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What are the challenges that the commercial real estate industry will face in the coming decade? Like Janus, the Roman god of Beginnings, the Industry Trends Task Force looked both to the past, and to the future, to identify the trends that would drive real estate development over the next 5-10 years. Following are some highlights of the Task Force’s White Paper.
How Will Business Be Conducted?Norman Miller, PhD, and a NAIOP Distinguished Fellow, mentioned off-shoring as perhaps the most dramatic change in how business is being conducted. Off-shoring relates to back office procedures that are leaving the high labor cost countries and being handled in countries with lower labor costs, e.g., India, Russia, China, Thailand, etc. According to Ross Moore, Forrester Research estimates that 3.3 million service industry jobs will be moved offshore by 2015, driven by advances in technology.What is going offshore? Miller points to technology companies, like Microsoft, Cisco and GE, to name a few. Call center support. Financial services and accounting companies. Merrill Lynch and Goldman Sachs have added a twist by recently announcing plans to hire equity analysts in India. “What is most interesting is how business functions have been segmented so successfully, so that even a hospital can run its insurance filing operation from India,” notes Miller. Ross Moore predicted, however, that North American businesses will be forced to adopt the current “off-shoring” trend to stay competitive. “First it was manufacturing, now it is services,” he said. “But at some point, there are limitations to off-shoring.” Thinking strategically, if the United States loses manufacturing jobs because of NAFTA and brain-based jobs to off-shored operations, which industries will have the best prognosis for corporate health? Miller suggests that the U.S. excels or is at least globally competitive in the following industries: entertainment, bio-tech, pharmaceuticals, genetic research, food production and processing, aerospace, telecommunication, financial services, higher education and medicine. Dale Dekker mentions nanotechnology (e.g., medical and other interventions on a cellular level) as another industry holding future promise for the United States. “If the local economy does not have some of these industries then it must have advantages in terms of climate or quality of life or it will not grow,” Miller cautions.
How Will Development Be Funded?Real estate must find a way to position itself to compete against other investment alternatives. Brian Brennan noted that, as always, “Hot money will continue to follow the greed/fear cycle.” He foresees that more elaborate capital structures will be necessary to finance projects in the future, and “this will take more than one checkbook.” In his view, the deals will have a smaller primary debt piece (50-65 percent loan to value) and a larger mezzanine piece (debt and/or equity). The larger equity piece will be layered into A and B positions, in which the A equity has preferred return (moderate risk) and the B equity assumes the first loss position (higher risk).Brennan made the following predictions regarding debt:
Real Estate ProductDale Dekker predicted that the work-force will be more diverse, especially as we proceed with the transition of Baby Boomers from work to retirement. We will slow down and attend more to quality of life issues and more so-called “selfish” desires.
In the office, workers will work in both open and individual spaces, as well as gather in collaborative spaces and work on teams, “both face-to-face, as well as space-to-space.” The workplace will emphasize security and safety, as well as health-related amenities and day care. It will embrace “Talent, tolerance, technology,” as espoused by Richard Florida in “The Rise of the Creative Class.” The workspaces will reflect the following trends:
The trend is toward more infill, more mixed use and more density. Green development will catch on in a big way, with energy supplied and generated by a building’s solar, wind and photovoltaic systems. Adoption of green building principles will be spurred by government incentives and tax credits. Public/private partnerships will meet emerging needs and offer opportunities for development, particularly with government agencies like GSA, DOD and the Veterans Administration. Design/build will emerge as a dominant force.
PeopleJim DeLisle, PhD, and a NAIOP Distinguished Fellow, sees the industry moving toward a more dynamic environment within which new skill sets and aptitudes will be important to industry professionals. To prepare for this new environment, greater technological training, emphasis on sustainable business practices and a clear strategic vision will be warranted.Dr. DeLisle characterized today’s industry professionals as generally more people-oriented than analytical, with an emphasis on real-world experience instead of specialized academic or technological training. DeLisle views the current industry style as one that focuses more on the business-at-hand and less on a long-range vision. Presently, there is no formal body of knowledge or certification that exists for development, as it does for other disciplines like property management and real estate investment (e.g., CPM and CCIM designations). DeLisle would like to see real estate recognized as a legitimate academic discipline that would have an interdisciplinary approach to problem solving. Professionals should be skilled in technology and “sustainable business practices,” instead of the current trend toward maximizing income. In add-ition, a new “standards of conduct” should be adopted to increase industry accountability. DeLisle believes that the future will demand a more entrepreneurial and dynamic approach to real estate. The successful developer of the future will have strong technological skills, which s/he can use to competitive advantage. Collaborative and customer-oriented, the developer will balance costs and consequences when coming up with effective solutions. The resource pool needs to become increasingly heterogeneous, as well as younger, to fill the slots as the Baby Boomers finally retire. According to DeLisle, the challenges facing the real estate industry in the future are to:
Sheila Vertino NAIOP’s vice president of information and research.
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