Jay Epstien and Michael Hamilton, DLA Piper
In the latest edition of WWL: Real Estate, Jay Epstien and Michael Hamilton at DLA Piper explore the technological developments currently affecting the real estate sector, from autonomous vehicles to blockchain.
The real estate industry might appear slow-moving and plodding to outsiders. Nevertheless, it is grappling with the same disruptive forces that are reshaping the larger economy. Commercial real estate has not only been impacted dramatically over the past decade by the technological shifts occurring within society, but it has also been the source of new thinking and approaches to conventional design and space challenges. The emergence of co-working spaces, the inevitable progression to autonomous vehicles, and the tug of war between online retail and banking and conventional brick-and-mortar businesses have had, and will continue to have, important implications for real estate. In addition, the fundamental manner in which industry transacts business is evolving as a result of new capabilities fuelled by artificial intelligence, blockchain technology and other innovations. Where there are challenges, so too are there opportunities.
There has been astonishing growth around the world in recent years of co-working providers such as WeWork. Co-working spaces were initially seen as an option for freelancers and small businesses. The concept has increasingly become mainstream. Recently, large traditional businesses have begun to employ a menu of optionality in office design and collaborative space models in particular markets and for specific business purposes.
WeWork has become one of the largest office tenants in major markets such as New York, London and Washington, DC. Owners of office properties have taken note and are now emulating the model − building furnished spec suites with shared amenities. Landlords are embracing shorter-term leases and flexible space requirements – the result being highly curated spaces, attractive work environments and satisfied next-generation tenants.
Since 1908, when the first mass-produced automobile rolled off the assembly line, matters of real estate and transit have been intertwined. Developers, city planning departments and users of space would be naive not to consider the methods and modes of transportation that are most compatible with a particular site. Historically, these same stakeholders have favoured a single means of transportation: automobiles. How to build a better car park to accommodate more vehicles was the 20th- century challenge for many developers.
Forward-thinking developers are now questioning that premise, asking how they might change transportation patterns. How will people come to an area versus how should they come? How many will come based on a particular development’s different transportation options? Does the site even need parking? Should we discourage certain transportation options in favour of others (eg, do we put streets on a diet by creating dedicated bike lanes and shrinking the space for cars)? Such questions are structurally and literally reshaping new development.
At the same time as this philosophical shift was occurring, ride-sharing emerged and has extended the transit flexibility that typifies urban areas into the suburbs. The rapid growth of Uber, Lyft and other ride-sharing services is impacting both the commuting, living and working patterns of millennials and almost every other generation. This will further enhance new development and transportation paradigms. Parking lots and structures are no longer a higher or better use.
In addition, while the timing may be open to question, many experts believe that autonomous vehicles will play an increasingly important role in the transportation network over the next five to 10 years. The combined impact of autonomous vehicles and ride-sharing services will further impact where people live, commuting patterns and more. Developers, urban planners and local land use regulators and end users are working to understand how these inevitable changes will impact the ways in which buildings are designed, developed and operated. Already, office developers are designing parking garages for more flexible long-term uses. Multi-family developers, with the support of local zoning authorities, are greatly reducing – and even eliminating – parking garages and instead providing dedicated areas for ride-sharing pick-up and drop-off. George Jetson would be happy.
Retail real estate faces the greatest challenges. As retail delivery services grow increasingly popular and more widely available, traditional brick-and-mortar retailers must adapt to survive. Experiential retail and omni-channel marketing are two of the most important themes in the retail industry.
Regional shopping centres must continue to adapt as 30-year operating covenants for anchor department stores expire, making repositioning strategies critical. Even in the world of grocery-anchored community centres, uncertainty prevails as owners, developers and tenants monitor the growth of online grocery delivery services.
Ride-sharing services will have a serious impact on retail real estate. Developers of regional shopping centres will need to accommodate shoppers who arrive and depart via ride-sharing services. Moreover, the need to reposition traditional parking fields and structured parking to maximise revenue and remain consistent with both expectations and restrictions imposed by anchor tenants and others will present many challenges.
Bank branches have been important occupants of prime real estate throughout the USA for many years. But the industry is being disrupted in many ways as a result of the growth of mobile banking, PayPal and other innovations that enable customers to handle all aspects of their finances and banking transactions online, rather than in person. In 2014, there were almost 95,000 bank branches in the USA. As demographic shifts continue and mobile banking continues to displace the need for local branches, one would expect this number to plummet. However, similar to traditional retailers looking to create better experiences, Capital One is opening cafes with bank branches inside, so customers may enjoy food while accessing both the internet and banking services. In addition, JP Morgan recently announced it would open a large number of retail branches in Washington, DC where it has historically had virtually no street presence. As with many aspects of commercial real estate, it is difficult to predict where the current trends will lead, but it’s safe to assume that there will continue to be significant change.
The fundamental manner in which interests in real estate are conveyed is also changing. The de-centralised, immutable and “trust-less” system of blockchain is expected to dramatically affect the global economy and is a natural fit for application to real estate. Blockchain is essentially a more reliable means of tracking the ownership of assets of all types. It also facilitates transactions between parties without the need for escrows, banks, title companies, governments and other intermediaries.
We’ve only begun to understand its potential implications, but we are certain that blockchain’s impact will be widespread and profound. For example, blockchain is, in many ways, a substitute for the rule of law. In countries where ownership of and investment in real property has been challenging due to undeveloped or unreliable recordation systems, or worse (eg, corruption), blockchain offers hope. Centralised registries may be replaced with de-centralised registries on the blockchain. Various crowd-based consensus mechanisms that ensure the accuracy of the blockchain will provide greater assurance to those willing to invest capital into developing markets.
In the developed economies, conventional concerns about the illiquid nature of real estate investments will be impacted by blockchain. Interests in real estate will be more easily traded on a de-centralised, reliable exchange. The layering of smart contracts onto the blockchain will facilitate investments in real estate platforms by unconventional and unrelated parties. In essence, blockchain will lead to a democratisation of the economy, with a substantial impact on real estate.
Technology and innovation are not the only disrupters in the commercial real estate industry today. Other challenges include rising interest rates, political uncertainty, changing regulations and lending practices, and shifting global investment patterns.
Yet domestic and foreign capital continues to be drawn to commercial real estate investments in the USA and other markets. The desire for diversification, the predictability of cash flows, the transparency of market information, the relative downside risk protection and the very tangible nature of the asset continue to make commercial real estate attractive.
Real estate is subjected to extreme differences in legal, regulatory and tax matters across the globe, and this brief overview highlights only some of the most significant issues. In the end, real estate remains local by nature and, as a result, it is of utmost importance to consult with local counsel and other expert advisers in each jurisdiction where an investment will be made. When picking counsel, choose not only a legal professional, but someone who is knowledgeable on industry developments and the many forces affecting the real estate economy.