Trends in Commercial Real Estate

Do you ever give any thought to what it means to live in a “smart” city? To me, what immediately comes to mind are the towering 2,000+ foot tall sky scrapers in Dubai, at least one of which has skin that acts like a sponge, collecting condensation that becomes a source of water for a local park. Most major cities in the world are not located in desert conditions with little rain and extreme heat. However, in the case of a Burj Khalifa, you have a 2,700 foot vertically-oriented surface area that, given the right technology, can become valuable to life itself.

By all indications commercial real estate is entering a period of uncertainty fueled by 3 planned Fed lending rate increases this year and weak inflation. Tepid present demand for new retail and office floorspace combined with low borrowing rates is a negative indication for any growth in new construction. Add in the European factor. Many commercial properties in the US are financed through European or British-based banks such as HSBC, Barclays, and Deutche Bank. Forbes Great Britain is facing a possible exit from the continental economic alliance—Brexit. The kicker is the EU will not allow financial institutions as part of an eventual trade deal, which means British banks could face major losses if the country leaves the EU. Further, French and German banks would be incentivized to relocate their headquarters and jobs, if not the employees, out of the UK. If Brexit goes through, then US-lending will become more constrained at least until banks are certain what losses they will have to write-down.

Real estate is beginning to transform itself into more than brick-and-mortar with comforts and sleek designs. Buildings and their surroundings are becoming “smart” cities with interactive resources that enable mobility for the public. Secure, high-speed wireless networks and mobile devices with 5G service connections are transforming the actions and decisions that people can independently make virtually 24 hours a day. Deloitte Advanced sensors are being developed that gather data which will allow building managers to control HVAC and monitor crowds at the touch of a finger. Retail managers will have access to augmented reality (AR) tools. These are just a few advancements in how spaces will be built and used by the public in the future.

Large retail chains and malls are shrinking rapidly because more people can shop comfortably on their phones without heading to the store. It was once only clothing, shoes, and household items. Now, it’s groceries, alcohol, and fast food. As stores like Kmart, Wal-Mart, and Macy’s loose retail presence, those that have successfully generated a robust online shopping experience are rapidly replacing commercial real estate with industrial real estate facilities. Fulfillment centers, warehouses, and distribution center footprints are increasing where brick-and-mortar shopping has failed. As REITs plan new developments and reevaluate the utility of existing properties, they must be ready to create spaces that work for businesses that want to increase worker productivity and attract consumers with a growing appetite for a more technology-driven lifestyle, to remain competitive.

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