Emerging Trends -- Commercial Real Estate and the Future of Work

Every year at about this time commercial real estate wonks dig into the publication of a battery of predictions  --  who shall live and who shall die  --  about the fortunes of commercial real estate for the coming year. The report, published annually through a collaboration between PriceWaterhouseCoopers and the Urban Land Institute -- Emerging Trends -- 2015, is available for download here.

Emerging Trends attempts to take a wide-angle snapshot of the prospects for the myriad sectors of real estate in the U.S. and Canada: residential, office, retail, hotels, and industrial. The sourcing for Emerging Trends is the gathering nearly 1,500 interviews and opinions from an array of real estate Masters-of-the-Universe -- an aggregate of prognostications of developers, owners, asset managers and brokers of all stripes with a sprinkling of academics -- cobbled and mushed together to create the conventional wisdom of the real estate establishment. The report tips its hat to the reality that real estate in all its iterations forms our every-day-life infrastructure -- for living, working and commerce.

For the workplace/office sector, the report shows that office landlords and their brokers are hoping and praying for the perpetuation of the status quo -- traditional credit tenants signing long term leases. Yet in the real world, how and where work is actually being accomplished is undergoing a rapid revolution. This transformation has been driven by mobility in all of its forms as well as the rise of the sharing economy. A distinct ossified place of work is no longer a paramount demand in the business world. And the justification for small and mid-sized businesses signing on for long term lease liability is rapidly dissipating.

The real estate cognoscenti know if and feel it -- but because their business model is so entrenched in the old way of doing things, they see the advent of collaborative workspaces and open space plans -- as a temporary fad that will eventually pass. Some real estate office pros maintain that the revered millennials will lose their collaborative mojo and revert back to wanting to work in walled-off private offices and will move to the suburbs to make babies and raise families.

The report points to a belief that space compression in office space is "about at its end, and in the coming years the quality of the office environment will be used as a marketing tool to recruit talent." The notion touted by the conventional wisdom is that the millennials will not put up with the space cram-down much longer, especially as it gains seniority in the workforce....."I don't think people need to talk to their coworkers all day long."

Dogs bark but the caravan moves on.

More presciently, other respondents in the report suggest that the rise of the sharing economy could turn the office market upside down with landlords offering collaborative and shared office locations themselves -- as well as tenants renting out unused conference rooms by the hour or a day of underutilized office space.

Last summer, Fitch, the rating agency, actually issued a warning that the rise of open plan offices would put pressure on investors in the office sector. A survey by CoreNet Global in 2010 showed companies allocating 225 square feet per employee. By 2013, that allocation had fallen to 150 square feet or less. Fitch predicts the trend will contribute to vacancies and result in some landlords having difficulties leasing vacant space to traditional tenants.

Overall Emerging Trends ignores what's driving the rise of the sharing economy and the concurrent explosion in alternative workspace options. A major reason is how inefficient we are with much of what we own. For example cars spend 90 percent of their time parked and corporate boardrooms spend 90 percent of their time empty -- hence the rise of Uber and the shared office providers. Reports on utilization of a typical office find that it runs at 35 percent per employee. What a waste of space and capital!

Small and mid-size businesses no longer want or need to commit to long term leases based on a prediction of what their space requirements are going to be in three or five years. If the company plans to grow, chances are they will have excess capacity for the first few years. And if the company grows faster than expected, they could find themselves locked into a lease for space that's too small. Companies -and not just tech companies -- are more fluid today than ever before, scaling up or down as demand for their product or service shifts.

The world of work as it exists demands flexibility from a real estate industry built around rigidity. Hence the rise and expansion of third place workspaces in various sizes, permutations, and aesthetics.

This is truly an "emerging trend" that's just beginning to flower.