{"id":81,"date":"2023-04-17T14:39:48","date_gmt":"2023-04-17T14:39:48","guid":{"rendered":"https:\/\/myrealestatearticle.com\/?p=81"},"modified":"2023-04-17T14:39:48","modified_gmt":"2023-04-17T14:39:48","slug":"commercial-real-estate-is-in-crisis-where-do-we-go-from-here","status":"publish","type":"post","link":"https:\/\/myrealestatearticle.com\/?p=81","title":{"rendered":"Commercial Real Estate is in Crisis… Where do We Go From Here?"},"content":{"rendered":"

The headlines<\/a> on the state of the Commercial Real Estate industry are downright frightening, and they appear to only be getting worse.\u00a0 Occupancy is nowhere near pre-pandemic levels, nor is leasing activity.\u00a0 Skyrocketing interest rates have significantly ratcheted up the pressure on landlords, and with nearly a billion square feet of office<\/a> leases coming up for renewal in the next 2 years, the level of anxiety is reaching a boiling point.\u00a0 There will always be demand for ultra premium space in key cities like NYC, Miami, and LA, but these assets account for a tiny sliver of the total market.\u00a0\u00a0<\/p>\n

Industries face crises all of the time, and this is far from the first crisis in CRE, but this time is different.\u00a0 Prior crises were driven primarily by financial dynamics, but this time around, issues like interest rates are just one factor.\u00a0 I have all of the confidence in the world that we will get through these challenging times, but it will require much more effort and creativity than just cutting costs and waiting for things to turn around.\u00a0 In order to stop the pain, and eventually return to a healthy growing industry, we need to come to grips with the fact that the world has changed, and we must adapt to meet the evolving needs of customers.\u00a0 A healthy real estate industry is fundamental to the health of the entire economy, so we need to get this right.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0<\/p>\n

There has been plenty of talk about a complete metamorphosis of the commercial real estate industry since COVID began, but besides for a huge increase in remote work, very little has actually changed.\u00a0 Every summer since the beginning of the pandemic, people (myself included) were convinced that things would return to normal that coming September.\u00a0 And each year, September came and went, but normalcy never returned to the market.\u00a0 We are 3 years past the start of the pandemic, and it\u2019s time to agree that we are in a new normal.\u00a0 With the culmination of all of the challenges that the industry is facing, I believe that we are going to start to see some monumental shifts in the way that the industry operates finally begin to take place.<\/p>\n

First and foremost, there will always be a need for productive workspaces.\u00a0 Some jobs cannot be done at home.\u00a0 Even for the roles that can be done remotely, there needs to be a place to meet customers and colleagues.\u00a0 Using myself as an example, I rarely go into my office, but I have been traveling more than ever, and I need physical locations to work from when I travel.\u00a0 A coffee shop may work for a quick intro meeting, but definitely not for a presentation, or a strategy session, or when working on deals which require strict confidentiality. In my opinion, there is no substitute for an in-person meeting when building rapport with a client. \u00a0\u00a0<\/p>\n

Hiring Regardless of Geography<\/strong><\/h4>\n

One of the biggest changes that occurred in the corporate world during the pandemic was the fact that many companies started hiring candidates regardless of where they lived.\u00a0 Since everyone was working remotely during that period, companies were no longer restricted to candidates based on geography.\u00a0 Candidates also benefited from this change since they were able to apply to companies that did not have a local presence.\u00a0 As the world began to reopen, many of these companies found that they had employees based all over the world, but their presence in most markets was subscale, so opening an office in each market would never actually make financial sense.\u00a0 These companies need access to a network of workspaces to solve the issue of providing employees in remote markets with a productive place to meet clients and collaborate with team members.\u00a0\u00a0<\/p>\n

Is Flex the Answer?<\/strong><\/h4>\n

Anyone that reads my blog knows that I am a huge fan of flex.\u00a0 I remain convinced that flex operators will continue to play an increasingly critical role in the future of the industry.\u00a0 However, I do not believe that they will solve everything on their own.\u00a0 For starters, most of the major players in the space have never turned a profit (WeWork\u2019s<\/a> stock closed last week at $0.50 per share) .\u00a0 Secondly, it would be foolish to believe that traditional landlords won\u2019t also play a significant role in the future of the office industry.\u00a0 In addition to the market being big enough for many different types of companies, quantum change will require multiple business models working together in harmony.<\/p>\n

Real Estate Owners<\/strong><\/h4>\n

The majority of my work week is spent meeting with property owners and managers across the US.\u00a0 When I originally started working in the Commercial Real Estate industry, it was common for real estate owners to manage each property in their portfolio as an individual asset.\u00a0 Each property manager & asset manager made their own decisions based on what they felt was best for the building(s) that they ran.\u00a0 Although they may have shared best practices with their colleagues who manage similar properties, they were often empowered to choose their own vendors and technology solutions which they deemed as the right fit to meet their objectives.\u00a0 Buildings are bought and sold on a regular basis, so there was not a huge advantage to standardizing on a specific solution or service provider.\u00a0 Other than property management platforms, most owners have a collection of disparate technologies across their portfolio.\u00a0 Over the past few years, we have started to see this operating model change.<\/p>\n

The Value of a Portfolio<\/strong>\u00a0<\/h4>\n

Real estate owners have begun to view the assets that they own from the lens of a portfolio, instead of individual assets that share little with each other besides for common ownership.\u00a0 To unlock value and activate a host of new experiences for their tenants, Multi-Building owners are discovering that they can create a network across their assets to provide a powerful offering to meet the needs of the Work-From-Anywhere culture.\u00a0 As an example, some of the largest CRE owners are offering their tenants access to their entire portfolio when they sign a lease at one of their buildings.\u00a0 If I work out of a building in NYC, and I am traveling to LA for the week, as long as my landlord owns a property in that market, I can book a conference room or furnished office that I can use during that time.\u00a0 The same principle works with multiple assets within the same city.\u00a0 If my primary office is in Midtown and I live in Brooklyn, I may decide to work from home most days instead of spending 30 minutes on the subway.\u00a0 However, if my landlord also owns a building in Brooklyn that I am able to access whenever I want to, I would be much more likely to work from that office instead of working from home with all of the distractions.\u00a0 In addition to accessing office and meeting space across the globe, tenants also can access the amenities in any property in their portfolio.<\/p>\n

Where things start to get really interesting is when a portfolio includes different asset types.\u00a0 If the owner of my office building also owns Multifamily properties and\/or Hotels, I can then access a place to sleep when I am traveling, or if I need to work late on a particular night.\u00a0 The same concept can be used for parking garages, storage facilities, and entertainment venues. \u00a0 If you have visitors coming into town, a digital visitor pass can be created to provide your guests with access to lodging, office space, and parking nearby.\u00a0 The larger and more diverse a portfolio is, the greater the value becomes for their tenants.\u00a0 However, this will only work if the process of booking and accessing the different locations is frictionless.\u00a0 If a tenant needs to jump through hoops in order to book and access different assets throughout a portfolio, chances are low that many people will actually use them.\u00a0 I recently published an article<\/a> which detailed some of the technical hurdles that need to be solved in order to activate these offerings.<\/p>\n

How do the Smaller Owners Compete?<\/strong><\/h4>\n

Large multinational real estate owners are well suited to create a network to meet the needs of their tenants, but the smaller companies have found a way to compete as well.\u00a0 We are starting to see alliances being formed by owners that have a footprint limited to just a few markets (or even a single city), as well as owners of asset types different from what they own.\u00a0 As long as the booking and access process is easy, a tenant should have no issues with the fact that there is no common ownership across the network that they have access to.\u00a0 While these smaller players have found a way to compete with their larger competitors, they face more technical hurdles that the industry giants do not need to worry about.<\/p>\n

An owner can standardize their technology stack throughout their portfolio, but they have no control over the infrastructure that their alliance partners have.\u00a0 The number of disparate platforms across a single portfolio can be daunting, so you can only imagine the challenges of disparate technologies across a network of many different ownership groups.\u00a0 Access control and reservation systems need to all be tied together which is an extremely complex scenario.\u00a0 But that is just the tip of the iceberg.\u00a0 The biggest issue is on the administrative side.\u00a0 Even if a tenant gets unlimited access to all of the assets across the alliance’s entire network, dollars need to be transferred between the partners based on usage.\u00a0 A clearinghouse needs to be created to ensure that each member of the alliance is compensated when one of their partner\u2019s tenants utilizes one of their assets.\u00a0 My lease would be with my landlord, but if I access the office space of an alliance partner in another market, there needs to be a transfer of funds (at a pre agreed to rate) between my landlord and the landlord of the property I am using.<\/p>\n

The concept of a clearinghouse may be new to the commercial real estate industry, but similar structures were common in other industries which have more mature technology infrastructures.\u00a0 When cellular phone networks were first introduced, they were operated by regional ownership groups.\u00a0 When someone left their local area which did not have cellular coverage by their provider, their phone still worked.\u00a0 The phone seamlessly transferred over to the neighboring network.\u00a0 If you are as old as I am, you probably remember the word \u201cRoaming\u201d appearing at the top of your phone screen indicating that you had left the area covered by your cellular provider, and you were on a different provider’s network.\u00a0 Depending on the package that you had subscribed to, your per-minute rate may have increased, but you still only received one bill at the end of the month.\u00a0 Regardless of the amount of cellular networks that you crossed over to during that billing cycle, you only paid the company that your contract was with, and a clearinghouse made sure that the money was transferred appropriately between the different regional ownership groups.\u00a0 The clearinghouse removed the \u201cfriction\u201d so that a consumer didn\u2019t need to carry multiple phones or have multiple contracts.\u00a0 The concept is no different than what needs to take place in Commercial Real Estate.<\/p>\n

How Does it All Work?<\/strong><\/h4>\n

The technical requirements needed to provide tenants with a network of on-demand workspaces is not trivial, but there are 3 main areas that are critical.\u00a0<\/p>\n

Booking\u00a0<\/p>\n

Access Control<\/p>\n

Clearinghouse\u00a0<\/p>\n

First, tenants need to be able to see real-time availability of workspaces near where they are working on a particular day.\u00a0 These spaces can be a combination of buildings owned by their landlord, buildings owned by alliance partners, and flex spaces provided by 3rd party operators. \u00a0 I anticipate Tenant Engagement Apps such as HqO<\/a>, Rise<\/a>, Cove<\/a>, Equiem<\/a>, Sharry<\/a>, and HILO<\/a> playing a major role as the interface that tenants utilize to book these different spaces.\u00a0 I also believe that flex marketplaces and operating platforms such as Upflex<\/a>, LiquidSpace<\/a>, OfficeRnD<\/a>, Flexspace<\/a>, and Spaceflow<\/a> will be key to adding flex spaces to the available inventory.\u00a0<\/p>\n

Next, tenants will need to be able to seamlessly access these workspaces – both the base building (perimeter doors, turnstiles, and elevators) and the suite where they will be working that day.\u00a0 One company which will play a huge role in making this all happen is Apple<\/a> via NFC<\/a>\/Apple Wallet.\u00a0 I recently wrote an article<\/a> detailing how this will work.\u00a0 Access control providers will also play a critical role in making everything work seamlessly together.<\/p>\n

Lastly, a clearinghouse must settle the transactions between each ownership group to ensure that the process is frictionless for all parties.\u00a0 Apple Wallet<\/a> and Google Wallet<\/a> can also play a role in transferring funds, but more solutions are needed to act as the clearinghouse.<\/p>\n

Customized Packages<\/strong><\/h4>\n

I strongly anticipate networks of workspaces being the future of the Commercial Real Estate industry, but it will not be a one size fits all.\u00a0 While large multinational occupiers may need unlimited access to a global network of spaces, many smaller companies that operate in just a handful of cities may be able to get by with a credit system which grants them access to a limited amount of hours per month in a select number of markets.\u00a0 Similar to the Cellular Network analogy mentioned above, I believe that different packages can be tailored for each company\u2019s unique needs.\u00a0\u00a0<\/p>\n

Since companies are willing to pay a premium for short term bookings, Real Estate owners that get this right should be able to generate significantly more revenue per square foot than they can by leasing all of their space via traditional leases.\u00a0 Banks will need to get more comfortable underwriting properties that no longer require 10+ year leases, but whether they like it or not, this is the direction that the entire industry is moving towards.\u00a0 There are some rocky times ahead as Commercial Real Estate owners evolve to meet the changing needs of occupiers, but I remain extremely bullish on the long term health of the industry.<\/p>\n

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The headlines on the state of the Commercial Real Estate industry are downright frightening, and they appear to only be getting worse.\u00a0 Occupancy is nowhere near pre-pandemic levels, nor is leasing activity.\u00a0 Skyrocketing interest rates have significantly ratcheted up the pressure on landlords, and with nearly a billion square feet of office leases coming up […]<\/p>\n","protected":false},"author":0,"featured_media":82,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[],"class_list":["post-81","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investments"],"_links":{"self":[{"href":"https:\/\/myrealestatearticle.com\/index.php?rest_route=\/wp\/v2\/posts\/81"}],"collection":[{"href":"https:\/\/myrealestatearticle.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/myrealestatearticle.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"replies":[{"embeddable":true,"href":"https:\/\/myrealestatearticle.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=81"}],"version-history":[{"count":0,"href":"https:\/\/myrealestatearticle.com\/index.php?rest_route=\/wp\/v2\/posts\/81\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/myrealestatearticle.com\/index.php?rest_route=\/wp\/v2\/media\/82"}],"wp:attachment":[{"href":"https:\/\/myrealestatearticle.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=81"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/myrealestatearticle.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=81"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/myrealestatearticle.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=81"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}