The Changing Face of Real Estate

One of my more enjoyable activities that I have is to act as chairman for a developers forum as part of the NAIOP organization.  This activity provides insights into the thinking, planning, and expectations of commercial and industrial property developers and owners across North America.  At our annual meeting a couple of months ago there were many presentations and discussions that focused on 2013 and beyond.  I thought I would share just a few of the points from that meeting.

The NAIOP Research directors provided some interesting factors to consider going forward that tended to revolve around the way technology is changing the office and industrial markets.  E-commerce is projected to have a negative impact on mom-and-pop retail and small start-up retailers until the housing market makes a big recovery, according to Cassidy Turley-Terranomics.  They went on to say that while middle market retailers will continue to struggle, the luxury and discount retailers will continue to expand and open new retail and distribution facilities. 

Speaking of distribution facilities, Jones Lang LasSalle indicated that they believe that distribution center users will continue to push for higher bays...up to at least 36 clear feet...in order to increase efficiencies in handling e-commerce transactions.  Another interesting impact of e-commerce that was highlighted by IMS Worldwide and by Liberty Property Trust is that changing real estate requirement for an e-commerce focused distribution center.  The number of transactions per day in an e-commerce site can be 10 times greater than for a traditional distribution center.  Each of those transactions must be touched by someone so the number of employees in an e-commerce center is much higher.  Parking for up to 1,000 cars in addition to trucks means the land required for these centers can be 40 or 50 acres greater than a comparable "traditional" distribution center.  Implied in this scenario is also the need for a temperature controlled work environment for those 1,000 workers instead of the old "just keep the pipes from freezing" distribution or cross-dock environment.

Another impact of technology and e-commerce is that a DC ("distribution center") for e-commerce has an element of "mission critical" to it in order to process all of the transactions.  Developers and users of these new types of distribution centers look for locations that have reliable fiber optic and cable network access, as well as dual primary power substations in order to minimize downtime in the event of a power disruption.  Other location related decision criteria include being in a right-to-work state and in a state that does not charge sales tax on e-commerce transactions.

Shifting back to the office market, CBRE-Canada, noted that employees are changing how they work and the traditional office with walls is going away.  They also noted that employees, especially the younger ones, communicate with each other by text message versus phone reducing the "noise level" in the office down to the clicking of small touchscreens...reducing the need for walls to control cross conversations.

PPR/CoStar commented that the average lease that they see in the office market has decreased from 5,000 square feet to 3,600 square feet.  This statistic is reinforced by the results of a CoreNet survey of 500 corporate real estate executives who have changed their office plan metric from 225 square feet per employee down to 175 square feet in 2012 with a projection of only 150 square feet by 2017.  This change means that development of new buildings will continue to be pressured as it will take longer to absorb space in overbuilt markets. 

The final point from the annual meeting is that while there is abundant capital available for the right deal all of these other factors are driving developers to spend that capital on remodeling and repurposing of existing space.