Land use and commercial real estate’s demand-supply dynamic are set to experience a significant change by the time the year 2030 rolls around. Given the almost daily technological advancements and changing consumer behavior, commercial real estate professionals should reevaluate their business models and focus on the leading factors of this disruptive change.

Four key macro trends have been found to be the front leaders of the disruption – according to research performed by the Deloitte Center for Financial Services. Over the next 15 or so years, CRE executives should pay close attention to the following when positioning their companies to respond to the ever changing commercial real estate market.

Sharing goes beyond table manners and enters the office space market. 

Individual entrepreneurs and small businesses are leading the shared office space movement, including the demand for flexible-term leasing, furnished space, and amenities. In turn, commercial real estate developers, owners and operators must start to design space to accommodate these demands, redevelop and reposition space as a result of excess capacity, and come up with innovative and dynamic leasing models.

Improving technology makes direct-to-consumer services more easily obtainable.

Information sharing, cognitive technologies, big data analytics, and artificial intelligence are becoming the norm across all industries and these trends are being seen in commercial real estate through improved access to market information and data. Due to this, the potential for transactions without brokers is increasing and begging the question of traditional brokerage services and leasing models. To balance the shift, companies must look to non-broker revenue sources and new service models that drive value for clients.

On-demand and same-day delivery blurs the line between retail and industrial space.

The retail and industrial markets are responding to consumer expectations for on-demand and same-day delivery services by utilizing 3-D printing, robotics, drone technology, and inventory optimization technology. This in turn reduces inventories and limits demand for large warehouse spaces. Gone will be the days of large distribution centers, instead commercial real estate executives operating in the retail and warehouse/industrial markets should focus on smaller, local distribution centers and flexible store formats that allow for maximizing space utilization.

Non-traditional employment experiences drives demand for office and mixed-use properties.

The millennial workforce is leading the charge in the evolution of the marketplace by way of where commercial real estate is located, how it’s designed and the way it’s used. In order for employers to win the talent war, they must locate office space in mixed-use, transit-oriented developments that incorporate amenities such as housing and recreational options. The live-work-play environment will be the differentiator of what attracts and retains the millennial worker, who will comprise 75% of the workforce by 2030.

In addition to keeping these four key macro trends in mind, commercial real estate leaders and decision makers should consider how construction and paid parking impact economic development.

Construction activity expected to remain strong amid growing costs.

Given 2015 was a banner year for construction activity, 2016 would be hard-pressed to follow suit given mounting costs and a lack of talent supply. Even with these contributors, 2016 should see stable-but-slow construction activity in several key sectors including education, industrial, office, and retail. The key factor behind the rising costs are due to the sharp rise in sheet-glass prices, which negatively impacts office and high-rise residential construction budgets. Coupled with rising costs is the challenge of finding skilled workers at higher labor costs. An industry-wide survey by the Associated General Contractors of America found that 86% of contractors have trouble filling key hourly craft positions and salaried professional jobs.

Paid parking benefits developers, businesses, and consumers.

Ample parking in urban and downtown areas can be hard to come by and businesses are usually the ones to hear consumer complaints. A solution to this can be found in a parking benefit district – a quasi-government organization, usually a public-private partnership with local business participation that has some authority over parking rules and revenues. These transportation benefit districts, downtown development authorities or business improvement districts enhance parking convenience and uses the revenues from paid parking to improve the commercial, residential, and retail environments in a variety of ways.

Best Practices

By utilizing technology, staying abreast of market trends and consumer activity, commercial real estate professionals can ride the tides of the ever-changing real estate landscape. Besides the major disruptors, all signs point to relatively clear skies ahead in 2016 for steady growth in key markets across the United States.

Sources:

NAIOP, Development Magazine Spring 2016, Business Trends: Four Key CRE Disruptors

NAIOP.org: Construction Activity is Still Growing – It Just Costs More Now

Associated General Contractors of America, Nationwide Survey Finds 86 Percent of Contractors Have Difficulty Filling Key Craft and Salaried Jobs as Demand for Construction Increases

NAIOP, Development Magazine Spring 2016, Business Trends: Making Paid Parking Pay

Two months into 2016 and there are five trends to watch this year for office and industrial commercial real estate. Marcus & Millichap experts discussed topics such as jobs, oil, interest rates and inflation as factors influencing the company’s 2016 U.S. Office & Industrial Investment Forecast.  See below for what they and other commercial real estate advisers have to say.

GDP growth continues despite global slowdown.

The U.S. GDP is entering its seventh year of growth, with the current growth cycle beyond the average of 60 months. Declining oil prices are placing additional stresses on the market, yet falling gas prices are a net positive for the economy. U.S. economic outlook is positive; however, concern is forming over the impact of the overall global economy as the European Union shifts into a lower gear in how to handle a drop in China’s external trade and how the influx of refugees could impede trade between European countries.

Job creation and compensation broadening.

U.S. employment growth is entering its 65th continuous month (there are 4.9 million more jobs than at the onset of the recession of December 2007), with a slight slowdown anticipated this year due to the fact that the number of people available to be hired can over the long term only grow in line with population growth. The jobless rate fell to 4.9% in January, due to more people joining the labor force instead of people dropping out. While job numbers rise, wage slowly does too. January showed a 0.5% increase in the average hourly earnings and a small increase in the length of the average workweek. With inflation still low, an increase in an average worker’s pay translates into a gain in buying power.

Limited construction demand.

Based on the 2016 Forecast, office product type completions are at two-thirds of what they were prior to the recession, which has given the sector opportunity to recover and drive vacancy rates back down. Office vacancies hover at 14.5% at the start of 2016, which is driving up rents. A decline of space per employee has impacted absorption rates, even with job growth. Office construction remains highly concentrated in Houston, San Jose, Dallas/Ft. Worth and New York. Industrial construction is at two-thirds of the last cycle despite e-commerce’s impact and the greater demand for urban-located fulfillment facilities. According to the Associated General Contractors of America, the industry’s unemployment rate is at a 17-year low of 8.5%, which is unclear if it’s due to a lack of talent or if broader economic uncertainty is leading to a decline in demand. Dallas/Ft. Worth, Inland Empire, Atlanta and Houston are seeing the highest industrial completions.

Transaction activity pushing new heights.

Growth in transactions has been steadily accelerating since the end of the recession; at this point, office transactions are at 22% above the peak of the last cycle although pricing is slightly down. Growth is driven by solid fundamentals and increased capital, due to investors looking for alternative places than Wall Street to put their money. In San Diego, infill is driving sales of industrial and office space, with REITs and other large investment owners being a large contributor. Worldwide, Savills World Research’s 2016 “Around the World in Dollars and Cents” report, calculates the value of all high-quality commercial real estate at $29 trillion. The report notes that this value is unevenly distributed, with nearly half (45%) of all global CRE assets located in North America. About 1% of all global real estate assets trade each year in big-ticket transactions, Savills concludes, adding that differences in monetary conditions and investor practices around the world have “important and profound implications for global real estate trends.”

Cap rate compression.

According to  Real Capital Analytics, cap rates averaged 6.5% nationwide during 2015, while the 10-year treasury rate averaged in the low 2% range for most of 2015 and early 2016. This implies a spread of over 4% (or 400 basis points). Today’s spreads are significantly higher than those observed pre-crash where they averaged slightly below 200 basis points and even below 100 basis points for class A assets in top markets according to the commercial real estate economics researchers at the Lakemont Group. Tightening vacancies and climbing rent growth continue to support pricing appreciation for office moving forward. Downtown markets and suburban markets are 8.5% and 3.5%, respectively, below peak of the last cycle, but both are getting solid lift off of the trough of the market in 2008-2009.

With a variety of economic and monetary factors at play in commercial real estate, differences of conditions and practices leave it up to the investor to be as informed as possible. To learn how to maximize the return on investment of your commercial real estate assets, contact Brent Williams of Meissner Jacquét Commercial Real Estate Services at 858-373-1113 or [email protected].

Sources:

NAIOP Blog, February 18, 2016, Five Trends to Watch in 2016

NAIOP Source, February 2016, Global Real Estate Assets are Worth $217 Trillion

Our City San Diego, Business, Real Estate & Politics, January/February 2016

The Daily Transcript, vol. 131, No. 25, January’s Job Numbers Answer Some Questions

The Daily Transcript, vol. 131, No. 25, Construction Employment at 7-Year High

SVN Blog, January 29, 2016, Commercial Real Estate Market Outlook