In the words of Bill Gates, “The advance of technology is based on making it fit in so that you don’t really even notice it, so it’s part of everyday life.” However, 2018 may be the year we can’t help but notice technology’s profound effect on commercial real estate.
Technology, by definition and application, is all about exploring new frontiers. We’re seeing that geographically as the tech industry expands beyond its established hubs in large urban areas to smaller markets in the Midwest and the South. Firms are increasingly bypassing celebrated tech centers like Northern California’s Silicon Valley and New York City’s Silicon Alley in favor of cities not typically associated with the technology sector, such as Cleveland, New Orleans, Austin, Nashville, and Raleigh-Durham, N.C., because they offer skilled workers, cheaper office space and housing, and access to major highways and airports.
Throughout 2018, the expanding tech sector will continue to be a key driver for office space. While large, established tech hubs will stay active, certain small and mid-sized cities will be well-positioned to attract more tech business in the years ahead.
Warehouses—Not Just for Goods Anymore
Advances in e-commerce are reshaping commercial real estate, and not just the retail sector. Benefitting from internet sales is the warehouse sector, as e-retailers led by Amazon vie to get purchases to buyers’ doorsteps in two days or less, giving rise to a “constellation of vast warehouses” in pockets of the country that once relied on manufacturing, including the Lehigh Valley market. There and elsewhere, long-shuttered manufacturing plants are reopening as fulfillment centers even as new ones are cropping up on relatively cheap land. These centers are huge by necessity, but sizing up the warehouse sector’s future it’s important to factor in the rise of robot workers, which, among other game-changing attributes, tend to require less space than humans to do their jobs.
Sustained demand for cloud-based technology will continue to drive data-center construction around the country through the end of the year and most likely beyond. If you think of data centers as information warehouses, it’s easy to understand why demand won’t ease in the foreseeable future, given the “unprecedented avalanches of information” churning through servers these days.
Office Sector Evolution
It makes sense that technology would shape the office sector, but when it comes to office space, the human element is full of surprises. With today’s technology, dedicated workers can telecommute without missing a beat (or even a meeting), but IBM recently joined a growing list of companies that have put a stop to remote working. Indeed, topping Forbes’ list of 2018 workplace trends is the desire for more human interaction, and even work-at-home freelancers are leasing co-working spaces for a change of scene.
Looking forward, more human interaction may not translate to the type of open, collaborative workspaces that are so prevalent today. That’s because the youngest members of the workforce seem to want more structure and solitude in our increasingly connected world, a desire made clear by their tendency to wear earbuds in open-plan office environments. We predict that the need for companies to continue smart-sizing—or reducing office space for maximum efficiency—combined with Gen Z’s need for boundaries will lead to office design innovations emphasizing flexibility.
Adaptability will be especially important a decade from now, when office valuation—for a variety of reasons and to a certain degree—might start to look more like hospitality and multifamily, with shorter leases and a backward valuation model.