A Second Set of Leading Indicators for the Future

Winter 2017/2018 Issue
By: Kathleen Farrell, head of Commercial Real Estate, SunTrust Banks, Inc.

CRE should focus on indicators that may foretell technology’s impact on the industry.

THE CYCLICAL nature of commercial real estate requires industry leaders to constantly read the proverbial tea leaves to help them stay ahead of the economic curve. Everybody is looking for a competitive edge, or at least forewarning of a negative trend.

Economic data, however, may not encompass the full range of factors, driven largely by technology, that are poised to impact CRE, especially over the medium and long term. From self-driving cars to wearable tech and emerging generational preferences, CRE will need to adapt to the ways that people and technology are rapidly changing. The industry needs to pay attention to a second set of leading indicators that may signal when major shifts in tenant behavior are around the corner.

These indicators should augment, not replace, economic data, and act as a kind of radar, one that is constantly searching for subtle signals that suggest major trends. CRE professionals may never be able to define the precise contours of these changes before they fully emerge. But the industry can improve its ability to recognize their existence and plan for their arrival.

The list of leading indicators below is intended to start a conversation about the types of predictive tools to be added to the CRE executive’s toolbox.

Teleworking Trends

Kathleen Farrell

Kathleen Farrell

Are Americans teleworking more, or less? The commercial real estate industry could learn a lot from teleworking trends, especially whether the share of work performed at home will continue to rise or has reached a new equilibrium. According to the Bureau of Labor Statistics, the share of workers doing some or all of their work at home grew from 19 percent in 2003 to 24 percent in 2015. What will this figure be in 10 years?

Office landlords are already feeling the impact of reduced space needs that has resulted from sophisticated technology and more flexible work conditions. North America may be in the midst of an office space paradigm shift, but how much further will this shift go? If workers increase their mobility and spend more time working remotely, whether at home or in a coworking center or coffee shop, the impact on office property will be seen not only in lower demand but perhaps in completely new designs. Industry experts should be asking many questions: What is the appropriate ratio of square feet per employee and square feet per executive? How much common area space is needed? Will the parking mix need to change?

Some companies are aiming to reverse this trend by requiring remote employees to come into the office more often. Others are abandoning permanent full-time remote work in an effort to spur collaboration, idea generation and better communication. The traditional office building lobby may have to give way to collaboration centers and coffee shops in response to these trends.

Car Ownership

Is the average number of cars per U.S. household declining? Much has been written about car-sharing and ride-hailing services, and whether they will become viable alternatives to owning a car. The challenge for the commercial real estate industry is determining whether this trend will mature, or if car-sharing and ride-hailing will remain a convenient second option for car owners.

One way to measure the impact of these services is to follow the number of cars owned per U.S. household. According to Statista, a statistics and analytics company, the number of vehicles per U.S. household has declined over a recent eight-year period, falling from 2.14 in 2006 to 2.09 in 2014. Statista credits the shift to waning interest in car ownership among millennials (those born between the early 1980s and the mid-1990s). While this decline is hardly precipitous, it could signal more changes ahead if Gen Z (those born in the mid-1990s to the mid-2000s), which is growing up familiar with Uber and Zipcar and is comfortable with the sharing economy concept, embraces ride-hailing and car-sharing wholeheartedly.

Widespread adoption of these services as alternatives to car ownership would have serious implications for all types of commercial real estate. The impact would be especially pronounced in urban centers. Residential developments in these areas could conceivably be built with significantly reduced parking in the near future. This could free up additional space for more housing units or other uses, or for new amenities that could improve tenant retention. (See “Ride-hailing Becomes a CRE Amenity,” Development, fall 2017.)

Autonomous Vehicles

What are regulators signaling about autonomous vehicles? Legislatures and regulators are among the best sources of early signals about the viability of autonomous cars and trucks. Billions of dollars have been poured into developing this technology, and investors will want these investments to begin paying dividends soon.

The National Conference of State Legislatures reports that the number of states evaluating autonomous driving legislation increased from 12 in 2014 to 33 in 2017. The focus on this issue signals that technology may be closer to entering the mass market.

How autonomous vehicles will impact consumer choices remains to be seen, but the possibilities are endless. Will more people consider suburban or even rural lifestyles if their cars become mobile offices and media centers that allow them to maximize the time they spend commuting? Will fully autonomous vehicles supercharge the sharing economy by allowing people to rent their vehicles to car-sharing services while they’re at home or work, reducing the total number of cars that the economy needs to meet demand? Both of these scenarios have implications for commercial real estate design and development. (See “Impacts of Autonomous and Driverless Cars on CRE,” Development, fall 2016.)

Drone Deliveries

Will the FAA allow companies to test drone deliveries in urban areas? Like autonomous vehicles, the decisions that regulators make regarding drones could impact various aspects of the CRE market. The widespread availability of same-day delivery for consumer goods could further depress brick-and-mortar retail developments, many of which are already struggling. In contrast, drone delivery could be a boon for industrial properties near urban centers if online retailers accelerate the trend of moving their fulfillment centers closer to their customers. Rooftop pools or terraces in multifamily properties could be replaced by drone delivery pads, requiring a shift in how building amenities are designed.

As the drone delivery process is perfected, regulators could signal a willingness to test drones in highly populated areas. This would be a clear indication that the technology is ready for widespread deployment. Forward-thinking CRE executives should watch this closely and think about the impact on all sectors, including retail, multifamily and industrial.

Barometers of Change Don’t Have to Be Perfect

The CRE industry has watched how Amazon has dismantled retail, Airbnb has challenged the hospitality industry and Uber has shifted how people commute. The old adage “location, location, location” may prove to be less valid as physical location becomes less relevant and technology becomes more relevant.

While the list of trends cited here is not exhaustive, it should prompt CRE professionals to begin identifying and refining a new set of leading indicators that will help the industry stay ahead of the curve. Economic indicators are not perfect, but they help CRE professionals understand where the economy is moving. The same will be true of indicators that measure the impact of social and technological change. Business leaders can avoid costly mistakes if they try harder to peer into the future.