Five takeaways from our 2019 Commercial Real Estate Outlook has been added to your bookmarks.
Five takeaways from our 2019 Commercial Real Estate Outlook
The rapid evolution of technology and consumer preferences is redesigning commercial real estate (CRE) business models and bring relentless change to the industry. Deloitte recently released its 2019 Commercial Real Estate Outlook, which shares expectations of institutional investors and actionable recommendations for CRE firms in 2019.
Keeping up with the pace of change in CRE
In what has become an annual ritual for the last four years, many of our leading real estate practitioners conducted an in-depth brainstorming session in Chicago early this spring. With the rapid evolution of technology and consumer preferences redesigning traditional commercial real estate (CRE) business models and the use of built space, we debated how CRE companies can manage the constant challenge of matching the relentless pace of change over the next 18 months. Will the traditional rules of the road work fast enough to provide the agility CRE companies of the future will likely require?
To answer these questions, we listened to the voice of the investor. We surveyed 500 global institutional investors to learn about their investment preference in July. The good news is that our survey revealed that 97 percent of the respondents plan to increase their capital commitment to CRE over the next 18 months. But there's more to the story. In our 2019 CRE Outlook, we uncovered investor preferences in the areas of global capital flows, technology, cyber risk, talent, and proptechs. We have offered in-depth insights and actionable recommendations that CRE companies can employ to attract higher capital commitments.
There are essentially five key takeaways for CRE owners/operators (see figure below):
Source: Deloitte Center for Financial Services analysis
Five takeaways from the changing expectations of institutional investors
- Global capital flows: Global CRE investments continue to rise on the back of steady economic and employment growth in key global markets. This is despite some concerns about a flattening yield curve, various country tax reform initiatives, and the threat of trade tariffs as well as the potential impact of Brexit in Europe.1
While our study shows that investors plan to increase their capital commitment, they are likely to diversify their portfolios through higher investments in newer and emerging business models and thematic investments. With regard to business models, more than half of the respondents said they aim to invest or increase investments in properties with flexible leases, and 44 percent plan to do so for flexible spaces. On the thematic side, survey respondents specializing in mixed-use and nontraditional properties plan to increase their capital commitment by a higher percentage than those focused on traditional properties.
Takeaway #1: CRE owners/operators should reassess property and tenant mix to attract more capital.
- Technology: Technology has permeated every aspect of the CRE business. Nearly 53 percent of respondents believe that technology advancements will have the greatest impact on legacy properties within the next three years, and 15 percent believe that the impact is already visible.
Investors also have certain expectations about technology usage in their CRE investee companies. More than 80 percent of our survey sample said CRE companies should prioritize the use of predictive analytics and business intelligence across different business areas.
One of the challenges facing CRE companies is the ability to prioritize investments among different technologies and needs. Often, CRE technology leadership tends to spend significant time and resources managing both modern and legacy infrastructure while not reimagining the power of fully utilizing data.
Takeaway #2: It is an imperative for CRE companies to upgrade their digital strategy and infrastructure.
- Cyber risk management: Technology advancements and evolving business complexities have resulted in increased information security and data privacy concerns. These risks will likely rise, as CRE stakeholders expect companies to increase technology usage.
The growing use of IoT technologies such as wearables and sensor-enabled building management systems could broaden the attack surface of hackers, increasing access to sensitive data that can cause financial and reputational damage. It is also worth noting that attacks are no longer limited to data theft, but also to buildings' efficiency and output, as well as, in rare cases, life itself.2
Many CRE companies, however, seem to be struggling to find the right balance of investments and efforts to handle such cyberattacks. They also have to prove to investors that they are adequately equipped to manage cyberattacks. Only one-quarter of survey respondents are very satisfied with companies' current efforts.
Takeaway #3: CRE companies would need to evolve from reactive to proactive risk management.
- Talent: New talent needs are emerging and should become a business priority as workplaces and work itself are becoming increasingly digitized. Institutional investors agree: Nearly nine in 10 retail-property-focused investors and nearly seven in 10 industrial-property-focused investors somewhat or strongly agree that CRE companies need to do more to nurture their talent.
The industry seems unprepared to recruit, engage, and retain a younger talent pool: Ninety-three percent of pension-fund and 95 percent of hedge-fund investors believe so. Yet many CRE companies continue to face a scarcity of skilled talent. Most CRE companies also appear unprepared to deal with the high proportion of baby boomers likely to retire over the next three to five years.
Takeway #4: CRE companies should double down on their efforts to prepare for a digitized workforce and work environment.
- Proptechs: Proptechs are increasingly popular with investors and are expanding their coverage across the real estate value chain. Consider this: Globally, almost nine in 10 of those surveyed said that proptechs will have a moderate to significant influence on the CRE industry.
There is merit in CRE companies becoming knowledgeable about proptechs, since these firms are using technology to nurture new, innovative ideas that enhances operational efficiency, tenant experience, and information flow. Yet, so far, we have seen limited engagement of CRE owners with proptechs.
Takeaway #5: Given the high investor enthusiasm, CRE companies should look at different approaches to engage with proptechs to gain a competitive edge.
Proactive adaptability key to future success
Bottomline, CRE companies that proactively adapt to the forces of change are likely to cash in on investment dollars, tenants, and top talent. This requires companies to be innovative, collaborative, and agile.
Read our 2019 CRE Outlook to deep dive into institutional investor expectations and actionable recommendations for each of the five key takeaways listed above.
2019 Commercial Real Estate Outlook
Read the report
1 United States Economic Forecast 2nd Quarter 2018, Deloitte Insights.
2 “Cybersecurity for critical infrastructure: Growing, high-visibility risks call for strong state leadership,” Deloitte Insights, 2017.
QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.