Why is commercial real estate changing?

Commercial real estate is changing because most tenants don’t want and can’t commit to a long-term lease. Tenant demand is changing because the level of uncertainty in our world continues to increase and flexibility has a very real value. While long-term lease won’t entirely disappear, their share of commercial real estate transactions will significantly decrease for the foreseeable future.

Introduction of Co-working

Around 2005 the world of work started to change in a noticeable way because co-working had emerged as a new workplace option. The seeds of the gig economy were being sown and remote work was gaining traction. The way people worked was evolving from the standard 9 to 5 in cubicle farm to a more varied workplace. GenY were also entering the workforce in ever increasing numbers and their values regarding work & life added more fuel to the fires of change. The seeds of change for commercial real estate were planted when co-working emerged.

Long-term lease is falling out of favor

Commercial Real Estate LeaseSpeaking of millennial’s … when our kids were young my wife used to say to them; “There are two things for dinner; what I am serving, and nothing take your pick.” The “two things for dinner” saying is a great metaphor for how the commercial real estate industry was serving space to tenants. The only option was really; “will that be a 5-year or 10-year lease?” However, change started to accelerate with the introduction of WeWork the co-working unicorn. WeWork has been gaining traction in the market and spawned other options for flexible space.

The good news for tenants is the number of options for renting office space is increasing. The bad news for the traditional commercial real estate industry is something is going to have to change. The organizations dealing with tenants will need to change and commercial real estate brokerages are adapting.

Recent Announcements from CRE Brokerages

It is not business as usual in the commercial real estate industry because changing from a brokered transaction business model to full service provider is a significant cultural shift. I will explore the cultural shift brokerages will need to make when we analyze emerging commercial real estate business models.

What CRE thought leaders are saying

Deloitte Financial Services recently published 2019 Commercial Real Estate Outlook “Agility is key to winning in the digital era”. This is a quote that validates the areas of change; “New business models and competition, extensive use of technology, and changing tenant and investor expectations are redefining the commercial real estate (CRE) industry.”

Another point of reference is CBRE’s 2019 commercial real estate market outlook . The CBRE report explores the impact of technology on commercial real estate. Here is a quote from that article; “I didn’t see a lot of tech experience in the C-suite,” Morassutti said. “In fact, I saw almost none. And I don’t mean the people who oversee the servers and hand out the laptops; I mean those who can provide true strategic guidance. This is one area where our industry is definitely going to have to evolve.”

New Business Models & Technology will have an impact

Changing tenant demand, new business models and technology are going to have an increasing impact on commercial real estate in the next two to five years.

Each of my next three posts will analyse;

1) changing tenant demand,
2) business model evolution and
3) the impact of software & technology on commercial real estate.

Ian Graham