The commercial real estate sector has been one of the most poignant figures in the economic growth trends over the past decades. Whether it is its growing popularity as an investment or gaining value as an asset to a business, the CRE has become an integral part of assessing a nation's GDP and economic health. Opening up of avenues such as REITs and REOCs in the stock market has proven to be key aspects for the success of the CRE. There is now a rising interest among investors regarding real estate property.
The advancing competition between various investing parties has led to an in-depth study of the trends that the CRE sector follows to predict its expansion or recession with time.
According to Deloitte's commercial real estate report, the projection for 2019 highlighted institutional investors' growing preference for companies that invest in technologies to make buildings future-ready. This progressed to changing talent models and a need to embrace alliances with protects to address the changing nature of the real estate more rapidly.
The outlook at the start of 2020 was inclined towards prioritizing tenants' and end-users' needs, increasing the influence and application of technology, and changing customer preferences. According to IBEF, it was estimated that the Indian real estate would grow by 19.5% CAGR from 2017 to 2028. Growing volatility of the global economy due to international disputes affects the global trade investments and equity markets, and CRE comes under its radar.
In a survey conducted by Deloitte in summer of 2019 involving over 750 CRE executives- owners/operators, developers, brokers, and investors to study the effect of emerging technologies and analytics on the decision-making process, it was found that the preferences of tenants are changing due to-
Increasing urbanization and globalization.
- Changing workforce demands such as a flexible location and workspace.
An emerging need for technological advancements such as AI and the Internet Of Things (IoT).
- Most respondents rated tenant experience as a top priority. When it comes to tenant experience-related technology investments over the next 18 months, 36%of respondents expect their organizations to hold the line, 42% anticipate a moderate increase, 14% plan to increase significantly. CRE executives surveyed the uncertainty of interest rate, geographic market, and tenant concentration risks as their top challenges.
The major aspiration for the commercial real estate sector is touted to be a shift from the previous 'location' oriented mindset towards a modern amalgamation of location, experience, and analytics.
What is the Current Status of the CRE Sector?
The year 2019 ended in providing optimism to the CRE industry owing to the downward trend of interest rates and the industry fundamentals holding firm. So, how did the various sectors of commercial real estate cope?
The retail sector is the worst-performing sector, with a year-to-date return of 1.75%. There are several markets in which retail space exceeds demand, and that fact, combined with the increasing move towards e-commerce, has caused a lull to the sector.
Offices and hotels are next in line for top performance across CRE sectors, providing a year-to-date return of 6.08% for hotel, and 6.79% for office. According to the NAR CRE Market survey, vacancy rates are considerably higher for these two categories than other sectors, with office space at an average vacancy rate of 10.2% and 12.6% of hotel/hospitality.
According to the NRCEIF property index (NPI), the top-performing CRE sector is the industry. One of the most significant contributors to this increased demand over the years is the transformation in how people shop. The increase in e-commerce avenues has led to an increase in demand for industrial space to produce goods and storage for retailers. Another facet of the success of this sector is an increasing need for data centers. As technology advances and companies expand, so does their need for data security.
Developments such as apartments and student housing reign over other sectors in being the most sought after asset class for CRE investors. It derives profits from shifts in the demographic, economic patterns, and homeownership.
- Capitalization rates are at an all-time low, while occupancy rates stand at historic highs. The performance of all commercial real estate sectors increased in the second quarter of 2019, except retail. However, returns for all asset classes, including industrial, are well below historical levels.
What's Next for the CRE Sector?
To deal with the changing times, adopting new strategies can help fulfill the goal without compromising the well-being of people.
The prime focus of the CRE market should now be on the inculcation of three major components:
- People safety strategy
- Technology strategy
- Real estate strategy
This triangle will help reform the sustenance of the CRE market and aid in achieving long term goals.
Given the rapid changes in tenant and end-user expectations, companies may find it challenging to visualize the ideal experience. But the trick to overcoming this lies in the utilization of data by CRE leaders who can help understand tenant behaviors and create unique experiences.
John D'Angelo, the D'Angelo real estate firm in Texas, pointed out the importance of data in the CRE organization. Using data can help provide a quicker way to obtain information instead of wrangling through spreadsheets for hours. It can also help look at markets that are off radars, jobs, and demographics that you cannot think about also catering to the social media sentiments. Adding to this, the technology will help shape the experience of both the tenant and the end-user, looking first at IoT and mobile apps. AI and digital reality technology are becoming the backbone of most real estate organizations. There is no denying that the benefits of AI and IoT are not limited to tenant experience. They can also raise operational efficiency and lower costs.
Some of the leading examples of technology innovation in CRE space include:
- CBRE's enterprise-grade experience platform, Host that enables smarter workplace experience by connecting data from previously unconnected devices and leveraging machine learning algorithms.
- JLL's PinPoint- a geofencing tool that assesses the shopper's behavior by analyzing mobile data.
- Alibaba's futuristic FlyZoo hotel in Hangzhou, China, uses a combination of the mobile app, AI-based facial recognition, and a digital assistant called Ask Genie to create more personalized and secure guest experiences, from reservations to in-room services.
- Coming to the work from home scenario, it will lead us to reconsider many aspects of CRE such as urbanism- earlier suburban offices were on the deep decline, now people may choose it to accomplish gathering of associates and to maintain social distancing.
A New Chapter for the CRE sector
The CRE industry is at an inflection point as the engagement between tenants and end-users with their physical surroundings is evolving rapidly. As a result, CRE companies would have to view the real estate-as-a-service, which means using physical space rather than only practical uses. This will require companies to strengthen their analytical and predictive capabilities.
It's a now or never chance for the CRE industry's evolution, where the CRE leaders must be proactive and adapt to the winds of change. If they are successful in this endeavor, the next decade would genuinely be beyond imagination.
Commercial real estate or CRE is a property used exclusively for business purposes or a workspace rather than a living space. It includes details of all kinds, office space, hotels, strip malls, restaurants, and convenience stores.
Residential purchases deal with general inspections (commonly a single day) and are also cheaper. They are mostly emotional purchases where the commercial property purchases involve property used for business purposes. Hence, there is more liability in the property and land connected to it. The inspection process is also more extensive.
One of the most common errors made by business/investor is touring the potential properties without deciding on a commercial real estate brokerage relationship. It is recommended that if you hire a commercial real estate broker or advisor to represent you, do so before touring properties.
Inquiring before hiring a CRE agent should include the following-
- What is an agent's reputation regarding experience, honesty, and attention to detail?
- How large is the agent's brokerage?
- What is the accessibility of the agent?
- What are the agents' strong and weak points?
- Does the agent have the right level of communication?
- What are the fees and commission rates of the agent and brokerage?
Commercial real estate cap rate/capitalization rate, the rate of return of an investment in CRE, based on the amount of income it is expected to generate.
These are all of the NNN (referred to as triple net) charges such as tax, insurance, and common area maintenance.
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