Global commercial real estate faces a series of dynamic challenges. The COVID pandemic has irrevocably altered tenant and landlord needs and behaviors. The cost of purchasing and selling property has grown as interest rates continue to escalate as part of an ongoing effort to curb inflation. The energy crisis has increased operating costs and has forced property owners to plan for and adopt entirely new initiatives, such as energy efficiency and net-zero carbon standards. And then there is the global labor shortage, which has impacted facilities management as much as any sector.
These obstacles and others create a situation that is challenging for even the most capable landlords and management firms. As property owners and managers look ahead to the next five years, understanding the key trends is critical to devising the right strategy to combat these challenges and seize the opportunities that they offer.
7 Trends Shaping the Future of Real Estate Management
Changing Ways of Work
Prior to 2020, before the world knew what COVID-19 was, the quarterly vacancy rate across the U.S. office real estate sector hovered around 12%. However, as the pandemic unfolded, vacancy rates surged to over 15%. In the first quarter of 2023, approximately 16.1% of office space nationwide was unoccupied. In some U.S. markets, vacancy rates have soared to as high as 30%.
While macroeconomic challenges such as supply chain deficiencies and rapid, record-breaking interest rate hikes have contributed to this problem, the pandemic has had the most significant impact. Many U.S. employers and employees have shifted to remote or hybrid work. For those companies that still require office space, their needs and preferences have changed dramatically.
Offices have evolved from primary workspaces to hubs for collaboration, exchanging ideas, and interacting. This shift in focus has led tenants to seek out modern, adaptable office spaces designed to cater to the workplace of the future. In this sense, the pandemic allowed businesses to reassess their office policies and adapt spaces to meet their evolving needs. Consequently, firms are placing a higher emphasis on quality – newer, energy-efficient buildings – leaving older buildings with outdated designs or poor energy efficiency in lower demand.
For investors, higher vacancy rates spell potential trouble. Landlords with high vacancy rates experience disruptions to their income streams, rendering them unable to service their debts. Data from April 2023 reveals that several U.S. metropolitan areas were grappling with a significant portion of distressed office real estate debt. In Charlotte-Gastonia-Concord, NC-SC, more than one-third of commercial mortgage-backed securities tied to office properties were either delinquent, in special servicing, or a combination of both. Nonetheless, offices still had lower delinquency rates compared to other commercial property types, such as lodging or retail properties.
Sustainability
Sustainability initiatives remain at the forefront of the minds of commercial real estate professionals. According to recent research, nearly 70% of more than 500 commercial real estate professionals participating in a global survey cited reducing greenhouse gas emissions as a top organizational priority. In addition to complying with new regulations and being socially responsible, sustainability offers many economic benefits. As Deloitte notes, green buildings “are estimated to consume 29 to 50 percent less energy…emit 33 to 39 percent less CO2...depreciate less quickly than others…have higher tenant attraction, rents, and sales prices…[and receive broader payback through] lower-cost financing, lower operating costs, property tax rebates, and discounts on insurance premiums.”
Put simply, if being sustainable isn’t literally and figuratively built into the fabric of the property, the ability to operate profitably will be significantly impacted.
A New Generation of Talent
Attracting talent has never been harder, and facilities management is certainly no exception. According to ProFMIs 2022 FM Training Outlook Survey, approximately 66% of Facility Managers and staff have left or considered leaving their job within the past year. Moreover, 86% indicated that there is a significant gap between their team’s current knowledge and skills and what they need to excel at their jobs.
It will take some time and considerable resources for organizations to train younger generations of workers. However, a younger workforce will not only fill the gap but will bring tech savviness to the industry, helping organizations leverage digital technologies to get more done with less.
High-Interest Rates
The growth in interest rates in the last couple of years is a dramatic departure from a long-term trend, which saw rates fall consistently over the previous 40 years. While we cannot predict with certainty whether rates will remain high for months or even years from now, recent projections from the Federal Reserve provide some guidance. The Federal Open Market Committee (FOMC) predicts that interest rates will “be stable or higher through 2023 before slowly coming down in 2024-2025 to settle at a comfortable 2.5% for the long term.”
In the interim, property owners can continue to expect higher costs due to interest rates that will eat into margins.
15-Minute Cities
While the concept has been around for several years, the idea of neighborhoods where most necessities and services (such as work, shopping, education, and healthcare) can be reached within a 15-minute walk or cycle has recently gained traction. Builders are increasingly incorporating these designs into new development projects while adapting existing commercial properties in urban areas to various uses to make them more accessible.
Of course, the shift to these types of cities will alter occupant needs and how spaces are used. This
Smart Buildings
The continued digitalization of physical spaces helps property managers improve the occupant experience at scale while managing costs. Automation, the Internet of Things, and data analytics can provide stakeholders with actionable insights to enable informed decision-making around offices and other commercial buildings. Landlords and managers can be more responsive to changing situations (such as public health crises, localized disturbances, or weather events). Moreover, occupants generate data that can help property owners and managers determine how spaces are designed and used.
Experiences, Not Workplaces
According to research by Gallup, just 21% of the workforce is engaged – involved and enthusiastic about their work and workplace. Employee engagement matters because engaged employees are less likely to miss work, are more productive, and are less likely to look for work elsewhere. The physical space in which employees work plays is a critical component of overall employee engagement.
For instance, according to Zach Russell, Bungie’s Senior Director of Employee Experience, newly designed workspaces feature stations “on the outside of the office, and when people get a cup of coffee or go to the bathroom, they have to move to the center of the office, where they run into other people. There are also some wide-open spaces with couches and seating areas where people can hold Zoom calls or play video games.” Over the next five years, employers will continue to reimagine the workplace to find new ways to improve the employee experience.
How Accruent Can Help
Real estate costs are a significant expense for many businesses, and having the tools to manage all aspects of commercial property is critical. As the trends above shape the market, facilities, and property managers need to be able to balance limited resources with delivering the experiences their businesses and customers expect.
That’s where we come in. Accruent Lucernex is a comprehensive real estate management solution covering every aspect of the retail built environment. It empowers property managers, from designing and scoping to building, acquiring, and renting out multiple sites in different geographies.
One company that’s seen the benefit is global footwear retailer Genesco. With more than 1,500 stores across North America and Europe, the company has used Lucernex to improve processes, negotiate better renewals, and lower costs. For instance, it has reduced the time it takes to sign new leases and contracts by 20% and has identified $15,000 in savings on printing equipment leases.
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