The Commercial Real Estate Outlook: Smaller Spaces, More Flexibility
No industry is returning to life completely as it was prior to the COVID-19 pandemic sweeping the world nearly two years ago. As the dust begins to settle, the commercial real estate industry is looking at how to adapt to emerging trends and develop new standards.
In the year ahead, the commercial real estate outlook shows many companies moving into smaller spaces to reduce their real estate footprint, while others are repurposing space or using non-traditional spaces like hotels. The National Association of Realtors (NAR) reported a 6% decline in the value of commercial real estate compared to 2020, despite corporate real estate prices becoming more stable. This will lead to an uneven recovery through the rest of 2021 and into the new year, but the long-term commercial real estate outlook is positive and hopeful.
The commercial real estate outlook: 5 key industry trends
1. The rise of smaller spaces
In the April 2021 “Commercial Real Estate Trends and Outlook” report, the NAR said 70% of respondents reported companies are leasing or moving into real estate with smaller square footage to accommodate the rise in remote workers. Recent statistics show that 52% of global employees work remotely once per week, and 68% work remotely at least once per month. With this move to hybrid work, the commercial real estate outlook shows office spaces will not necessarily be filled by the same employees every day. As companies move to a more agile strategy, they no longer need to have enough space to house a majority of their workforce daily. In fact, a recent CBRE analysis suggests that remote working could reduce the overall need for office space by 15%.
The NAR’s commercial real estate outlook showed 70% of respondents are leasing or moving into office space with less square footage due to hybrid schedules. However, working with less space requires more strategic planning. As a result, more leaders are investing in corporate real estate technology solutions to help them plan and optimize space utilization. They’re also investing in mobile technology that makes it easy for employees to reserve space when they need it.
2. Increased leasing flexibility
Though office occupancy is falling as companies cut costs or employees work remotely, the NAR reports an overall 5% increase in asking rents from 2020. The commercial real estate outlook for areas with high vacancy rates — such as metropolitan areas including New York or San Francisco — shows rental rates are still down, while rates in smaller cities with lower commercial vacancies — such as Fort Myers and Naples, Fla. — are up more than 10%. Rather than reducing rent as companies return to the office, commercial real estate landlords are starting to make more rental concessions, including
- Flexible or short-term leasing terms
- Free parking
- Allowing subleasing to help businesses offset costs
- Offering allowances for tenants to make building improvements
More than half of those surveyed by the NAR’s recent report — 57% — said they are seeing more short-term leases of less than two years compared to pre-pandemic levels.
Colliers International reports that subleasing space continues to grow as companies reduce their lease footprint. One example is in St. Louis, where sublet space increased by 7.72% between the second and third quarters of this year.
3. An increase in suburban leases
With asking rents remaining constant or rising, companies are starting to look outside of the traditional city center for potential office space. One example is Minneapolis-based Target Corporation, which moved 3,500 employees out of its downtown Minneapolis City Center headquarters in March, citing remote work opportunities and less need for office space.
CBRE’s Global Midyear Real Estate Market Outlook 2021 said suburban office markets will see an increased vacancy similar to their metropolitan counterpart, but the rate will be lower. Though this trend does not seem to bring a major shift to office leasing, megatrends such as shifting demographics in residential real estate show support for the continued increase in suburban office leasing.
4. Rising demand for warehouses and distribution centers
In addition to working from home, the coronavirus pandemic significantly impacted consumers’ inclinations to shop from home. An Adobe report from June indicated a $52 billion ecommerce surge from the previous year — an estimated four to six-year acceleration of the industry — and the drive in demand for industrial products continued into the third quarter of this year. In its research reports, Colliers International said this demand caused increased need for warehouse and distribution users, helping to strengthen industrial leasing activity.
CBRE reported that every $1 billion in incremental e-commerce sales generates 1.25 million square feet of warehouse space demand. If the demand stays on trend, the research firm predicts a net absorption of almost 250 million square feet by the end of this year, which is 39 million square feet more than the previous five-year annual average. This commercial real estate trend will lead to new construction and hopefully pre-leasing due to speculative projects. The research firm predicts 2021 as the strongest year on record for the industrial real estate sector.
This continued rise of e-commerce is projected to have a continued impact on retailers, which could lead to an increase in retail space vacancies while the need for larger industrial spaces keeps growing.
5. Investors look ahead to alternative opportunities based on the commercial real estate outlook
As the global focus has narrowed in on medicine and life sciences in the face of the pandemic, there is greater interest in innovative and alternative investment properties. Since 2017, investors put a $93 billion average annual global investment toward alternative property types such as cold storage, life sciences, and data center sectors through direct investments and acquisitions. CBRE reports that while the total commercial real estate investments fell by 33% for the year ending in this year’s first quarter, alternative investments fell by less than 20%.
CBRE’s 2021 commercial real estate outlook report continued to outline that the global real estate investment trend toward alternatives is largely driven by the strength in global data centers, as well as the growth of life sciences facilities in the U.S. and Asia-Pacific. The largest potential obstacle is a constraint on supply.
Grandview Research indicates the global life science analytics market size is expected to expand at a compound annual growth rate of 7.8% between now and 2028; it already is a $7.7 billion sector. As more COVID variants emerge, the increased focus on developing health care and research will continue to drive the demand for life sciences research centers, as well as cold storage facilities for vaccines and other medication.
How will a changing commercial real estate market impact your investment strategy?
While there are still many unknowns in the next 12 months and beyond, it’s clear that many companies are embracing a flexible approach to corporate real estate to improve space utilization and reduce risks in the future.
That means smaller spaces, shorter-term leases, and diversifying their real estate portfolio. As a CRE leader, your success will increasingly depend on your ability to proactively plan for the future and make adjustments quickly. Having real-time data on all your properties, including occupancy and total costs, makes it much easier to do this.
For more ideas on how to evaluate your commercial real estate portfolio and plans with the right analytics, download our guide, 18 Essential Real Estate Metrics to Measure.