Deloitte: Agility is key to winning in new era

New business models and competition, extensive use of technology, and changing tenant and investor expectations are redefining the commercial real estate industry.

Deloitte’s real estate team surveyed the world for investor sentiment. This is what they found.

In our 2018 Real Estate Outlook, we emphasised that property companies will likely have to take some risks and embrace change to adapt for the future.  Since then, we’ve seen these factors occurring at ever-increasing rates, which has continuously challenged companies to deal effectively with the relentless pace of change. As a result, traditional rules of the road might not work fast enough to provide the agility CRE companies of the future will likely require.

In our endeavor to help CRE companies understand the new rules of the road, our 2019 Commercial Real Estate Outlook dives deeper into the preferences of CRE investors. Our survey of 500 global investors, which provides insights on factors that are influencing their CRE investment decisions, revealed the following key themes:

1. A large proportion of respondents plan to increase their capital commitment to CRE, with the United States, Germany, and Canada leading the way.
2. Nontraditional assets such as mixed-use properties and new business models such as properties with flexible leases and spaces are expected to attract an increased allocation of investment dollars.
3. Many surveyed investors expect to prioritise their investments in existing and potential investee companies that respond rapidly to changes in business models and adopt a variety of technologies to make buildings future ready.
4. Survey respondents see a significant impact from technology advancements on legacy properties in fewer than three years.

With investors seemingly committed to investing in newer business models and a tech-enabled ecosystem, how can CRE companies cash in on the gold rush?

Fundamentally, CRE companies should gain a thorough understanding of the changing usage pattern of the built space. Take the example of WeWork, the co-sharing space owner that is positioning itself as a ‘services’ company rather than a property owner-operator. Since its inception in 2010, the company has grown from a single space in New York City to 287 physical locations across 77 cities and 23 countries globally, as of August 2018.  At $20bn, WeWork is considered among the most valued tech startups, following Uber and Airbnb. The company’s growth outstrips many traditional CRE companies.

What are the companies with new business models doing differently? These companies, which can be considered change agents, are typically retaining the core ethos of the real estate business – the importance of location – while changing the mindset about how the physical space is consumed. Powered by technology, their value proposition lies in augmenting the user experience. For instance, WeWork’s goal appears to be to create not only a functional experience but also a memorable one through a vibrant ambience, varied open-seating options, amenities, and networking opportunities for the on-the-go Millennial and Gen Z workforce.

Change agents like WeWork are repositioning the CRE asset as not just a physical space but a service hub. In addition, they strive to differentiate themselves with a nimble and flexible business model. Once CRE companies are ready to change their mindset, agility tends to be the most important factor that can enable them to rethink the way they approach change, remain competitive, and grow.

Given the increasing uncertainty in the CRE sector, this year’s outlook takes stock of the current business environment and uncovers key investor preferences on capital allocations, use of technology, cyber risk management, talent, and the role of proptechs. We also provide actionable recommendations for how an agile CRE company can respond to these key investor preferences.

What should CRE companies do to be more agile in attracting capital?

With the change in investor preferences, CRE companies should consider rebalancing their property portfolios, focusing on creating memorable tenant experiences, and diversifying their investor base to attract higher capital investment.

Rebalance property portfolio

Investors’ capital commitment plans suggest CRE companies could have an advantage if they stay close to and demonstrate clarity on their core investment strategies, and risk alignment against those strategies, while balancing and diversifying their property portfolios. However, even the meaning of “diversification” could be challenged. Properties and portfolios could take different shapes and forms, such as building more flexible spaces and making properties more experiential and engaging.

Most traditional property real estate investment trusts, except industrials and certain classes of non-traditional REITs, are trading at a discount to their net asset values.

Accordingly, CRE companies may also be able to take advantage of mergers & acquisitions and joint venture or partnering routes. Companies can leverage data-driven analysis to craft a more robust strategy around current market positions and analyse how expansion into newer properties could complement their existing ones. Strategy linkage driven by supporting data can help demonstrate how a single investment not only presents operational synergies but also evolves the broader portfolio.

For instance, retail owners could conduct highest and best use analysis based on location, surrounding demographics, and other macro factors to repurpose some of their vacant assets into nontraditional uses such as data centers and senior housing and create new sources of revenue.

Increase tenant centricity

CRE companies should reimagine tenant experience by weaving technology throughout the tenant life cycle.

This can help strengthen tenant stickiness and therefore valuations. For instance, CRE owners and developers can use a combination of Augmented and Virtual Reality, commonly known as mixed reality, to allow potential buyers or tenants to visualise the new property using a 360-degree immersive experience and offer multiple finished site options. This may also expand the reach to potential clients across different geographies. Companies could also leverage technologies such as Internet of Things, Artificial Intelligence, and predictive analytics to (re)develop and tailor existing or new buildings to suit changing tenant preferences and to anticipate tenant needs.

This also provides an opportunity for CRE companies to partner with tenants to augment the end-user experience.

• Deloitte 2019 Commercial Real Estate Outlook