Back to the Future

The commercial real estate (CRE) market has historically been known for its “traditional” approach to business, also known as the “Old Boys Network.”  Recently we have seen a trend towards implementing innovative technologies that are transforming the industry, like artificial intelligence and forecasting software which many of the traditional brokers have struggled to adopt.  Listing properties, tenant improvements, construction estimating, leasing platforms, planning, forecasting, and investment analysis, the commercial real estate universe is being turned on its head by a multitude of innovative businesses and technologies. Unfortunately for the traditional guys these new “things” are not fads, gimmicks, or trends.  They are the new reality that is hitting everyone right between the eyes.  Commercial real estate is one of the last industries to adopt the latest and greatest in efficiency technologies and brokers and commercial property managers must change or die.

Here are some ubiquitous emerging trends in commercial real estate:

  1. Financing and capital are increasingly difficult to obtain.  More cash is sitting on the sidelines waiting for a break in the storm. When and where a bottom will hit is the key question right now.  New buyers do not want to overpay, and sellers do not want to sell their properties at the bottom only to see them rebound at higher prices as the market improves.  Importantly the Federal Reserve is keeping everyone on the edge of their seats.
  2. COVID-19 had a net positive impact on commercial property throughout the entire country.  Overall returns, rent price growth, and value appreciation were historically significant. Now we are seeing that growth recoil and profits dwindle.  This could be a typical cycle except that COVID-19 was the catalyst and no one knows for sure what the eventual “other side” looks like with any certainty.
  3. What was normal prior to the pandemic may never be normal again.  We all live, work, and recreation a little differently and possibly these changes are here to stay.  Leisure travel has recovered but business travel may take a while longer, the results of which affect business hotels, business entertainment, business dining, and conference facilities.  Commercial office use and leasing is still stagnant but is slowly coming back to pre-pandemic levels. The overarching question is willing companies be successful in bringing people back into the office?  Some people believe the reversion to the mean might get to 75-80% of pre-COVID occupancies but getting to 99% may take many years.
  4. Savvy investors and seasoned developers are looking for screaming deals where quality is masked by some temporary infirmity or true narrowly defined niche opportunities. There appears to be zero appetite now for riskier or speculative investments.  Leisure demand in the hotel industry is recovering steadily.  Niche resorts and desirable destination hotels are seeing increasing revenue, but convention centers and business hotels are still having issues gaining traction. The office space market is craving modern buildings and turning their collective noses up at anything with age.  There could be opportunity with renovation of older buildings, but the risk is not worth the reward yet.
  5. Many jurisdictions are encouraging commercial property owners to convert their buildings to residential units.  Tax credits streamlined planning and permitting processes, and other incentives are all being dangled to persuade these conversions.  A big question is whether conversions are supported by the individual marketplace.  In California there are dozens of cities and counties participating in these programs due to the housing needs.  The property value loss that owners may realize in these projects may not justify the conversion investment, and this could be the greatest impediment to project viability.
  6. Environmental, social, and governance (ESG) compliance continues to transform today’s commercial property development environment.  Increasing burdens for ESG disclosure by commercial property owners, investors and commercial property managers is intensifying, and state and local governments are resorting to regulation to this issue.  This pressure will continue as the world’s climate continues to change and get warmer.  Having a quality team to deal with ESG issues and compliance will be a key ingredient to a long lasting sustainable and profitable commercial real estate portfolio.

Environmental and Technology Future Outlook

Office Buildings in 2030 and Beyond – The Future of Efficient HVAC Systems

Even brand-new commercial HVAC systems are inefficient compared to some of the more technologically advanced heat pump systems on the market today.  Moreover, they rely on fossil fuels for energy. Connected modern day heat pumps boost efficiency and reduce emissions dramatically.  A heat pump is a new HVAC device that is energy-efficient and provides electrified heating in the winter and cooling in the summer.  Today, high-end commercial heat pumps have integrated sensors that can further improve efficiency by introducing artificial intelligence (AI) models that are constantly monitoring and predicting where and when heating or cooling is needed, based on real time weather data.  Proper implementation of AI in the HVAC arena will offer property managers and property owners an initiative-taking rather than a reactive HVAC system, reducing energy costs while improving overall efficiency and interior building comfort.

Solar Panels and Battery Storage Systems

With installation of a solar panel grid, along with the latest technologically advanced HVAC system these upgrades will provide future buildings with a virtual power revenue stream.  Artificial Intelligence equipped heat pumps with allow building managers to increase or decrease HVAC energy use as dictated by the weather which is constantly auto monitored.  Combined with an array of solar panels and efficient battery storage systems to enable a stream of power back to the power grid during periods of peak demand.   This process allows efficient buildings to function as virtual power plants (VPP). VPPs can become a source of revenue for building owners.

Smart Glass is Discriminating

Implementation of technologically advanced Smart Glass has the dual effect of reducing temperature control loads while providing self-directed privacy screening.  It is estimated that more than 25% of heating and cooling for commercial buildings goes out, or through the window (even grease can travel through walls and glass).  Smart glass tackles this challenge by changing the level of tint through AI applications and weather algorithms, which will dictate how much light can pass through a window.

Security Systems Are Not What They Use to Be

AI-assisted security systems allow increased safety for building occupants, tenants, and building personnel.  A technology called Computer Vision is the processing, identifying, and analyzing visual data with a computer the many of the same ways that humans do.  Computer Vision can decipher images and systematically identify any unknown individual or human walking around a building.

Digital Twin of Your Commercial Property

Digital twins offer an innovative solution to streamline your facilities management practices.  This process builds a virtual twin of your property.  These virtual counterparts, meticulously constructed using real-time data from sophisticated sensors, provide a comprehensive blueprint of your physical assets. By subjecting these digital twins to complex simulations, you gain valuable insights into the potential performance enhancements across various hypothetical scenarios, all without the need for costly physical experiments. The knowledge extracted from these simulations is then channeled to optimize the functionality of your tangible assets, ensuring continuous refinement and improvement. For instance, imagine assessing the energy-saving potential of integrating advanced heat pump technology into your commercial property’s HVAC system. Through the integration of the compiled data and intricate 3D modeling, you can create a comprehensive digital twin of your entire establishment, enabling you to run simulations to precisely gauge the benefits of adopting this state-of-the-art technology.

Modular Construction to Speed Up Construction

Modular construction is a method that involves manufacturing building components off-site and then assembling them on location for efficiency and cost savings. This approach dramatically reduces construction time, labor costs, and waste.  We are seeing significant growth in this industry especially since the increased popularity of residential accessory dwelling units (ADUs).  The progress of this construction method into the commercial arena is much slower than residential and for good reason – commercial buildings and their components are usually much bigger and cumbersome than residential units.  Although the adoption of this technology into commercial buildings has been slow it should continue to grow and become a bigger percentage of the overall commercial building construction landscape.

Digital Building Modeling (BIM)

BIM technology in commercial construction has made tremendous strides in recent years, which helps architects, engineers, and construction professionals to create detailed digital representations of projects, components, and buildings.  This method improves the accuracy of the professional’s design process, allows real-time collaboration with stakeholders (online without being physically present), and facilitates changes in the architecture without much fanfare or costs.

Virtual Reality/Augmented Reality (VR/AR)

The future is already here with virtual and augmented reality technologies. These two technologies have found a solid footing in the commercial real estate field.  Leading edge companies using these processes to streamline the design and leasing processes for tenants and clients.  Matterport, for example, is a 360-degree video creation which offers online 3D virtual tours without tenants’ presence necessary.  AR allows design professionals like architects and developers to visualize tentative projects in real-world environments (within a city block for example), improving design ideas, design accuracy and stakeholder visualization.

Envisioning Spaces with AI

Generative AI and its progeny are artificial intelligence that uses deep learning algorithms to generate new content.  AI in commercial real estate has significant potential to help clients, tenants, and design professionals to envision interior spaces and changes in office layout within the commercial real estate industry.  Automating and optimizing design processes is a perfect generative AI task and can help enable architects, interior designers, and clients to explore a multitude of design possibilities with ease.

What is AI Doing for Commercial Property Investors

The amalgamation of AI technologies, including data analysis, predictive modeling, natural language processing, and sentiment analysis, is revolutionizing the landscape of commercial property investments. These groundbreaking advancements empower investors with comprehensive insights and strategic foresight, enabling them to navigate the intricate nuances of the market with unprecedented precision and confidence. Smart commercial property managers can help their clients leverage these sophisticated tools, such that investors can not only decipher complex data patterns but also forecast market trends, gauge consumer sentiment, and derive actionable intelligence, thus elevating their decision-making process to unprecedented heights in the dynamic realm of commercial real estate.

Big Data Aggregation and Comprehensive Analysis

The utilization of AI extends to the comprehensive aggregation and analysis of expansive datasets sourced from a myriad of channels, encompassing property listings, transaction records, demographic insights, and an array of crucial economic indicators sometimes overlooked by the Old Boy Network. Leveraging its formidable processing capabilities, AI orchestrates the seamless organization and synthesis of this intricate web of information, thereby facilitating investors in discerning intricate market trends, continuously monitoring dynamic market conditions, and efficiently pinpointing lucrative investment prospects. This powerful combination of AI-driven data analysis not only amplifies investors’ market intelligence but also fosters a nuanced understanding of the underlying dynamics, empowering them to make proactive, well-informed decisions in the dynamic world of commercial real estate.

Laser-Focused Predictive Analytics

Innovative AI-powered predictive analytics solution, meticulously engineered to anticipate forthcoming market trends and property valuations through a sophisticated analysis of historical data and real-time market dynamics is imperative to a successful commercial property management enterprise. This transformative technology empowers investors with unparalleled foresight, facilitating informed decision-making strategies concerning asset acquisition, divestment, or retention, while seamlessly identifying latent risks and untapped opportunities within the ever-evolving landscape of commercial real estate.

Information Sentiment Analysis

One of the superpowers of AI is in scrutinizing sentiments articulated across news articles, social media platforms, and online forums dedicated to the commercial real estate domain. By meticulously assessing public opinions and gauging market sentiments, AI serves as a crucial ally for investors, enabling the identification of burgeoning trends, imminent market fluctuations, and promising avenues for strategic investment.

Deal Sourcing and Deal Matching

AI-driven platforms can match investors with suitable investment opportunities based on their preferences, risk tolerance, and portfolio strategy. By analyzing data on various properties and comparing them to an investor’s criteria, AI can suggest tailored opportunities and streamline the deal-finding process.

Risk Assessment after Due Diligence

Enter the realm of AI-driven platforms adept at seamlessly aligning discerning investors with handpicked investment prospects tailored to their specific preferences, risk appetite, and meticulous portfolio strategy. Through an intricate analysis of diverse property data juxtaposed with the investor’s unique criteria, AI orchestrates a bespoke curation of investment opportunities, optimizing the process of discovering and securing lucrative deals with unparalleled precision and efficiency.

Portfolio Optimization

Leverage the prowess of AI-powered tools to fine-tune and enhance your commercial real estate portfolios through meticulous evaluations of critical factors, including asset allocation, risk exposure, and prevailing market conditions. By offering invaluable insights into optimal strategies for portfolio diversification and expansion, AI serves as a steadfast ally, enabling investors to navigate the intricate landscape of commercial real estate with heightened precision and confidence, thus fostering a more strategic and data-driven investment approach.

Final Thoughts

AI technologies are playing an ever-increasing role in helping investors, stakeholders, commercial property managers, and building owners navigate the complexities of commercial real estate.  Providing data-driven insights, predictive analytics, and enhanced precise decision-making calls, AI is helping all the players in understanding markets, identifying deals, and optimizing their investment strategies like never before. Silicon Valley technology companies are leading the industry in developing the building tools of the future to allow increased functionality and efficiency. Top level Silicon Valley commercial property management firms are educating and providing their clients with the latest and greatest information to their clients – helping them foster the competitive assets of the future.

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