There are so many people I speak with who say they know nothing about commercial real estate. My response is always, “you know more than you think.” If you’ve ever been to a mall, hospital, office building, grocery store or lived in or owned an apartment building, you know something about commercial real estate!
I have spent my entire 40-year career in commercial real estate and am going to share with you how the commercial real estate industry will be affected by technology, such as working from home, online shopping, DoorDash and many other changes happening in our world.
There is zero question that commercial real estate is being affected by these things. The question everyone is trying to understand is HOW.
Let’s take the simplest one first:
Retail
How many of you went to shopping malls 10 years ago? How many of you still go to shopping malls today? Chances are highly likely that you’ve chosen to shop online now as a primary method of obtaining what you would have gone to a mall for in the “old days.”
COVID-19 only accelerated this change that was already happening. At the height of COVID, many forecasters predicted that over 1/3 of all malls would be permanently closed. We are seeing this now, right before our eyes. Did you know that there is currently about 24 sq. ft. of retail space for every American? Many U.S. retail chains are announcing more store closings due to this oversaturation of space.
There are many types of retail though. Think now about your local grocery store. Chances are good that grocery stores will remain open and viable for the near future. Even though I personally buy most of my groceries online, I cannot envision a time when grocery stores are not needed.
Now let’s dive into the office market.
Office
Ten years ago, companies had an average space requirement of 200 sq. ft. per employee, and every employee was generally expected to be in the office five days a week. Employees with higher titles typically got an office, and the coveted space back then was the corner office. There are even books written about corner offices.
Office trends such as flexible scheduling, hot desking (where multiple people share one desk), and the move toward remote work were already on the rise a few years ago, but they took a monumental leap forward during the pandemic. Employees today have seen that remote work is feasible and are prioritizing their work/life balance by increasingly expecting flexible work arrangements and a higher standard for the workplace environment. Formal office structures have changed, maybe forever, and working remotely has become the norm.
I’m sure you have all seen the memes about young people entering the workplace recently, only to be shocked that their employer expects them to come into the office two or three days a week. That was unheard of when I entered the workforce. Just think of how much we have changed.
So, how does this affect office buildings? Less people coming into the office equals less space needed for the tenant or business owner. More than half of the respondents to the CBRE: Global Commercial Real Estate Services’ 2023 U.S. Office Occupier Sentiment Survey said they plan to further reduce their office space in 2024.
More employers are choosing luxury office buildings with amenities (Starbucks, nap pods, etc.) and other incentives as a way to induce employees to physically come to the office.
Add all this together with the much higher interest rates in today’s market, and you have a recipe for an office disaster - and we are seeing that! Luckily, Texas has not been hit as hard as many other cities, like San Francisco, Chicago and New York.
The future of commercial real estate
Unlike residential real estate, most commercial real estate loans have a 10-year term. There is approximately $5.6 trillion of commercial real estate debt in the U.S. and about half of that is maturing between now and 2026. At maturity, an owner will need to get a new loan to pay off the existing loan.
Can you imagine underwriting a retail loan right now that will mature in 2034? What will retail really look like by then? Will we even go out to shop anymore, or will drones drop off everything we want at our homes within an hour of ordering? Or will it all be virtual? I can’t even imagine what things will look like in 2034, but this is a common challenge lenders face, and if they want to get paid off in 2034, they must make some smart predictions.
What will offices look like in 2034? Will we need to go to an office? I can imagine that with just the wave of our hand, a holographic computer screen will appear and a simple pair of goggles can transport you anywhere in the metaverse! Can you imagine having to underwrite those 10-year loans?
Technology is forever changing and evolving our world, especially in commercial real estate.
"Technology is forever changing and evolving our world, especially in commercial real estate."
"If you’ve ever been to a mall, hospital, office building, grocery store or lived in or owned an apartment building, you know something about commercial real estate."