4 Ways Technology is Shaking Up Commercial Real Estate (& Why Multifamily Will Pull Ahead)

by | BiggerPockets.com

Here are two undeniable truths:

  1. Commercial real estate has built many investors’ fortunes throughout history, and
  2. Technology is changing the world at a faster pace than ever.

But how do those two truths affect one another?

There is a reason 80 percent of millionaires attribute their financial success to real estate, much of which focuses in commercial real estate. In past blog articles, I’ve explained in detail how the wealth-building power of commercial real estate works, specifically for multifamily. Due to these articles, I have had many people ask, “Why multifamily? Why not office, retail, or industrial?” All of these options are classified as commercial, and all of them give the benefits I love to write about—but I don’t invest in them. Why?

There are a several reasons I don’t invest in those other niches of commercial real estate and focus on multifamily. The one reason I will write about in this article is technology. I don’t think anyone can argue that technology is changing the economy, people’s lives, and the world as a whole faster than it ever has. It happens to be changing things so fast that predicting where it will take us has become more of a crystal ball reading and less of a data analysis.

Let’s take look at how technology will affect commercial real estate in the years to come.

The success of investment real estate, as with most businesses, can be boiled down to supply and demand. Economics 101, right? We all know this stuff. How badly do your tenants want to rent a property like yours, and how many options do they have to choose from? Well, technology is taking supply and demand for the commercial real estate niches and shaking things up.

Let’s look at few undeniable truths technology has given us and what they mean for commercial real estate.

4 Ways Technology is Shaking Up Commercial Real Estate

1. Demand for workspace is shrinking as people work from home more than ever.

Technology has made it easier to work from home than ever, with tools like Think Email, Skype, Go to Meeting, Podio, and others facilitating virtual collaboration.

According to a Gallup survey of 15,000 adults released last year, 43 percent of employed Americans spend at least some time working remotely. The survey also reported those working remotely four to five days a week grew by nearly the same amount, rising to 31 percent from 24 percent.

Related: 4 Ways New Technology is Changing How Real Estate Investors Communicate

The reason we see this swing is because working from home causes employee satisfaction and productivity to go up and employer costs to go down. Many surveys show employees are willing to forgo 15-20 percent in compensation for the flexibility and convenience of working from home.

Combine all this with that fact that the growing tech industry leads the pack in allowing employees to work from home, and it appears that the trend is likely to pick up pace in coming years.

This all results in a steady trend of more and more employees working from home. Because of this, the demand for office space will continue to decrease as less is needed to accommodate this new trend. I am not saying office space will disappear, but demand will go down, and when demand falls, both pricing and valuation of the asset will fall.

2. Demand for retail space is shrinking as people shop online more than ever.

Ten years ago, if someone told you that you could order your groceries online and have them at your doorstep one hour later or that Amazon would be delivering packages to your doorstep with a drone, you would have thought it was crazy talk.

Today, eight in 10 Americans shop online, according to a new study from Pew Research. That’s 79 percent of U.S. consumers. Leading the pack in online retailers in recent years, Amazon has made a major impact on how we purchase everything from groceries to lawn mowers. Amazon sells just about everything you can think of.

Other major companies, like Wayfair, follow behind Amazon. Even Walmart has made huge push to online shopping recently.

I believe of all the undeniable truths that this is the one that will change commercial real estate the most. Brick and mortar real estate serving retail is and will continue to be replaced by massive fulfillment centers out in the middle of nowhere. Again, to be clear, I am not saying all strip centers in the world will be boarded up and no longer used, but with such a massive push towards online buying and the savings that gives to companies, I have no doubt that demand for this asset class will decline due to this change in technology.

3. Demand for commercial real estate will be displaced because it is simpler for businesses to source from overseas.

I mentioned how technology continues to improve communications and purchasing. Those two things also open the door for businesses to conduct their business overseas to achieve the most competitive pricing. Now even the smallest of businesses can quickly and easily source manufacturing or simple purchasing from overseas vendors.

The most rapid changes I see that technology has opened up for businesses is the ability to not only order things overseas but also hire people to work virtually. Now with a few clicks and calls, a small business owner can hire someone in India, the Philippines, or anywhere else in the world. The Intelligent Virtual Assistant Market is expected to rise from $627.7M in 2015 to a massive $7.9B by 2024. The market is forecasted to expand at an astounding 32.8% CAGR. As this trend grows, it pushes the need for types of real estate that service these jobs out of the country. For the most part, this means industrial spaces for manufacturing and offices will be displaced to serve virtual assistants.

build-relationships

4. Demand for multifamily will increase as people change jobs/careers at a faster pace than ever.

With the world changing so quickly, people are changing as well. The Millennial generation is known to job hop, creating transient employees. They bounce around the country and stay in jobs for a significantly shorter period of time than previous generations. The data supports this. A recent Gallup report on the Millennial generation reveals that 21 percent of Millennials say they’ve changed jobs within the past year, which is more than three times the number of non-Millennials. Jobs and net migration of population are changing, and the younger generation is adapting to that. I believe these changes are being driven by technology.

Related: 5 Ways the Real Estate Industry Will Completely Transform Over the Next Decade

Fifty years ago, if you lived in Ohio, there was no good way for you to hear about job opportunities in Texas. Even if you did somehow find out about them, you would have to pay a fortune for long distance phone calls, and you’d have to send in your resume via snail mail and hope to hear back. If by some good luck you did get the job, you would be forced to move to a new state and say goodbye to your family. Now we can jump on the computer and search for the best fitting/paying opportunities all over the country, apply for them, and interview with them, all without ever leaving our home state. If the need to move out of state arises, we can simply text, FaceTime, or Skype to stay in touch with friends. Put simply, moving jobs and transient lifestyles just aren’t as unachievable as they used to be, which has lead to an increase in this way of living.

This lifestyle results in decreased demand for home ownership. Today, only 63 percent of people own homes, a 50-year low. Some of this is a result of affordability, and some of it is a result of lifestyle. Regardless, people are renting more and more. This increases demand for residential rental property, specifically multifamily.

The undeniable truth is that people work from home now more than ever, and that continues to climb. More people shop from home, and that continues to climb. And more than ever people don’t want to or cannot afford to own the very home they are working and shopping from. The demand for the commercial real estate asset classes are being shaken by change, and that change is a result of technology.

What do you think is going to happen with commercial real estate in the next decade? Do you agree with this assessment?

Leave your thoughts below!

About Author

Jered Sturm

Jered Sturm is co-founder and director of sales and marketing at SNS Capital Group. Jered began in the real estate industry in 2006, working for a successful real estate investment company as a handyman. From 2009-2012, Jered co-founded the construction company Sturm Properties. Using his background in contracting and construction, he began investing in “Value Add” real estate. Now, after co-founding SNS Capital Group, Jered has conducted over 10 million dollars in real estate transactions. He currently co-owns and operates a portfolio worth over 3.7 million dollars in investment real estate.

36 Comments

  1. Christopher Smith

    A lot of interesting things to think about. However for me personally (I work 97% at home and only leave for conference events), I would much rather do that from my own SFR than an apartment or townhouse. But that’s just me, and admittedly I am totally biased owning several SFRs in great upper scale communities in the Bay Area and Midwest.

    • Jered Sturm

      Thanks for the Comment Christopher. I also work from home in an SFR but with 37% of the nation being renters and only a small percent of those being qualified to buy there is still a very large pool of people that I believe will work from home and that home will be rented residents. It may be a rented SFR or an MF unit but I choose MF because of the control of valuation and investment performance it gives. Check out this article I wrote to see more of what I am referring to.

      https://www.biggerpockets.com/renewsblog/how-the-wealthy-invest/

  2. Andrew Syrios

    Well thought out and interesting article. I tend to agree with you on all of it. Demand for industrial space has also been going down because of Just-In-Time delivery and things like Six Sigma. Not sure if that has already ran its course yet and how technology will affect that going forward. Would be interested to hear your thoughts.

    • Jered Sturm

      Andrew, My guess is as good as yours, But I believe demand will continue to go down. I think technology has much more runway on making those operations more efficient and when I say efficient I mean less needed and more condensed. I could be really wrong but that’s what my gut tells me.

  3. Christopher Smith

    We might consider getting away from the use of click bait titling. I’m sure whoever came up with the “plummeting” language thinks it’s a great emotional hook, but honestly it’s actually exceedingly unprofessional and makes all associated with the article sound like some grimey little carnival barker.

  4. Rodney Harris

    I agree but I don’t think commercial will completely be phased out as it is more social, better amenities, and certain things being taken of by the complex itself. I do believe multifamily will continue to grow and thrive for young adults looking to get a foothold into some kind of home ownership! Great article!

  5. Joseph Leofsky

    I know you have only been in real estate for 10 years but come on …

    “Why not office, retail, or industrial?” All of these options are classified as commercial”

    No, no they are not
    Multifamily residential is Residential not commercial!! Industrial is absolutely NOT commercial. Maybe you are assuming since banks consider 4 units and above commercial loans that somehow makes them commercial ?? Residential multiunits, commercial and industrial are not the same. Not today not ever. Zoning not the same, permitting not the same, use not the same.

    • Jered Sturm

      I appreciate you challenging my thinking but I have to agree with Vincent Prunier on this one. None the less the article was not to define commercial real estate but rather how technology is affecting each of the niches of real estate. Call it commercial real estate, call it residential, call it XYZ real estate, It’s important to look at changes and make a guess at where it will be taking us. The key word is “guess” it is just my opinion based on the data I see. My hope is readers like yourself will hear my ideas and form their own.

  6. Nate Itkin

    I agree with your article – just one problem. Other than buying the currently overvalued and highly over leveraged publicly traded REITs, how do you suggest buying multifamily properties (unless you just happen to have $20M burning a hole in your bank account)? Thanks.

  7. Ronnie Woolbright

    In comparison to the labor market we can certainly see that certain jobs go away with time as technology advances and new jobs categories are created. Along the same line of thought certain types of commercial real estate will decline but will also be replaced by new categories. Some promising commercial RE trends include data centers to house the growing number of servers required to run this new online economy. All of these online retailers have created a new demand for distribution centers to hold all of its inventory. As Americans gain more leisure time we also have seen a rise in commercial real estate for entertainment venues. Just some counter thoughts on where commercial real estate has see gains recently- although I am on board with you and prefer residential real estate 🙂

  8. Mike Doran

    A lot of what you say may be true. However speaking for my self working from home is not as productive as some kind of shared office space with resources that can be shared. Also we are human beings and need some interaction. Therefore small MOm and pops , beauty salons, sandwich and yogurt shops , specialty foods ,, and basic service needs should continue. The large retailers like Macys Target and others will most likely feel the pain the most

  9. Michael Poolin on

    Well said and like most good things, everyone’s jumping on board with multi. Consequently, good cap rates are hard to find and overbuilding is a risk. I’d be interested in hearing from someone who wants to talk geography:)

    • Jered Sturm

      I very much agree, Michael. I Invest in both Atlanta and Cincinnati. ATLs fundamentals are off the charts good for potential growth and everyone knows it, and are willing to pay for it. Becuase of this I have not found anything fitting for me in ATL in a while but I can still make sense of things in Cincinnati. Then when ATL corrects I will shift back and begin buying again. This is one of the benefits of sourcing two markets one more segments and predictable and another more volatile where you can back off when times get hot. That’s at least my philosophy, Only time will tell if I am correct.

  10. Beckie Pahner

    ABSOLUTELY.
    There is no “bad” rental market, and there will never be a “bad” rental market!!! I am the broker in charge of a real estate firm in North Carolina. I work a lot with investors, helping them find good deals. I do home sales and rental management. I also own my own investment properties. I do not own them out right, and I did not purchase them with cash. which took a while to buy nine properties at the right price.
    I earn more money from managing my own nine rental properties than I earn managing 50 other rental properties for other owners. THAT SHOULD TELL YOU SOMETHING! Maybe, not to become a property manager, of course, other than for managing your own properties!
    Pinehurst, NC

    • Jered Sturm

      Spoken like a true broker 😉 . Thanks for the comment Beckie. I can’t say I agree that there are no bad rental markets, but I do think investing mistakes can be very forgiving in rental real estate with enough time.

  11. Cory Adams

    I’m kind of torn between multi-family vs SFH. Tenants in my SFHs tended to rent for longer periods of time whereas people in my duplex tend to exhibit more frequent turnover.

    The other arguments regarding technological disruption within much of the real estate market may hold true. I have found that working from home requires solid discipline in order to work only specific hours otherwise you never really leave work mentally if not physically as it is easy to just send one more email or do just a little more work.

  12. Justin Park

    Lot of food for thought here. Enjoyed the read.

    It’s interesting to see what kind of retail businesses succeed despite the trend toward buying nearly everything online. I live in a destination town where being on Main Street still commands ~$5K/mo rents but I’m sure things are different back home in the Rust Belt.

    I’d be very interested to see an in-depth look at how the work-from-home trend actually affects where people (especially renters) live. Overall, will people continue to move into city centers and neighborhoods with lots of amenities or will suburbs and exurbs be more attractive for the space now that the long commute isn’t as much an issue?

  13. Karl B.

    Commercial real estate is broad – some is risky and some has little risk. We have some trucking terminals and warehouses and we own a few Fed-Ex buildings as well – triple-net leases and we know Fed-Ex won’t be going anywhere anytime soon.

    I love me some multi-family buildings but also like the idea of diversifying.

  14. Mary White

    It sounds like we invest along the same lines. Traditional retail spaces in my town are a dime a dozen and are most often not fully occupied. We are currently 1031 exchanging our last single family rental into a 4-plex and will then have all of our holdings in multi-families. We are interested in owning storage units but haven’t headed down that path yet. Our assessment is that as people live in tiny houses, apartments, and the like they will need to store their off-season items. Interesting article, thanks.

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