2013 Outlook on Commercial Real Estate
Interview with Bob O'Brien
The recovery of the U.S. commercial real estate (CRE) sector, although slow, has been visible in improved fundamentals, capital availability, asset pricing and transactions. However, the sector’s recovery appears to be unsteady, and the minimal development activity taking place does not bode well for long-term growth. In the following interview, Robert T. O’Brien, partner and vice chairman, U.S. and Global Real Estate leader, Deloitte & Touche LLP, discusses nontraditional growth strategies and other trends expected to impact the industry in the year ahead.
Where is the industry looking for growth with prospects in the U.S. and other traditional markets appearing limited?
In our “Commercial real estate outlook: Top 10 issues in 2013” report, we noted a rise in overseas activity last year, despite the eurozone crisis and slowing growth in China. We believe real estate investment trusts (REITs), in particular, are well-positioned for global expansion. For the most part, they have been cautious about expanding into different property types and new geographies. Increasingly, though, we are seeing the larger, more sophisticated REITs reach overseas, often following their tenants. We’ve seen this on the industrial side, where they are building out warehouses and distribution centers for existing tenants as part of their global distribution networks. Shopping mall developers can look for overseas investment opportunities by working with their U.S.-based retail tenants that are looking to expand globally. Mall developers can also get exposure to overseas retailers by bringing in retailers from emerging countries, such as Brazil and in Asia, that are looking to expand into the U.S.
Besides the economy’s slow recovery, what other macro trends are impacting the CRE market?
“Advancements in technology are driving long-term, structural changes for commercial real estate.”
Advancements in technology are driving long-term, structural changes for commercial real estate. In retail property, e-commerce has changed consumer shopping habits, impacting retailers’ store size and expansion plans. In the office market, online connectivity and mobile technology have enabled alternative workplace strategies, which are helping corporations reduce the amount of office space they lease. For industrial property, both e-commerce and continued advancements in logistics technologies are influencing where companies locate warehouses and distribution centers. These trends are going to continue to impact CRE industry growth.
How might CRE companies respond to these structural changes?
Companies can fight fire with fire, so to speak, using technology to drive both top-line growth and improve their bottom line. Right now, CRE companies as a group are lagging behind their tenants in making use of technology. For example, when negotiating leases, tenants usually have more data and better data analysis available to them to assist in those negotiations. We see a lot of opportunity in using advanced analytics to enhance revenues.
We also see significant opportunity for data analytics to improve the bottom line by providing insights that drive costs out of the business. Energy use is a great example. It’s a huge cost for real estate companies. CRE uses over 70 percent of the electricity in the U.S. and is responsible for nearly 40 percent of carbon emissions.1 Better energy management can be an important component of an organization’s sustainability and social strategies, which often appeal to tenants and investors. Moreover, it can improve financial performance through better operating performance and bigger margins.
Cloud computing is another technology that offers CRE opportunities to improve operations and margins. Just as mobile technologies and connectivity tools have reduced tenants’ space needs, cloud computing reduces demand for commercial property. Yet, it also offers flexibility, agility and scalability, which aligns well with how CRE businesses manage their normal real estate business cycles.
In addition, companies can drive savings with cloud computing by using software as a service to support the mobile technologies that on-site property managers and leasing personnel are using to interact with tenants and with the home office. Using cloud computing rather than building some big infrastructure in-house can be a huge savings.
1. Green building facts, U.S. Green Building Council, July 2012