How the Modern Workplace is Reshaping the Office Market

With the pervasion of smartphones, laptops, and tablets, the 21st century workplace is no longer confined to leasable office space; workers can conduct business just about anywhere. According to workplace design company Knoll, workers now spend just 49% of their time in a company’s main office.

In addition to increased flexibility, the workforce is changing. According to workplace expert and author Jacob Morgan, Millennials are projected to comprise 50% of the workforce by 2020 and 75% by 2025. Between the need to entice workers back into offices and a growing cohort of employees that expect work environments to support their work-life balance, office space design has changed drastically.

The new model of office environments focuses on fostering collaboration, with open floor plans and few private offices. Some companies have taken that concept one step further and are choosing to occupy shared space with other firms through membership platforms such as WeWork.

Google, which is known for its innovative work spaces, has a "150-feet from food" rule. The idea that no part of the office should be more than 150 feet from sustenance (be it in the form of a restaurant, cafeteria, or mini-kitchen) is rooted in collaboration. If employees are encouraged to snack, they are more likely to run into people they don't normally work with. Such encounters promote the creation of new ideas while facilitating camaraderie. 

Opportunities for social stimulation and recreation have become increasingly important, as worker happiness leads to higher retention. Meanwhile, physical storage needs have been reduced, as paper files have been replaced with electronic files and cloud storage.

As these changes have spread from tech tenants to more traditional office occupants, the way tenants use office space has necessitated significant improvements to keep existing buildings from becoming functionally obsolete. As part of this transformation, tenants are leasing less space per employee, requiring many existing buildings to undergo substantial retrofitting to attract tenants.

Keep in mind that right now, most companies are trying to catch up with the office trends set forth by preeminent technology firms such as Facebook, Twitter, Lyft, Adobe, YouTube, and Airbnb. But many those offices were adapted for the company. New trends are being established as companies choose to build from the ground up, which provides more design flexibility.

For example, in the massive Bay View Google campus that is under construction, employees will always be about three minutes away from every other employee. All indoor space will be optimized for natural light, and outdoor space will play a significant role in employees' day-to-day job functions. As these office layouts prove themselves successful, other companies will attempt to mimic the designs, resulting in additional modifications. And in this case, modifications mean construction.

The changes tenants are requiring of their existing office space will reshape the office market, leading to fluctuations in vacancies, subletting, construction, and occupancies. Ultimately, retrofitting existing properties should lead to increased rent per square foot and occupancy levels.The possibility exists, of course, that certain older buildings will be left vacant if property owners choose not to undergo significant upgrades. Regardless, this paradigm shift in what office environments should accomplish will take time to be reflected across the market and will affect tenanting in the interim.

CMBS Delinquency Rate Rose Slightly in June: Fitch

Loans backing commercial mortgage-backed securities saw a slight uptick in delinquencies last month, Fitch Ratings reported.

Fitch's CMBS index saw a six-basis-point rise in delinquencies during the month of June, up to 4.54% the agency said. The balance of delinquent CMBS loans grew about $65 million, to $17.17 billion, from the prior month.

New delinquencies outgrew the dollar amount of bad loan resolutions by $96 million. Meanwhile, portfolio runoff outpaced new issuances in the month of May (the month used by Fitch for the denominator value in its CMBS index calculation), $5.4 billion versus $1.6 billion.

Retail properties had the highest CMBS delinquency rates at 5.44% in June, an increase of 18 basis points from the month before, while hotel properties followed not far behind at 5.2%, an increase of two basis points from May. Mixed-use properties had the lowest delinquency rate of asset categories specified by Fitch, with a 3.68% delinquency rate, though that rose significantly (178 basis points) from the month before.

3 Tech Trends That Will Transform Real Estate

Three emerging technology trends are going to impact the future of real estate and how people work, live and play, according to Elie Finegold, CBRE Group Inc.’s senior vice president of global innovation and business intelligence.

“Quite simply, we are going through a period of intensely rapid and actually accelerating technological change that is penetrating every aspect of our lives—and will continue to persist for the foreseeable future,” Finegold told Commercial Property Executive. “The challenge for real estate leaders will be to keep eyes on this different future while still creating value for existing asset bases.”

From broad access to WiFi and the ubiquity of smartphones to ever-lighter laptops and more powerful tablet devices, the virtual barrier between work and home is all but gone, and the way people think about real estate is fundamentally changing.

“The technology thread is undoubtedly the continuing rise in power and decline in cost of computing, which drives most of the other incredible innovations,” Finegold added. “But the deep human thread is that we are going through a profound transformation in how we live and how we work, how we grow up and how we grow old. We’ll still be doing all of that in buildings, but it is going to be a very different experience.”

According to Finegold, these three trends will reshape the way people use real estate in the future:

1. radical mobility;
2. a collaborative economy;
3. the transportation revolution, with the ability of people and machines to work from anywhere likely to transform the utilization of traditional spaces.

“I think the collaborative economy accelerates and deepens the impact of autonomous vehicles. In many major cities, if you average less than 10,000 miles per year, it is already cheaper and easier to Uber than to own your own car,” Finegold said. “This means that for many people transportation will become a cheap and ubiquitous service—much like we have given up CDs for streaming services, people in a lot of urban areas will abandon their own cars for a cheap, driverless chauffer. It stands to profoundly change the cost of living in cities, while being at least price competitive with mass transit, highway infrastructure, and owning a car.”

Finegold expects the most disruptive technological advancement will be safe, completely “robotic” cars and trucks.

“Fully autonomous vehicles are already licensed in certain states, and will probably be fairly common by 2020 or so,” he said. “I think it will have a profound effect on how we move goods and people through and between cities, creating a far greener and more efficient experience, but also leaving us with a lot of infrastructure and city planning that we will need to repurpose.”

While some of these trends may be in the distant future, aspects of all three already exist, and are quickly creating new modes for people to access real estate, Finegold concluded.

Oil's Impact on Commercial Real Estate

Perhaps more so than any other industry, oil and its pricing volatility impacts all elements of the U.S. economy, both positively and negatively. Looking at it from a macroeconomic level, higher oil prices are good for some industries, and yet bad for others—and the same goes for lower prices. So overall, how does oil and energy affect the commercial real estate economy? Well, almost in the exact same way, if you break it down.

According to recent statistics from the U.S. Energy Information Administration., U.S. oil production will grow to 9.31 million barrels daily by 2016, so the industry is still healthy production-wise. But for the past few years, prices have remained low and are expected to remain steady or even decline for the foreseeable future. Where this has the greatest impact for commercial real estate is in the retail sector. It’s a simple equation: Reduced gas prices cause a boost in discretionary income and the end result is additional spending for the country. Money that would be typically earmarked towards filling car and home gas tanks now remains in the wallets of U.S. consumers and retailers are the clear beneficiaries.

It’s not a coincidence that the retail sector has shown a marked improvement as oil prices have plummeted. The 2014 holiday retail sales were strong and 2015 is expected to be much the same. By extension, another byproduct winner in this ripple effect are operators of industrial properties, particularly as online retail demand triggers the movement of purchased items through their facilities.

But while retailers and shopping center and industrial building owners celebrate continued affordable gas prices, commercial real estate within markets like Houston, where oil production is the “bread and butter” business, the news is not so welcome. In fact, the entire state of Texas, our country’s number one oil drilling state, has really been squeezed by the price decline.

The Lone Star State is always subject to the underlying forces of the energy sector. When oil fundamentals are strong and prices are up, Texas is a national economic leader. But when the opposite occurs, stunted financial growth is the unfortunate result. This decline has seeped into most of the regional commercial real estate segments such as the Texas office and retail sectors. In addition, a slowdown in local construction has been steadily occurring. Fortunately, Texans have learned from previous oil crunches to diversify the businesses to avoid being completely beholden to the energy industry—so while there has been some job loss, it has been mitigated to some degree.

But Texas and other localized markets specializing in energy aside, the current state of the oil industry and its lower than normal prices and the uplift in consumer spending has generally been considered a good thing for commercial real estate. While the long-term future of oil prices remains a mystery, retailers will still be able to ride this wave for the time being.

Is crowd funding the answer for developers left without financing from the banks?

The concept of syndicate investment and indirect investment in commercial property through vehicles such as investment funds and REITs is firmly established.

Investors, who may not otherwise have the expertise or financial wherewithal to purchase commercial real estate in their own right, essentially pool their resources and purchase property as part of a larger group. Considering the extent to which technology is advancing and new concepts are emerging, it is conceivable that a new phenomenon may reach us before long - that is the concept of "crowdfunding", which is becoming increasingly popular in real estate in the US and gaining traction in Europe and Asia.

Crowdfunding or peer-to-peer lending is described as "the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet".

There are now several well-established crowdfunding platforms including Kickstarter, Indiegogo, Rockethub, and Crowdcube, among others. Most of these are US platforms that have been expanding overseas into Europe and elsewhere. These platforms enable start-up businesses and entrepreneurs to launch and promote their business ideas online and give investors an opportunity to invest in this idea, often for a relatively small outlay.

It goes without saying that investing in start-ups and early stage businesses, whether through crowdfunding or otherwise, involves considerable risks, including illiquidity, lack of dividends, loss of investment and dilution. Crowdfunding should therefore only be undertaken as part of a diversified investment portfolio.

Property crowdfunding is the fastest growing segment of the market today. Following some regulation changes in the US in 2012, commercial real estate sponsors obtained the ability to broadly solicit and advertise to the public. This opened the door for real estate developers and owners to capitalize on modern digital marketing tools and leverage the reach of the Internet to reach a wider potential investor base. A study from Massolution reported that $2.5bn of crowdfunding occurred in the real estate sector in 2014 and this continues to rise.

A number of specialist real estate platforms are now in operation in the US including RealCrowd, Crowdstreet, Fundrise and Prodigy Network. In fact, the largest crowdfunding campaign ever was a real estate crowdfunding project organised by Prodigy Network. Its founder Rodrigo Niño has predicted that "Crowdfunding will disrupt the status quo of traditional equity investment in real estate."

In 2009, Niño helped build the first skyscraper in Bogota, Colombia, in 40 years. He financed much of the project by attracting small investors who invested $20,000 at a time. By 2013, he had raised over $190m for the BD Bacata project - a world record in crowdfunding. Many of the investors in this project, which has recently been completed, made returns of more than 40pc since purchasing shares. Prodigy Network has since moved on to other successful projects in New York including AKA Wall Street, 17 John and AKA United Nations. Another real estate crowdfunding vehicle Fundrise is currently offering approved investors an opportunity to invest in 3 World Trade Centre in New York.

These specialist real estate crowdfunding entities are targeting up to 10 million accredited investors in the United States who are looking for solid returns on tangible assets that can generate private equity type returns. Accredited individual investors can research the best private real estate operating companies, view current offerings, submit offers, fund investments and manage their commercial real estate portfolios from their personal crowdfunding accounts. The portfolio valuation of the largest real estate crowdfunding platform Prodigy Network's now stands at over $600m. They claim to have over 5,200 accredited investors on their books. Interestingly, they are now reportedly looking for institutional quality investment opportunities in Europe.

However, crowdfunding isn't yet an option for all interested in investing in commercial property. Although the core principle of crowdfunding is affording small investors the opportunity to invest in particular projects for relatively little outlay, many of the well-established real estate crowdfunding platforms in the US have high thresholds for accredited investors. To become an accredited investor and to be able to browse open investments on certain real estate crowdfunding platforms, in some cases you are required to have a net worth of at least $1m and to prove that you have a minimum annual income of $200,000 over a number of years in order to be accredited.

If you meet these criteria, you undoubtedly already have access to direct real estate investment opportunities and may prefer to invest in real estate in this way as opposed to pooling resources with many other investors on a crowdfunding platform in order to achieve a similar rate of return. However, as time goes on, these thresholds are likely to reduce giving a greater pool of potential investor's opportunities to invest in commercial property through crowd funding.

In a European context, Spain, Germany and the UK are expected to follow the lead of Italy, which recently became the first country to implement a law on equity crowdfunding.

The property industry is now fully au fait with syndication and REITs and the concept of collectively investing in large and diversified portfolios of commercial real estate across different geographies and jurisdictions. However, the likelihood is that technology will alter current models and streamline investment processes over the next few years with accredited investors increasingly evaluating the merits of investing in particular funds or schemes via highly supportive data rooms and websites in the first instance and making their actual investment via transparent crowdfunding type platforms. Over the last few years, technology has eliminated middle men and increased efficiencies in a plethora of different industries and it has the potential to do likewise in the real estate industry. Real estate crowdfunding has seen exponential growth over the last few years and is likely to continue to grow over the course of the next few years, particularly as the regulatory framework becomes more developed in many jurisdictions.