussion about augmented reality and the impact on real estate owners. In his presentation, he warned of the risks of such seemingly innocuous developments as Pokémon Go, and the insurance threats therein. He also suggested that building owners and managers could consider placing virtual billboards on the façades of their buildings, as a way to “better monetize your real estate by using augmented reality.”
The peak behind us
The changes that are taking place in commercial real estate do so against the backdrop of the larger market conditions, and Colliers International chief economist Andrew Nelson was on hand at the Summit to provide his thoughts on what coming months would bring. Nelson noted that this extended recovery period continues, but changes are evident.
“As of May, we’ll be in the second longest expansion in the nation’s history,” Nelson told his audience. “We have 7% more jobs than ever, and we’re well below the long-term average in unemployment, at just about 4%.”
In the multifamily market, rents are roughly 26% above the prior peak, he reported. In commercial real estate, there has been a full recovery in terms of vacancies, and cap rates are “about as low as they’ve ever been.”
However, while the recovery still has life, “We peaked about three years ago,” he noted. “Transaction rates, price appreciation rates and absorption rates are all falling.” He was quick to reiterate that times are still good by historical standards on just about every meaningful metric, but “the best years of the cycle are behind us.”
A slowdown will not occur until sometime in 2019, and that, Nelson suggested, will be short and shallow. However, for investors at this point in the cycle, he advised: “Be defensive. Now is not the time to go way out on the risk spectrum.”