GlobeSt was reporting on data from the Dodge Construction Outlook Conference which took place in November 2022. The Dodge Construction Network provides data analytics and insights to construction executives and industry leaders across the US, and the annual conference is cited as: “the leading economic forecast event for commercial construction.”
Multifamily set to slow
As is often the case, the expected decline will affect specific real estate sectors in different ways. GlobeSt notes, for example, that the value of multifamily construction may see a large decline (around 7% when adjusted for inflation).
In their own report on the data, industry news site Engineering News Record (ENR) adds: “In the multi-family sector, starts are expected to finish the year  up 16%, but will drop 9% next year.”
Mixed bag for Retail, Office and Industrial
ENR also notes that the increases in retail and manufacturing starts seen in 2022 are likely to taper off, though it’s worth pointing out that the manufacturing industry saw gains of 196% over the year.
Quoted in the article, Dodge Chief Economist, Richard Branch, noted that despite an anticipated 43% drop for manufacturing construction, “that is still historically a very strong record level of activity.”
Meanwhile the dollar value of office construction is in for a “slight decline” of 1% in 2023, as remote work trends and the tight labor market continue to put pressure on the sector.
Niche sectors still offer respite
Despite these generally downhill trends, other predictions made during the conference include ongoing strong performance from some of the niche CRE sectors we’ve seen rise to prominence in recent years. As Archinect reports:
“While traditional school construction is set to fall, life science buildings and healthcare projects, including outpatient clinics and hospitals, continue to rise.”
Growing up in a small town in western Pennsylvania meant that I wasn’t necessarily on the cutting edge of technology. Any new electronics took months if not years to trickle down and even then would usually mean a trip to bigger cities such as Youngstown or Pittsburgh to track down. A great example is the LED watch. It was initially developed in 1971 and became widely available by the mid-1970s. But it wasn’t until Darrell Knight showed up sporting one on his wrist right after Christmas break of 1978 that I actually saw one, live and in person.
The use of technology in real estate seems to follow a similar path, with innovations taking months, if not years, to be integrated into the industry. This month, we are going to discuss some ways, specifically in the area of smart buildings, that technology has finally begun to make a big impact.
While certain sectors, such as medical and clean manufacturing, have been driving advances in clean air filtration and monitoring, the advent of COVID- 19 has placed a spotlight on this topic. The result is a whole ecosystem of products and strategies known as IAQ, or indoor air quality. The most common IAQ technologies revolve around higher-efficiency filters. Humidification and dehumidification systems have also become much more advanced, helping to control dust and mold while maintaining comfort. More advanced systems assist with heat and energy recovery ventilators to offset the increasingly “air- tight” nature of modern construction, as well as UV purifiers to neutralize airborne bacteria and viruses.
Voice-and touch-activated tech
Again, this type of technology received a huge boost in the wake of COVID-19. If you have ever used systems such as Alexa, Siri or Google, you are already well aware of the power and convenience voice-activation can offer. And while touch-activated technologies have been around for decades, the overwhelming popularity of smartphones and apps are leading to more advanced applications. In the commercial real estate sector, it’s no surprise that the hotel sector has taken the lead implementing this type of technology, ranging from speaking to control lights, temperature and entertainment to accessing the room and ordering room service from your smartphone. And don’t look now but many larger commercial property owners are beginning to integrate these same technologies, offering them to their tenants as a standard building amenity.
This may seem like something reserved for only big cities such as New York, Chicago and Los Angeles.
In the commercial real estate sector, it’s no surprise that the hotel sector has taken the lead implementing [voice activation] technology, ranging from speaking to control lights, temperature and entertainment to accessing the room and ordering room service from your smartphone.
And these cities certainly began adopting technologies years ago, with the advent of apps such as SpotHero and ParkWhiz, which allow parking operators to maxi- mize their occupancy through digital notification, reservation and even sub- leasing processes. But if you’ve ever parked in the decks at Hopkins airport, you’ve probably seen another, even sim- pler example that uses a small green or red light above each space, allowing potential parkers to quickly differentiate vacant spots from occupied spots
Energy efficient systems
This can fall into two categories:
1) systems that optimize energy via continual monitoring and 2) clean or renewable energy features. The former is the real heavyweight when it comes to smart building design and is mainly based on the autonomic cycle of data analysis tasks (ACODAT) concept. Basically, the HVAC systems have a central processor that continually monitors usage, time of day, outside air temperature, building occupancy and a host of other factors to not only be reactive in running the HVAC system at peak efficiency but also be predictive by learning patterns over days, weeks and months. The latter includes a host of advances in technologies such as heat pumps and geothermal systems as well as solar- and wind-enabled sources.
The most common acknowledgement of building technology is a certification known as Leadership in Energy and Environmental Design (LEED), through the U.S. Green Building Council. A similar certification is known as the Building Research Establishment Environmental Assessment Methodology (BREEAM) rating. Both of these involve achieving points related to set standards that address carbon, energy, water, waste, transportation, materials, health and indoor environmental quality. There are many examples of LEED-certified buildings in Northeast Ohio, including the Maltz Performing Arts Center at Case Western Reserve University, UH Avon Health Center and the Children’s Museum of Cleveland, among hundreds of others.
And there have been many noteworthy projects worldwide, including the following high-achieving facilities.
Developed by Siemens, the build- ing contains a variety of dynamic and artificial intelligence to power its operation. A noteworthy feature is an advanced air volume system that can put the entire building into “green mode,” which is a setting that uses aggregated historical data to optimize humidity, air pressure and temperature. It also has a decontamination mode that raises the temperature to acceler- ate the decay of airborne virus particles.
This was the first building in Toronto to be rated as a LEED Core and Shell Platinum building. It links up Cisco’s business operations and helps to power Cisco’s Internet of Everything (IoE) while also streamlining all building data into a single network.
Arguably the most striking example of the IoE in smart buildings, the Mitie building uses automated alarms, remote systems management, machine learn- ing and data analytics to achieve a 95% accuracy rate for predictive main- tenance calls and a 3% improvement of energy usage by clients.
By the time we hit high school, Darrell Knight’s simple, push-button, red-hued LED watch had been eclipsed by a series of LCD watches that integrated features like alarms (with music, no less), stop watches and the ability to track multiple time zones. And while today’s smart buildings have shown great advances over the last two decades, the pace of technology promises to have an even greater impact on this sector.
In a recent NAI article, we looked at the advent of the metaverse[SR1] and what this new tech might mean for commercial real estate (CRE). Though we concluded that the answer to how the metaverse might impact the real world remains uncertain, since then, there have been some interesting virtual developments.
To be clear, the “mortgages” in this case are funded entirely by TerraZero itself, rather than an external financial institution, but employ a system of down payment and instalments, much like the real thing. The first one was issued for a piece of land on a platform called Decentraland, where users can own, and sell, virtual assets. And as strange as this all sounds from a real estate perspective, there have recently been several big players setting up shop in the virtual world.
Perhaps the biggest, from a credibility point of view, is global financial leaders JPMorgan who recently launched a “virtual bank”, though at the moment it’s only being used for marketing purposes. In tandem with the purchase, JPMorgan issued a report, where they discuss their expectations for the metaverse’s development, saying:
“The success of building and scaling in the metaverse is dependent on having a robust and flexible financial ecosystem that will allow users to seamlessly connect between the physical and virtual worlds.”
They added that, in just the last six months of 2021, the average price for a virtual plot of land jumped from $6,000 to $12,000.
Despite this apparent endorsement from one of the world’s leading financiers, there are still plenty of metaverse critics urging caution. One of the main points raised is that, unlike physical real estate, metaverse purchases can’t satisfy both property value fundamentals: namely scarcity and location.
Or as Louis Rosenberg, CEO of Unanimous AI and a veteran Augmented Reality (AR) developer, puts it:
“We don’t even know which platforms are [going to] be popular, let alone which locations… so it’s like somebody buying a piece of land anywhere in America and hoping that it becomes San Francisco or New York.”
For many companies though, hedging bets is taking the form of securing their own piece of the virtual pie. The Wall Street Journal reports that accounting firms PricewaterhouseCoopers and Prager Metis have also recently snapped up virtual sites, with the latter spending $35,000 on its purchase of a virtual HQ.
Is the metaverse here to stay?
Though it’s still early days, and impossible to say how the virtual property trend might play out, the recent developments in the space suggest it’s certainly worth keeping an eye on. At the very least, the metaverse poses an interesting proposition, and one a lot of people seem to be willing to speculate on.
SOCIAL: Do you think there’s a future for metaverse property? And if so, how do you see it unfolding?
Extended uncertainty about the anticipated return to the workplace will have ramifications in the securities markets, but commercial mortgage-backed securities (CMBS) are holding strong… for now.
Commercial mortgage-backed securities (CMBS) are a financial product, a type of bond issued in securities markets, and built on the cash flow from pooled mortgages on commercial properties. They are often grouped by region or type of property, such as office CMBS or multifamily CMBS.
Vacancy rate effect
Naturally, the health of the underlying category influences the CMBS itself, although, unlike direct investment, these have a degree of diversification built into the asset which represents a bundle of loans.
In the US, the office sector currently accounts for almost a third of the underlying value within CMBS, and this has institutional investors wary, despite the 38.6% improvement in office occupancy in late 2021, investment specialist Jen Ripper told Commercial Observer.
This means “upcoming lease rolls and loans” would be “under heavy investor scrutiny”, she added.
Trends over time
CMBSes have, however, been resilient throughout the Covid-19 pandemic. CRED iQ – a data company – told the publication that CMBS office debt has remained relatively unscathed, with only 2.89% in “either delinquency or special servicing”. In December, the delinquency rate declined made for a 17-month streak of improvement.
“By property type”, they added, “individual delinquency rates for lodging and retail exhibited modest month-over-month improvements but still remain the two most distressed sectors.
This is largely in line with the results from data provider Trepp, who found the delinquency rate across categories dropped 20 basis points from October to 4.41% in November 2021. Within Trepp’s report, though, lodging and retail “saw the biggest improvements”.
Beyond its relevance for investors, keeping an eye on the strength of CMBS loans can help commercial real estate (CRE) professionals in spotting opportunities and even leads – as it forms part of property debt research.
The way the modern world interacts with physical space is changing. We’ve gone from “bricks and mortar” to “bricks and clicks” as the e-commerce revolution transforms retail, and all our devices are now talking to us and to each other.
The increasing utility of virtual and augmented reality is another contender for our attention as their applications in the commercial real estate (CRE) space become more apparent. These technologies promise to revolutionize the way we do business and interact with both our clients and real estate itself.
In this latest part of our series on emerging tech, we take a dive into some of the applications of these new tools and how they can be used to enhance CRE operations.
For many of us, the difference between virtual reality (VR) and augmented reality (AR) is a little fuzzy, so let’s start there. Augmented reality, according to the brains over at MIT: “superimposes virtual enhancements on real-world scenes in real-time.”
Virtual reality is a little different in that it creates an entire world or scene that you can explore, usually with the assistance of techs like VR headsets and haptic gloves. So, think about viewing an entire virtual mall or building site, or the interior of a space you are leasing out.
The terms are often used interchangeably, and they do overlap to some degree, but they aren’t synonyms. Fortunately, splitting them into neat little boxes is not a prerequisite for understanding how AR and VR can be used to enhance real-life CRE.
Space that virtually sells itself
One of the biggest advantages VR and AR offer is the ability to virtually show spaces, even before they’re built. This means marketing efforts can kick off earlier in the development process, and potential clients get a better, more immersive sense of what a property might look like before there’s even a door to step through.
Existing spaces are also increasingly being digitized through the tech produced by companies like Matterport which specialize in 3D capture. Properties can be staged and shown as a digital, interactive experience that really gives potential buyers a sense of what a space looks like. Recent studies on residential properties using the tech showed that having a virtual tour meant that, on average, a property closed 31% faster and sold for 9% more.
Aside from the obvious financial upshot of those numbers, VR tours also mean less time spent physically traveling to and from sites. That can be a huge bonus for both CRE professionals and clients. Brokers can guide prospective tenants towards a higher number of property options and help those clients curate a shortlist of candidates they’d like to see in person, raising the likelihood of making a deal.
Built to (digital) spec
Other areas where VR is making an impact are in architecture and construction. Modeling buildings under development in VR means that any potential problems can be identified before they’re, literally, cemented in place. Plans can also adapt and change easily, and creative solutions can be “tried on for size” before committing to them. Having a digital model also serves as a point of truth that a team can return to during lengthy development projects. All of which translates into savings in time, money and materials.
Once construction is complete, buildings outfitted with appropriate sensors can also generate a digital twin – a virtual copy of the building and its systems. This is a real-time model of the building and can include information like power usage, air quality, temperature, and occupancy, among other factors. Using this data, it’s possible to streamline a building’s operations to meet energy efficiency goals and once again, reduce costs.
Of course, this is much easier to include as part of a new development. One of the challenges to the wide-scale implementation of this tech is aging building stock, which is costlier to outfit or retrofit with the necessary hardware.
Meanwhile, returning to VR’s more grounded cousin, augmented reality has some interesting applications of its own. Large furniture suppliers like IKEA are already using the tech to help buyers model furniture, or entire room designs, through an app. In CRE, this kind of functionality could see use when staging a space – along with the option to present multiple versions of the room or site to potential buyers.
As mentioned above, AR is also being used for wayfinding. Using digital sensors, a busy mall or office space can be outfitted with virtual markers that visitors can follow to their desired destinations. Retail, in particular, stands to benefit from the ability to guide shoppers to specific areas or products – all while providing additional information and support through a phone-based app.
Steady growth on the cards
As far back as 2016, Goldman Sachs predicted that the global AR and VR market would be worth $80 billion by 2025. While current estimates from Statista are a little tamer – with VR predicted at $12 billion and mobile AR at $26 billion – the trajectory of the industry is clear.
Consumer demand for AR and VR enhanced experiences is likely to climb as these technologies gain traction, and the value to CRE professionals is obvious. All of which makes this a curve well worth getting ahead of for the savvy brokerage.