As we enter another 12-month cycle of perpetual change for commercial real estate (CRE), multiple trends and predictions begin to frame the rollercoaster ahead. In 2018, however, the overarching prediction for CRE leasing is pretty simple: the customer will, and MUST, come first.
Equiem’s Head of Client Services, Gabriella Karge recently cited that “2018 will be all about the tenant. In fact, the majority of predictions I’ve seen are all about tenant satisfaction and how value propositions can be modified to attract a new generation of demands. After all, without satisfied tenants,” says Karge, “there is no commercial leasing industry.”
With that in mind, a little bit of insight can’t hurt. So, here’s how we see the next 12 months playing out:
In 2017, office rental demands increased worldwide, with leasing activity soaring 3% from 2016 – a stat that’s set to remain high this year. Real estate heavyweight JLL recently reported that “the world will be on track for a good year for occupier demand in 2018, with annual volumes expected to be broadly stable on 2017 levels.”
In fact, in places like Sydney, office vacancy rates are hitting historical lows, falling to 5.4% at the end of 2017. But inversely, investment in new property is reportedly set to plummet by 5-10% in 2018, owing in some part to increasing interest rates and a disproportionate rise in property prices.
Those soaring valuations won’t simply drive companies to the leasing sector: while demand for office rentals rise, associated rent prices will need to increase too. Without inflation in this regard, CRE will never be able to sustain its upwards trajectory.
By way of case study, CBD office prices in some parts of the world have exponentially risen (almost vertically) over the last few years, but commercial rental yields have dropped significantly. For example, Sydney recently hit their lowest CRE yields in a decade, plummeting to a midpoint of 4.94%, despite property and land prices continuing to soar.
This disconnect smells of an industry-wide downfall if some balance isn’t achieved. In fact, the aforementioned Sydney’s rental growth rates are now amongst the highest in the world, surpassing annual increases of more than 30% to keep the tenuous balance.
This year, laws and practices across all real estate sectors are finally beginning to put the lessee at their core. For example, some parts of the world are changing the rules about pet ownership and making it easier for residents to live their ideal lifestyle – even if they don’t own their house.
And in commercial real estate, international legislations are making it a whole lot harder for sketchy agents and authorities to continue detrimental operations. The takeaway from these developments is that even the top of the funnel is now taking the tenants’ side – so lessors need to be too.
New generations are recognising the need for better work-life balance and the flexibility to work in unconventional ways: from home, standing up, in a new spot each day and more. It has been estimated that almost a third of all commercial offices will incorporate flexible space by the time we hit 2030.
The meteoric rise of co-working, hot-desking and mobility industries further supports this growth, with the number of people working in co-working spaces set to surpass 3.8 million by 2020 (almost double its 2017 statistic). Lessors will have to keep this in mind when pitching to prospective tenants, noting that a lack of flexible components may deter potential occupants.
It may not come as a surprise that tech investment is a foundation for this year. Experts are hinging “operational efficiencies” and “top line growth” on this very thing. Deloitte’s recent CRE industry outlook encouraged investment companies to “target higher proportions of smart buildings in their portfolios to provide more value to owners and occupiers in the form of lower operating expenses, such as energy costs, improved health and productivity benefits through smarter heating, ventilation, air-conditioning and lighting; and tighter security due to real-time monitoring and faster emergency response systems.”
It won’t just be physical design technology either – big data will play an integral role. Deloitte further encourages companies to “make more informed decisions based on data and insights... Companies can combine, analyse, and present insights from the large sets of sensor data in a manner that tenants or other stakeholders can leverage in order to better predict behaviours and thus augment their decision making.”
Innovative property management technologies are sure to lead this data charge, helping connect building owners with their tenants in with increased efficiency and opening up lines of communication within the building community.
One relatively unprecedented change in the leasing realm just happens to be invisible: the blockchain. Over the next few years, the entire world of payments, titles, debts, bonds and leasing agreements is set to migrate to the blockchain: a virtual, permanent ledger of transactions that makes lease transfers immediate, payments eternally traceable and the entire industry more efficient (albeit quite scary in its newness).
Although rollout across industries and countries will be staggered, 65% of banks are set to have blockchain projects in full swing by 2020. This progress will filter through to real estate in time, and is already moving faster than expected.
Experts are confident that collaborating and working with fintechs, proptech and start-ups will boast benefits on all sides of the equation. CRE companies and buildings should be reaching out in new ways to engage with those at the forefront of technological innovation this year - especially while the innovation is still in play and not out-dated.
Investing in solutions and products that will form an integral part of the industry in years to come is a sure way to attract tenants and stay strapped into the rollercoaster.
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