Technology’s Effect on Commercial Real Estate in a Recession

Though there seems to be an endless supply of other shoes to drop into the current economic chasm, there seems to be a general consensus that commercial real estate is going to take a significant hit. The shoe that could end up kicking commercial real estate down further and is relatively unknown or just not thought about is technology. Developed countries around the world, save a few, have never gone through such a potentially devastating economic cycle with the amount of technology we have at our disposal. What that technology allows for will greatly affect the length of the commercial real estate recession and its effects on the overall economy.

With our daily dose of eye popping layoffs, the top question on every company’s agenda is how to cut costs. When looking to cut costs the typical first question is how many people can be cut and how much of a cut in productivity can be tolerated. But with all of this technology, there is now the possibility to cut costs and keep the same amount of productivity. This wasn’t a viable option in previous recessions, but this time around companies can start sending people home to work, which is all made possible by the giant leaps in communication. People have been telecommuting for years, but with the great expansion of communications technology coupled with a downward economy, the cost cutting choice between cutting a group of employees and cutting out leased floors in a building has become a whole lot easier. The last time we saw a boom in telecommuting was the September, 11th attacks and the catalyst was the fear of travel and a shaky economy. Audio and video conferencing sales soared and using the technology was all the rage. The big problem back then was that the technology was a bit more difficult to use and everyone went back to their old ways of working after the crisis.

The difference now is that the technology has come very far and the new catalyst is a crashing economy that, in my opinion, will be an even stronger catalyst than September 11th. Fickleness and discomfort around the use of technology for basic operational issues is gone. I recently spoke at a conference about this and I asked a very simple question. Has anyone ever sent an email to the person in the office next to them? Everyone looked around like it was a trick question, but the reality is that there is no difference between sending an email to the next cubicle or around the world. This is now the same for almost all types of communicating including voice, video, text, Instant Messaging, etc., and connecting them all together in 2009′s buzzword called, unified communications. In the telecommunications arms race between the Telco’s and the cable companies, there has been such a huge push for mega bandwidth to the end customer to try and own them, that they have inadvertently made millions of households viable for high speed telecommuting. In addition to the end user having the capacity, most applications that company employees need access to have moved to secured web based applications that can be accessed through the internet over these super networks. With the actual communication media being so robust, an employer’s largest concern about sending an employee home is the potential for slacking and a loss of productivity. However, there are very sophisticated systems available to track employee’s progress and activity remotely that can resolve this issue as well. Even though this is not viable for every office worker, the ones that are allowed to do this end up being more productive; think less water cooler conversations, coffee breaks, and long lunches. There is an argument that the employees lose some of the social aspects that bind an office together, but the employees become less stressed without long commutes and early wake-ups, and they end up being happier all around with their job.

So, what does all of this have to do with the real estate market? Simply stated, with all of the supply in the technology arena the demand for physical office space is going to be reduced. Office space has always been a property type that is less desirable due to its susceptibility to economic pressures. Now more than ever companies are looking to chop space and get lean, and office space is going to take an even harder hit. With more space on the market, rinse and repeat and you will have a serious glut of space. The glut of space will end up deflating rental rates reducing cash flow and reducing market value of the properties. If the past 12 months have shown us anything, examining past trends do not help us in this market. Investor’s buying commercial real estate trying to use past trends to make future gains are going to get crushed short term. Why? Because even after the economy recovers companies are not going to take on an expense for space that they have done without through telecommuting. The Gartner Group’s last estimate was that there was 137 million teleworkers worldwide and, “This growth will mushroom as companies learn more about telework benefits and its highly advantageous return on investment, and the proliferation and use of online job boards and virtual hiring,” according to a report in Innovisions Canada.

So that is the argument for office space, but what else will technology affect? On the retail front, there is an entire generation that is getting used to conducting their lives online and that includes buying products. People that were born in the late 60′s and throughout the 70′s are a generation that has one foot in the past bricks generation and another in the future clicks generation. If I look at myself, I would say that there are some things I am not comfortable buying online but my younger colleagues and friends have no problem buying everything needed online. It’s a generational shift and it’s going to add strain on the retail property market during a downward economic cycle. Take Blockbuster for instance and their huge initiative to follow Netflix in the online ordering of movies. Right now those services are sending the DVD’s to your house without ever setting foot in a store. Many of the big cable and satellite providers in the industry are trying to make it viable to download 1000′s of titles from their cable and satellite boxes, and so far the On Demand services are on the forefront but lack in volume of titles. On another front, Telco’s are developing a robust broadband solution over IP, and in Microsoft’s case they are trying to enable downloads right into their Xbox entertainment system via the web. How many empty Blockbuster stores and other video stores is that going to push onto the market? Okay, so that’s digital media and one could argue it is an exception due to ease, but technology is enabling the ordering of many other services to be delivered right to our front doors. Are people still going to go out and shop? I would say yes because it seems that many people have turned shopping into a hobby (think better times), but with our youth becoming more introverted and more accustomed to everything being at their fingertips, maybe less than before on a per-capita basis.

Mobile technology efficiencies are not going to destroy office space or retail spaces on a whole, however it is important to understand that in an evolving technological economy, as well as a down economy, they start becoming a lot less necessary. Commercial real estate has always been a sound alternative investment but the last 12 months have proven that investing in these types of properties takes a lot of experience and more importantly, an open mind about what’s to come to gauge future cash flow and value. Betting against technology has never been a very sound investment strategy and this is definitely not the time for anyone to put their head in the proverbial sand. Perhaps you’re reminded of the story about the close minded man who opened up a typewriter store because he thought computers were just a fad for pimply faced kids?

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