Deloitte predicts conceptual shift in its Commercial Real Estate Outlook

The housing market of mid ‘90s San Francisco –– sheltered in Victorian Queen Anne Italianates, brick warehouses and Rousseau “Storybook” Homes –– ballooned amid the Dotcom Bubble boom. That bubble temporarily ruptured at the turn of the millennium, with the 9/11 attack of the World Trade Center, then swelled until the 2008 recession, when the markets crashed.

Full restoration of the market wouldn’t be seen until 2014. Ever since, it’s continued an upward trajectory.

Bay Area transplant Sally Ann Flood, a global real estate audit leader and stateside ‘Eminence Leader’ for multinational consulting network Deloitte, is a firsthand witness to the booms and busts of her backyard for the past 25 years.

“I’ve seen a lot of changes, but this past year,” Ms. Flood says of 2020-2021, a period defined by the COVID-19 pandemic, “reached a level of incredible uncertainty. It was unprecedented.”

In search of some clarity, Deloitte surveyed 1,600 executives in North America, Asia Pacific and Europe across all financial services sectors as part of its Commercial Real Estate Outlook for 2022. Of that total, 400 focused on commercial real estate.

The industry currently sits at an inflection point that defines companies who invest in digital, sustainability and services vs. those who do nothing. As Ms. Flood says, “This is a moment that will truly define the leaders.”

Per Deloitte’s Outlook: An estimated 80% of respondents reported an “optimistic” year ahead, despite financial recovery and an evolving regulatory environment related to the global outbreak.

The report reviews how economic, social and digital disruptions are impacting commercial real estate development and finance while considering industry trends, like Diversity Equity and Inclusivity efforts, sustainability and technology.

“The feedback we received felt like the industry was kind of shrugging off the direct impacts of the pandemic; that the fundamentals were coming back,” Ms. Flood says of the United States market. American respondents are confident that leasing activity will continue to improve, she adds.

Comparatively, 70% of the European market expects property valuations to increase alongside vacancies while Asian markets grow concern over debt obligations from the past 12 months, according to the survey. The latter was evidenced by the Evergrande Group, a residential property development firm headquartered in China, and its financial difficulties.

“We’re in this new normal –– I’m not sure how long we can keep calling it ‘a new normal,’” Ms. Flood says, noting that companies buoy in a “wait-and-see” strategy, influenced by pandemic conditions. “Once one of the large players takes that giant leap, others will be very quick to follow.”

Eager to jump, tech leader Google confirmed a $2.1 billion plan to purchase a 1.3 million square feet campus based in Manhattan late last year. The transaction will be the largest office sale in the United States since the beginning of the pandemic. The East Coast ‘groundscaper’ is targeted for completion in 2023.

Maintaining that record-breaking momentum, Deloitte’s Outlook defines what will differentiate the industry in 2022: proptech application and an overall shift in mindset –– reframing real estate as a service.

Broken down, ‘proptech’ is simply ‘property technology’ that uses digital innovation and technology to streamline real estate processes, tenant experiences and access to capital. In other words, proptech is sprawling sector with promise.

With this, Deloitte prompts leaders to reconsider their real estate revenue model. The professional services firm, which is one of ‘the Big Four’ accounting organizations worldwide, suggests that as digital innovations become built into the market, agents should consider the services they’re selling rather than just the space, asking “what does a space do for the tenant or user?”

“Successful real estate organizations and companies are the ones prepared to make the shift, be the change,” Ms. Flood says.

The Outlook found that over three-fourths of respondents say their companies will likely expand partnerships with or invest in proptechs, which could help firms deploy the REaaS delivery model.

Already on the move, global real estate developers Tishman Speyer –– which holds Rockefeller Center in its portfolio –– raised $100 million in venture funds for the purpose of funding “revolutionary,” technology-driven opportunities across the real estate market.

“Just look at real estate and blockchain,” Ms. Flood says. “They’re so compatible and ripe for being together.”

In its earliest stage, the digital ledger that records, duplicates and distributes transactions across a network offers a new means for buyers and sellers to connect with one another. Blockchain is also used to cut intermediaries out of the transaction process, reducing costs.

“There’s just so many opportunities,” she adds. “We just have to make the giant leap.”

Ms. Flood demonstrates what could be, pointing to SoFi stadium, this year’s Super Bowl host, in Inglewood, Calif. Hollywood Park Developer E. Stanley Kroenke constructed his 300-acre, $5 billion square foot facility using the first-ever digital twin, or a virtual representation that served as its real-time digital counterpart.

The digital twin, made possible by tech company Willow, houses all of the stadium’s data and operation controls into one platform. In one place, a building owner can view performance of key systems, predict failures, track energy usage and essentially “unlock additional revenue” through one service, Ms. Flood says.

As a tenant, it lets you know how you are benefitting from assets available to you and different avenues to consider.

Other technologies –– like tokenization, cryptocurrencies and data analytics –– are just a few of the opportunities on the other side of a “significant” initial investment. Making that pivot –– when the going gets tough –– is crucial for success in any industry; pliability to innovation, however, is not a characteristic real estate is traditionally well known for, Ms. Flood says.

Deloitte found that companies are considering retrofitting assets instead of acquiring new ones. “This is a great opportunity for firms to take advantage of technology given the new practices around remote and hybrid work models and as a way to attract new tenants,” Ms. Flood explains.

Only a fourth of companies increasing spending on analytics to validate tenant selection or mix, she adds.
In fact, most firms surveyed will continue to depend on legacy technology systems, many of which –– eight in 10 respondents reported –– cannot support emerging digital advancements.

Per the report, three quarters of respondents said that smart buildings comprise less than half of their total portfolio.

Sooner or later, the industry innovations of today may become tomorrow’s standard –– like cloud for storage, hosting advanced AL.

Whenever that may be, state-of-the-art modernizations will be built upon a common foundation: sustainability. Eco-conscious properties consistently ranked as a prioritized concern for owners, organizations and tenants alike.

Sixty-percent of real estate executives believe that Environmental, Social and Governance initiatives are driving new business opportunities for their companies, half of which view the push as a competitive edge.

Actualized options, such as green leasing, are a threefold win for all parties involved.

“We’re seeing sustainability being discussed on every conference agenda, in every boardroom. There’s a lot of new regulation coming out,” Ms. Flood says. “Tenants want accountability. Even if that means being more involved in how they can make that difference themselves.”

Retrieving those data analytics in order to hit targeted, carbon-neutral metrics compliant with climate risk assessments, Ms. Flood concludes, is how sustainable property becomes a green reality.

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