Great Adaptations: How Shifting Market Demands are Shaping CRE
If there’s one thing the past few years have taught us, it’s the importance of adaptability. Commercial real estate (CRE) markets across the globe have undergone sweeping changes, altering both the investment landscape and the very fundamentals of how we do business.
We’ve also seen a slew of new trends rising to prominence, including hybrid workplaces and the growing demand for specialized properties to service sectors like the life sciences.
In the midst of this, figuring out which changes are here to stay isn’t an easy business. What seems true across the board, however, is that traditional approaches to CRE must shift to meet the changing expectations and demands of tenants and investors alike.
Management consultancy McKinsey outlines the situation like this: “In this unique moment, real estate players should adopt a new mindset: replacing “if you build it, they will come” with “if you operate brilliantly and please tenants, they will stay.””
That quote is taken from their recent report, titled: “Six new imperatives for real estate players,” which covers some of the overarching trends that seem to be making their way into mainstream CRE.
And while we can’t delve into the fine-scale details of each of McKinsey’s imperatives here, it is worth highlighting some of the ideas from the report that stand out in terms of the current CRE environment.
Create solutions, not spaces
A prevalent theme throughout the pandemic has been the change in how we relate to space. Increasingly, we’ve seen a shift towards creating bespoke offices that incentivize employees to ‘return to work.’
Retail has undergone a similar transformation with an increase in omnichannel retail, and changes in the footprint, and usage, of retail space.
McKinsey sums these changes up with the idea of creating full solutions for clients rather than simply renting out space. They note: “Today’s competitive pressures mean that real estate owners and operators should rethink their purpose. It’s not enough to offer four walls; leading players will help tenants create workplaces that confer a competitive advantage.”
They add that moving into the territory of “problem-solving” will require CRE operators to invest in fresh talent and capabilities, while also being at the cutting edge of new technological developments.
Embrace ‘big data’ capabilities
One of those developments over the past few years has been the influx of new proptech solutions, and the tremendous amount of data available to CRE professionals in their day-to-day. With these tools, we can derive insights about a property, or market, that would have been impossible a few short years ago.
McKinsey provides a fascinating example: “In one digital-analytics-powered model we built for a US West Coast city, for example, we learned that proximity to a gas station had a negative impact on the growth of rents, but proximity to a high number of five-star Yelp-reviewed restaurants had a strong positive effect on it.”
Naturally, these observations form part of a larger picture and should be considered in that context. But that’s exactly the point of what big data offers CRE professionals: A chance to analyze a range of factors that could influence tenant satisfaction and market value.
Enhance operational efficiency
Another arena where advanced data and digital capabilities are adding value is property management. Digital platforms can enhance the tenant experience, providing everything from online rental applications to quick-and-easy maintenance requests and community engagement apps.
Combined with the growing requirement for climate-savvy operational models, it becomes clear that the shift towards digital efficiency is set to play an increasingly vital role in CRE operations in the coming years.
McKinsey adds that according to their own analysis, implementing digital tools for operational efficiency “can increase net operating income (NOI) by 10 percent or more.”
A long-term horizon
Taken together, these observations paint a picture of a CRE industry that must adapt to new strategies, and new methods for adding value. Naturally, those adaptations take time, and there’s work to be done in discerning what changes make sense in each market or area.
What’s certain, however, is that the market is moving. Maintaining a competitive advantage in the years to come means moving with it.