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The Evolution of Commercial Real Estate

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“Let our advance worrying become advance thinking and planning.”

-Winston Churchill

The rise of e-commerce should not give those in the commercial real estate sector any cause for worry. It should, however, give them plenty of cause for planning. The progress of online sales is real and it is rapid, but with a bit of help from data and common sense, it is clear that future strategies are beginning to take shape. After all, a cosmic shift in the business we do will only naturally affect the way we do business.

The Rise of E-Commerce

After averaging annual gains of around 10 percent during the previous decade, e-commerce soared out of the gates once the ‘Great Recession’ came to a close. In 2010, as overall retail sales grew by 5.6 percent, online sales saw an increase of 15.3 percent.

Last year, online sales experienced more rapid upward movement, increasing by 16.3 percent while overall retail saw a 5.1 percent increase. Even with these figures calculated in, e-commerce only accounts for roughly 6 percent of all retail sales. However, a study performed by Deloitte predicts that number reaching 30 percent by 2030.

The commercial real estate sector is still seeing sustainable growth despite these facts, with new retail units expecting to increase by 9 percent this year. This number, however, is bolstered by the restaurant sector, which will account for 43 percent of the planned growth. Some areas such as apparel, bookstores and other mid-priced hard goods are seeing large declines in their planned units due to competition with e-commerce.

The Future of Commercial Real Estate

The first thing that commercial real estate professionals should do is make sure to understand that the sky is not falling. The brick and mortar shopping experience is not at any risk of extinction and the e-commerce share of retail sales is not expected to go much further past 30 percent. Understanding this, the e-commerce shift in retail should be seen as an opportunity.

Industrial investors should prepare to handle a tidal wave of demand for distribution centers. The size of bulk warehouses are ever-increasing due to retailers like Amazon, which are in need of many distribution centers due to their exclusively online presence. These bulk warehouses will likely provide a boost by way of new industrial demand.

On the retail front, focus will shift away from mid-priced hard goods and towards sectors that do not need to compete with e-commerce. This means that restaurants, grocers, and service-based retailers will drive the future of commercial real estate. Instead of counting on large flagship apparel stores, successful shopping centers will be anchored by entertainment and dining establishments.

The future of the industry is still as bright as ever, but there is plenty of work to be done. Those who fail to plan are indeed planning to fail, but there is certainly a great amount to be gained from engaging in sound strategic thinking. In the end, those who display the dedication to adjusting with the times may have their best days ahead of them.

With the pace of development rising and home prices ticking upwards, it seems we may finally be reaching the light at the end of the tunnel for real estate markets. However, a failure to acknowledge future problems will only lead to more of the same. In an article for the National Real Estate Investor, David J. Lynn, Ph.D. discusses the following two issues facing commercial real estate in depth.

The Modern Office Space

Technological advancements have clearly redefined the structure of the typical office. As employees have gained the ability to connect to their clients, co-workers, and supervisors through various electronic mediums, the need for cubicles and offices has dwindled. Lynn cites CoreNet Global, stating that dedicated space per office has reduced to 176 sq. ft. in 2012 from 225 sq. ft. in 2010.

Beyond this, technological advancements have raised questions about whether employees even need to commute to their office. There has been a rise of independent contractors working from home and participating in meetings and conferences through virtual means.

Businesses that do encourage their employees to work from the office have also changed their way of thinking. The traditional cubicle setting has been exchanged in favor of more open space, giving employees the flexibility to move around and collaborate with each other.

Investments must be adjusted accordingly from the traditional office space to the more progressive, technology-friendly settings in order to move with the times. As of now, however, there is a fear that office space could be facing a grim future.

The ‘Echo Boomers’

From 1982 to 1995, the baby boom generation spawned a new large group of young people now known as the “echo boom” generation. This group of young adults is ready to move out and create a huge impact on the national economy through demand for housing.

The problem seems to lie in the fact that the echo boomers are leaving their homes for more urban areas. This is due to a variety of reasons including the vast nightlife, amenities, and restaurants offered by cities. However, this phenomenon is mostly due to the increased employment opportunities that cities provide in comparison to suburban areas. Echo-boomers are even willing to trade size of residence for proximity to these locations.

The echo boomers are not necessarily dependent on motor vehicles. They enjoy walking, riding bicycles, and even mass transit. Echo boomers are also not looking to buy homes, but choose to rent instead. These characteristics all make the city more appealing than the suburbs for the echo boom generation.

As there is increased demand in these urban areas, the suburbs will begin to see bumps in the road. Demand for housing and/or retail space will very likely decline and tax revenues will shrink. Lynn suggests that suburbs take action to modernize by investing in mass transit, parks, and other ways to create more urban surroundings in hope of attracting future generations.