Last week I attended the Realcomm conference in Orlando. It was a great event. The place was packed, the speakers were compelling, and the exhibition hall was filled with really exciting new tech. If you haven’t attended this conference in the past, I highly recommend attending it in the future. The who’s who of the industry were all in attendance, and even though many of the attendees were competitors of each other, there was a sense of camaraderie and cooperation amongst everyone, which is one of the reasons why I love this industry so much. Although there were definitely some positive trends that I saw, my outlook on the CRE industry was bleak after the conference. Below is a summary of some of the takeaways that I left the event with.
Generally speaking, my view is that people are not returning to the office in any meaningful way. Anant Yardi gave a really interesting presentation on the headwinds that traditional leases are facing in the coming years. He referenced a stat that every year for the foreseeable future, between 200M – 250M SF of leases are expiring across the US. Depending on the percentage of companies that decide to go fully remote, the consequences to the market can be significant. And even for the companies that do renew, they will likely need less permanent space because most of their employees will be operating on a hybrid schedule. To make matters worse, the tech industry (whose growth over the last decade resulted in a significant portion of new leases being signed), is getting hammered right now, and it appears that the pain that this sector is facing is just getting started. Add in the fact that almost everyone is convinced that a recession is a foregone conclusion, there is a potential tsunami on the horizon for Commercial Real Estate.
However, there were some glimmers of hope that Anant shared with the audience. Flexible real estate should be the big winner in this massive change which is taking place in the market. Face-to-face interactions between team members and customers will remain a crucial component to running a successful business, and although the need for permanent space will be reduced, companies will always have a need for quality, productive workspace. Companies like WeWork, Industrious, and IWG are well positioned to capitalize on the changing needs of occupiers. But, it is not only flex providers that stand to benefit; it is also the real estate owners. According to Anant, revenue per square foot that coworking companies generate, compared to a traditional lease, is 4 to 1. Therefore, if owners are able to successfully convert vacant space to coworking space, there is massive upside revenue potential. Even though an owner typically needs to share that upside with a Flexible operator that they partner with to manage the space, quadrupling the revenue that they are able to generate from the same amount of space can still generate more profit than if they leased it out on traditional terms.
The biggest question that most occupiers have regarding hybrid work relates to productivity. Does productivity drop when employees are working from home? To answer that question, Anant referenced a study by Price Waterhouse that concluded that there was no deterioration in productivity for employees that operate on a hybrid schedule (in fact, productivity actually increased during the pandemic). If these findings continue to hold true, I believe that hybrid work and flexible models will continue to accelerate for many years to come, as more and more leases come up for renewal.
There was one other positive sign that I heard about the state of the commercial real estate industry. The golden rule of real estate is location, location, location, and this principle continues to hold true. I spoke to owners who were extremely bullish on particular markets. One of my contacts who develops Class A Multi-Tenant Commercial properties in markets that include Atlanta and Austin told me that they literally cannot deliver buildings quick enough to meet demand. This particular developer is known for building incredibly high quality product, and when you mix the right local markets with the flight to quality that occupiers are demanding, there are always going to be opportunities to navigate the challenges ahead.
Another theme which was prevalent throughout the event was IoT sensors. The exhibition hall was filled with companies that were selling different types of sensors, and the subject was discussed in almost every session. From occupancy, to energy consumption, to air quality, everyone was hyping their own unique types of sensors. In addition to actual sensor providers, there were many companies that offered platforms to aggregate the data and display it via dashboards to make the findings actionable. From my perspective, it seemed to be a little disorienting as everyone was trying to figure out their strategy, and it didn’t seem like there were any clear winners who had been crowned yet. But the overall sentiment was that this technology is going to play an increased role in the future of Commercial Real Estate. And although sensors are not a new concept, I noticed something different this time around.
For the past few years, most conversations have been centered around Tenant Experience. Every building owner and manager has been laser focused on deploying technology to lure tenants back to the office and improve their experience to increase the likelihood of a renewal. And although tenant experience is still an important topic, it doesn’t appear that any of the technology that has been deployed has moved the needle in bringing people back to office. The tone of the discussions around different sensors appeared to me to change from tenant experience to cost cutting and ESG.
Owners are holding out hope that people will return to the office, and while anything is possible, the verdict won’t be rendered until the fall of this year. The summertime has historically been a period where office attendance has been low, but if people do not return to the office in September or October, then it is only natural to assume that owners will need to start tightening their belts. Sensors provide some of the best tools out there to supply the data necessary to inform these strategies. They can provide real-time data around occupancy to determine the best ways to optimize energy strategies; if nobody shows up to the 4th floor on a Tuesday until 10:00am, then there is no reason to pump AC on that floor at 8:00am. It can also help save considerable dollars by allowing for a reduction of staff. For example, if occupancy on Fridays drops considerably compared to other days of the week, there may be opportunities to reduce guard/concierge staff for that day. The only way to reduce expenses without your tenants being affected is to understand exactly how the building is being utilized, and sensors may be the best tool available to provide the data necessary to make informed decisions.
ESG was also a topic that was discussed in almost every session. ESG conversations have had many false starts over the years, but this time feels different. Investors are demanding ESG improvements, tenants are asking about it, and more regulations are coming. Personally, I think that all of the talk around ESG is welcome news, and as an industry I hope that we do not let this opportunity slip away from us. But even with all of the conversations around this important topic, we are still in the early innings of figuring it out. Before big changes can take place, most companies are still trying to figure out the best way to measure their current compliance levels. Sensors will play a leading role in determining the current baseline so that technology and process improvements can be implemented to optimize the ESG initiatives that companies will be rolling out.
Another challenge with ESG is cost. ESG initiatives should be able to help companies save money in the long run, but capital must first be deployed before the savings can be recognized. Fortunately, every owner is faced with the same challenges, so no company should be at a disadvantage when it comes to spending money to focus on ESG initiatives. The bigger challenge may come down to change management, but I am confident that the end results will be well worth the resources necessary to make these important changes.
The conference also had its share of really innovative technology that provided a glimpse of what the future may look like. Cochrane Tech Services had a VR/AR headset that overlaid real-time data over critical infrastructure to provide engineers with a new way to see how their systems were operating and determine issues much sooner than they normally would have. Additionally, one of the other stars of the show was a robot dog named Spot which was a collaboration between Trimble and Boston Dynamics. Spot’s scanning solution can not only provide an answer to labor shortages, but it can also be sent into unsafe conditions that are too dangerous to send a human. Robots have been part of the conversation for some time now, and we may be on the verge of seeing them being utilized for practical applications in the real estate industry.
In addition to the subjects listed above, Realcomm 2022 was chock full of other really valuable sessions. One of the other big ticket items that received a lot of attention was cybersecurity, and Jim Wahlen from Boston Properties did not disappoint with his overview of this important subject. Other interesting discussions included Digital Twins, The Metaverse, Data Analytics, and Mixed Use developments geared towards Live/Work/Play. And what really made the event special was seeing so many impressive leaders live in the same room after so much time was spent on Zoom over past 2 years. Realcomm delivered a best-in-class conference, and I am excited to see what next year brings.