How is the Mobile Economy Affecting Real Estate Investment?

As Internet wi-fi and smartphone cellular coverage enables people to work, shop and communicate more easily from anywhere, what impact on commercial real estate can we see today, and what impact can we predict for the future?

The question is not exactly new. Shortly after the first e-commerce transactions took place in the late 1990s, experts in the high-tech world and academia started predicting the death of brick-and-mortar retail. Shopping center and mall owners were also fearful that online sales would continue to increase to the point that physical stores would become obsolete.

In the past five to 10 years, a similar threat has emerged in the office market. As knowledge workers rely more on laptops, smartphones and tablets, less and less work is done in the office and more is done from home or some “third place” such as an airport or a coffee house. Private offices are incorporating desk-sharing programs designed in part to reduce the amount of space needed per employee, while paper file storage needs have shrunk to almost zero. Crystal ball-gazers who view shopping centers as dinosaurs have placed office buildings on the same endangered species list.

But a look at the numbers suggests that rumors of the demise of commercial buildings are greatly exaggerated. Real estate investors should not dismiss the impact of mobile workers and shoppers on office and retail properties as irrelevant; but there is also risk in overestimating the impact on commercial real estate (CRE) markets, and underestimating the ability of those markets to adjust to change.

We are far enough into the mobility trend to look at the impact to date, and predict some repercussions for the future.  The rising importance of mobile technology can have both negative and positive effects on CRE markets. Investors who understand those effects may see opportunity as well as threat in the mobile commerce trend.

Mobile technology affects all four core property types, but in very different ways:

Apartments:  Leasing agents in urban and high-tech markets say many young renters will only consider apartments with the fastest current Internet speed, for gaming and other leisure pursuits. Moreover, many people in the 18-to-34 age group, often known as Generation Y, are said to be satisfied with much less living space, in part because they tend to store music, books and other possessions online.

Office:  The average space needed per employee is shrinking. The main factor driving this decline is that people are spending more time working outside the boundaries of the corporate office space. Increasingly, our offices travel with us as laptops, tablets and smartphones, while our data is stored in the cloud, or on a file-sharing site that enables remote teamwork. As a result, companies are limiting the number of assigned workstations to people who must be in the office daily. Unassigned workstations are used by whichever mobile employees are in the office that day.

CoreNet Global, the organization of corporate real estate directors, surveyed its members to find that the average office worker uses 176 square feet of space today, down from 225 square feet in 2010.  Many companies believe they can get the space utilization number below 100 square feet per employee within a few years, although this goal may be more aspirational than practical.

If companies can effectively cut their office space usage in half over the span of a decade or less, what does this mean to the office market? Seemingly, it would be devastating, but the reality is that there has been little disruption in vacancy rates. The trend toward remote working and office space efficiency has been gathering steam for 20 years, and companies have not been able to shrink their space footprint as dramatically as they claim, although they are often able to expand headcount without taking on additional space. Vacancy and absorption rates were mightily affected by the recession, but they have recovered at the same pace as the overall economy. The impact of mobile devices may be a factor in limiting the need for new development, but that hardly represents an existential threat to office investment.

Retail:  Internet sales are growing by a much higher percentage than in-store sales  but that higher percentage starts from a much smaller base. Online sales still represent less than 6 percent of all retail sales, and in dollar terms, brick-and-mortar stores have gained more than online outlets over the past several years. This trend can be seen in U.S. Department of Commerce statistics on e-commerce as a share of total retail sales, even in the category that includes music and books as well as sporting goods and hobbies; in 2009, online sales represented just 2.3 percent of all sales in that category.

Retailers are taking the e-commerce trend very seriously, however, especially because young people who are the most heavily attached to their phones are also the fastest growing target market.  Retailers are working hard to turn social media and smartphone apps to their advantage, by drawing repeat customers with customized sale offers and by combining online and brick-and-mortar sales channels into a more seamless operation.

Retail vacancies overall and in almost every sub-category have been remarkably stable over the past several years. According to CoStar, retail vacancies overall were about 4.8 percent in 2006 and were about 4.2 percent this year; shopping centers were about 6 percent vacant in 2006 and are about 6.5 percent vacant today. Even the combination of the recession and e-commerce did little to damage the market.

Industrial:  The biggest trend in the distribution sector is the development of e-commerce and multi-channel centers, which require much different design elements and features than traditional warehouses. Distribution centers focused on online sales fulfillment need more workers to pick, wrap and ship individual orders than truck-to-store distribution centers that often use automated systems. With more workers, buildings need higher parking ratios, more staging areas, and a greater focus on employee-friendly features such as thermal comfort and natural light. Multi-channel distribution centers combine traditional shipping and e-commerce fulfillment channels, and are commonly 250,000 square feet or more. Given that these new centers often have well-established tenants, they are also highly popular with institutions and triple-net investors.

The mobile trend is real and growing. Investment managers need to take these trends into consideration when advising their clients. But the trend does not pose an imminent threat to any real estate product type.

There are advantages inherent in mobile commerce for some properties. For example, there is a greater need than ever for “third place” destinations for office work, such as cafes and satellite offices. Some companies are forming space “exchanges,” wherein each participating company offers underused space for employees of other companies to use as a convenience. Retailers are getting better at using interactive media to deepen customer relationships and leverage the shopping experience that only brick-and-mortar stores can provide.

For all the changes wrought by mobile communications, people ultimately need to gather and meet in person. Commercial real estate uniquely fills that need. While the shape and the location of commercial space demand will continue to change, as long as there are people who need a place to stand, sit or lie down, demand for commercial space will continue to rise.

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