In a digitized era where agile business principles reign supreme, traditional commercial real estate principles are being tested like never before. There’s no denying that technology has impacted and even disrupted all real estate asset classes, fundamentally altering the playing field. Given this, it’s tempting to think that it’s time to completely reinvent the way we do business. But not everything we learned before is useless in today’s ever-changing landscape. If we commit to both reevaluating what we bring to our jobs and adapting tried-and-true methodologies to emerging trends, we can weather the evolution with grace and relevance. So what, exactly, has changed?
Investment Principles
Most traditional investment principles continue to hold true. Location is still everything. Demand in a given market should outweigh the projected supply, and quality locations will always fetch higher rents and have a better capital appreciation. Buildings with quality, blue-chip multinational tenants who have solidly structured leases in place and are paying at-market base rents are buildings with less turnover. And diversification is always a good idea to hedge your bets. None of these elements change.
The retail industry is also in the midst of a massive disruption as more consumers move to mobile purchases and e-commerce transactions. Innovation has changed the way people shop, work and live, and the impacts can be felt for workspaces, retail shopping centers, distribution centers, offices and more. The need for physical retail stores has decreased. Instead of seeking larger storefronts, many are investing in complex fulfillment sites that can ship merchandise directly to consumers. Lessening demand for traditional office space is similarly altering office class assets.
Given these trends, extra due diligence is in order when evaluating tenants. In today’s market, the ability to pay on time is only a sliver of the equation. Attention should also be given to the viability of brick-and-mortar retail businesses. Given the rise of Amazon and other online retailers, have stores evaluated whether they can support the square footage for the life of the lease? While a big-box retail chain may seem like a sure bet, several have declared bankruptcy or closed stores over the past few years. In terms of office space, are the corporate tenants committed to maintaining a largely non-mobile workforce for the foreseeable future? How stable are their given industries? Are they a growing, cutting-edge leader in their space, or are they about to be crippled by a dynamo startup?
Particularly in locations with a higher surplus of supply, investors should also pay close attention to planned developments nearby. This is true for retail, office spaces, apartment complexes and high-rise condominiums. More retail owners are interested in building out distribution centers, so an arrangement that accommodates fulfillment is more appealing than a traditional space. Any potential lure to existing customers should be thoroughly evaluated to avoid a situation where you are facing massive vacancies plus the pressure to perform costly renovations just to compete.
– Combining Traditional And Modern Real Estate Tactics To Survive Industry Evolution
