Technology offers investors a hangover cure for the current cocktail of CRE office woes
We are now halfway through 2023, and the commercial real estate woes of last year show no signs of abating. We are in a higher interest rate environment, inflation is rampant, and the prevalence of hybrid work is draining demand for offices as well as urban centers. What are real estate investors supposed to do?
The first thing would be not to panic. Though these trends are causing widespread uncertainty, JLL Research indicates that the worst of them will likely subside by the second half of 2023 and settle into a new normal.1 The second is to recalibrate investment strategies around what this new normal is likely to be. An initial step is to understand the nature of the changes happening. Last year, the market share of all investment transactions in offices dropped to 24%, compared to 34% in 2019. Moreover, the flight to quality (mainly Class A properties) is concentrating the already dwindling demand for offices into best-in-class assets, fuelling the competitive intensity of the sector.
Macro trends underlie the need for smart technology investments
The ballooning costs of operating—for both landlords and the expenses they pass on to tenants—are driving the case for greater technology deployment and process automation. Think of self-service kiosks and information systems for visitor management, along with energy monitoring and optimization software solutions, for example.
Another dimension is the need to invest in technology to improve the tenant experience and mitigate the risk of non-renewal, particularly if inflation is forcing an increase in the price of the lease.
Beyond cost reduction and tenant retention, technology also plays a part in the broader strategic aim of future-proofing an asset.
CRE technology has helped make commercial office assets future-ready
An Italian investment manager ensured that the design of their building control systems enabled mobile apps, energy usage optimization, an integrated communications network, and the deployment of IoT sensors during the construction phase. These technologies help enrich several aspects of the tenant experience, such as ease of navigation, temperature control, utility cost stability, and seamless access. For the investment manager, the choice to spend on these tools is a result of the competitiveness of the Milan market and the need to differentiate. Having digital capabilities carved into the built environment will keep the location relevant to prospective tenants that are increasingly demanding a tech-rich indoor experience.
Another strategy is to use technology to enhance the ESG credentials of a property and secure a rent premium. Across APAC, for example, there is a rental premium available for green-certified stock ranging from 2% to 22%, depending on the location.2 Indeed, GRESB reported at the end of 2022 that there was significant regional growth in asset participation in APAC (of 64%), followed by the Americas (26%) and EMEA (12%).3 For instance, Allianz recently committed to developing buildings in London with strong ESG credentials as part of its strategic aspiration to finance more future-oriented assets.
Seeing beyond the midst of inflation and high interest rates
A critical point to emphasize here is that making an asset ‘future-ready’ does not mean a blind push toward higher rent. These price increases must be justified. As the JLL Global Real Estate Outlook 2023 warns, inflation-indexed rent increases might seem like a boon, but it can be a short-term victory that puts the likelihood of re-leasing at risk in the long-term. This can potentially jeopardize the property value and, ultimately, the price of a sale.
Justifying prices must therefore involve thinking about the role of technology—and deploying technology in a manner that adequately serves tenants’ current requirements and future needs, which will help with contract negotiations for lease terms as well as service delivery.
What to do next
- Develop a consensus internally on what existing and prospective tenants’ requirements are for leased space and how this may impact future contract negotiations.
- Prioritize the exact areas where technology could have the greatest impact, ranging from devices in the built environment that impact tenant engagement to backend software that monitors usage trends that inform asset cost performance, for example.
- Seek external support on how technology can enable success in the new reality of commercial real estate—think improving cost control through automation, competing with the home as a place of work, and stronger ESG reporting.
Need help with your CRE technology? JLLT Advisory Services can guide and advise your business along every part of this journey. Our real estate and technology experts have the experience to deliver with insight and pace.
References:
- Global Real Estate Outlook 2023: Investors (JLL, 2022)
- GRESB ESG data and benchmarks expand to cover USD 8.6 trillion in real estate and infrastructure value worldwide (GRESB, 2022)
- Asia Pacific Outlook 2023: Investors (JLL, 2022)
