Changes in behavior and mindset, as well as current economic conditions, are converging to create an era of change in the real estate sector.
"If you build it, they'll come." For decades, that's been true for well-located office, retail, and residential real estate, as well as the baseball field at Field of Dreams. But today, paradigm shifts, higher inflation, higher interest rates, and climate change are forcing real estate investors and operators to confront a stark reality: today, if you build it—or buy it—the usual way, they might not come.
It goes without saying that the COVID-19 pandemic changed where and how the world uses spaces. In some regions, office attendance remains dramatically lower than before the pandemic; in the United States, for example, it hovers around 50 percent.
Consumers have returned to physical stores, but they are shopping closer to home.
At this unique moment, real estate players should adopt a new mindset: replacing "if you build it, they will come" with "if you operate brilliantly and please the tenants, they will stay.".
In today's market, the success of a real estate investor or operator depends on whether they adopt the following six imperatives:
- Creating solutions for customers, not just physical spaces.
- Use developments to build momentum, not simply to capture momentum.
- Find value creation opportunities throughout a project's life cycle, not just at the endpoints.
- Embrace sustainability as an opportunity, not as a compliance process.
- Integrate digital solutions and advanced analytics across the board, not just by sporadically adopting individual solutions.
- Focus on operational efficiency, not just revenue.
- Acting on these six imperatives will require investments or partnerships to access technology, analytics, operations, and climate science capabilities.
In this article, we examine the stocks that have become crucial for investors and traders seeking a competitive advantage.
Creating solutions for customers
With some companies cutting back on the office space they own or lease, competition to attract tenants is fierce. Over the past three years, a net 125 million square feet of office space became available in the United States and the United Kingdom combined, the result of three consecutive years of more space becoming vacant than newly leased.
Today's competitive pressures mean that real estate owners and operators must rethink their purpose. Simply providing four walls is no longer enough; key players will help tenants create workplaces that offer a competitive advantage.
Expanding into problem-solving requires a new operating model, new talents and capabilities, and fundamentally different uses of technology.
In office buildings, this new mandate means partnering with employers to understand how they want their employees to use the spaces.
Workplace solutions could include providing energizing locations where employees want to spend time, dynamic designs that can accommodate collaborative and individual work, and sensors to track usage patterns, which can inform an employer's approach to hybrid work.
Generate momentum through development
Predicting the future—whether of industries, design tastes, or tenant behavior—has always been one of the most challenging tasks for real estate developers. But today, expanding capitalization rates, higher input costs, and reduced labor availability raise the stakes.
At the same time, rapidly changing behavior makes traditional speculative games less predictable.
High-performing developers can intentionally create tenant ecosystems that go beyond simply securing an anchor tenant. Some developments known as magnets for top-tier tech companies, for example, have also proven attractive to residential tenants and buyers, who can work for or with some of the companies on-site.
Our analysis points to rewards for vendors who successfully curate ecosystems based on how people will want to use the spaces in five years: innovation hubs enjoy an average premium of 10 to 12 percent on commercial rents compared to nearby central business districts. Invest in value creation throughout the entire lifecycle.
The superior performance in the decade before the pandemic required expert negotiation. Buying correctly, making modest operational improvements, and taking advantage of contract capitalization rates yielded strong returns.
Buying wisely remains critical, but the current environment emphasizes operations, an area that has become more competitive. Platforms provide tenants with a consistent experience and enable leveraged investments in technology, as well as efficient acquisitions and finance.
Combined, scale and vertical integration enable a seamless tenant experience, better use of technology, and efficient acquisition.
Embracing sustainability as an opportunity
Environmental, social, and governance issues, particularly sustainability, have moved from being elements of verification to value creation activities.
Real estate players can think about addressing sustainability in three ways: first, by analyzing existing portfolios through a sustainability perspective in a search for value; second, by decarbonizing existing buildings; and third, by building new businesses related to sustainability.
Each of these will require cutting-edge digital and analytical tools.
Real estate players would do well to evaluate their portfolios through a climate change lens, especially since climate change is already appearing in valuations.
Strategically acquiring assets and adding value through decarbonization improvements strengthens portfolios. The ability to generate returns while meeting climate goals can also help real estate owners access more capital on better terms.
Decarbonizing buildings requires investment, but it also opens the door to lower operating and energy costs, as well as a potential green premium on rental income.
Embed digital in everything
The real estate sector was once an industry years behind in terms of digital capabilities, but now it is catching up.
Today, larger landlords are collecting and harnessing the power of their vast data repositories to make better decisions and create applications that serve asset managers, tenants, and residents alike.
The next phase of the industry's digital transformation requires better change management and fundamentally new ways of approaching business. It also requires investment in new types of talent (including developers, engineers, and data scientists) to build, maintain, and improve the tools that the transformation demands.
Sellers who use non-traditional data and advanced analytics to value properties and negotiate leases can often move faster and more confidently, winning more deals and paying the right price. Advanced analytics and climate analysis can confirm experience-based knowledge and generate new insights.
Focus on operational efficiency, not just revenue
Input costs, including labor, materials, and financing, have risen rapidly. Meanwhile, inflation is outpacing previous norms for contractual or episodic rent increases in commercial real estate.
To keep pace with the changing economy, owners and managers must act on both costs and revenues.
On the cost side, building resilient supply chains and controlling operating costs can offset potential decreases in NOI margin.
Large landlords in a given market can, for example, centralize leasing teams and provide them with digital tools to help make value-generating leasing decisions.
With higher financing costs, it will also be necessary to maintain high credit ratings, find low-cost capital, and refinance regularly to produce returns.
On the revenue side, current market conditions demand greater leasing intelligence. Commercial rents can keep pace with rising prices if operators leverage all their levers (including leases with duration and escalation clauses) and tools (including advanced analytics and superior market research).
Changes in behavior and mindset, as well as current economic conditions, are converging to create an era of change in the real estate sector.
Those who embrace the challenges, reconsidering market demands, required technologies, and how to leverage new talent, will position themselves for success. Competitors who fail to adapt risk falling behind.
Build the real estate properties that tenants want and provide the experience that employees, buyers, and residents need, and they will indeed come.
Source: https://www.mymiamigroup.com/
