I am delighted to witness the rapid evolution of the commercial real estate (CRE) industry, surpassing my initial expectations. The impact of COVID has significantly influenced the industry, compelling us to swiftly adapt to changing requirements and strike a balance between work and life. In this article penned by Ben Mizes, the Co-Founder and CEO of Clever Real Estate, various fascinating trends in the commercial real estate sector are expertly analyzed.

 

Commercial real estate has experienced noticeable shifts in the past five years, with a pandemic, record-low interest rates and subsequent hikes, supply chain shortages, and other key trends shifting how we work, live, and play. So, what lies ahead for CRE? Here are seven trends driving the future of commercial real estate.

1. Use of Proptech

Technology continues to evolve and influence every aspect of the real estate transaction. Artificial intelligence (AI) tools are gaining the most press these days, but that’s just one way digital tools have transformed the industry.

Property technology, commonly called proptech, has revolutionized many real estate investments. Significant areas of transformation include:

• Property management: Software tools make collecting rent and communicating with tenants easier.
• Search platforms: Residential real estate has adopted proptech extensively to help investors find everything from real estate agents to investment properties, but CRE is gradually hopping on board.
• Virtual tours: Investors can tour facilities from out of state, making it easier to diversify their portfolios geographically.
• Data analysis: Better data proptech (like Crexi Intelligence) means a better understanding of rent-price fluctuations, changes in property values, and neighborhood trends.

Other tools include crowdfunding platforms for real estate investing, money lending technologies, and marketing and advertising tools.

2. Flex Spaces

Emerging from an era where office spaces are facing vacancies, and companies have started to rethink their traditional office culture, the future of CRE is flexible. This includes space that may have been designed for one configuration with a specified use, only to transform into another — even with the same tenant.

Flex spaces might include the following:

• Multipurpose areas able to shift their function as needed
• Reconfigured office space available to accommodate more (or fewer) people
• Strategic use of space to make it more cost-efficient

Some companies are staying fully remote post-pandemic, but those who aren’t require thoughtful office spaces that better suit their re-imagined workspace.

3. Co-working

Companies that have decided against a return to office policy still need space to meet clients, gather employees, and offer somewhere to get some work done when working at home isn’t an option. Co-working growth exploded before and during the COVID-19 pandemic. From 2015 to 2022, the number of people utilizing co-working spaces in the U.S. more than doubled, and despite WeWork’s recent declaration of bankruptcy, co-working is projected to continue its astronomical growth. 

4. Value-Add Investments

New office buildings and ready-to-rent luxury apartments may be attractive to the newbie investor, but they’re not the only path forward in CRE. Experienced investors (or new investors with a vision and a trusted advisor but limited cash) are turning toward value-add properties.

Value-add investments are properties that owners can make more valuable with a renovation, a reposition, or a re-brand. Examples of value-add investments include:

• An old warehouse is retrofitted to become more environmentally friendly, attracting a new “green” manufacturing company.
• A co-working building with cramped quarters and few amenities gets an updated outdoor space and rearranged facilities for more usable meeting space and private offices.

In some cases, the property is already rented but can generate more income and appreciate with re-branding or adding features and amenities that make it more attractive. This is an excellent option for areas where CRE needs have changed, but adding new buildings is not feasible.

5. Eco-Friendly Investments

Eco-friendly investing (i.e., sustainable development) focuses on minimizing the impact of building and development on the planet. The goal is to get as close as possible to carbon-neutral facilities — that is, developing in a way that adds no carbon emissions to the atmosphere.

Commercial real estate developers interested in eco-friendly investing:

• Use sustainable building materials
• Add alternative power (wind, water, solar) when possible
• Implement passive design principles for more affordable heating and cooling

Eco-friendly practices are also eligible for several local and federal tax benefits and credits that may also be worth pursuing.

6. Core and Core Plus Real Estate Investments

The volatility of recent markets has seen some investors turn toward core and core plus investments. In the CRE world, core and core plus properties are well-established with long-term tenants. The significant difference is that core plus assets may require more repairs or renovations (while core properties are ready to go), making core plus investments riskier but with an opportunity for a better return. 

A trend towards these ready-to-go investments indicates that some investors are working to stabilize their portfolios with minimal cash outlay and maintenance.  

7. Alternative Investments

Alternative investments fall out of what might be considered as a “typical” or traditional real estate investment. This covers a variety of CRE property types, which we dive into below.

Student Housing

Every fall, students return to their university. After a first year spent on campus in college-supplied student housing, they might choose to live independently, renting a spot off campus. While many might not consider this commercial real estate, student housing can be a lucrative market for traditional CRE investors to enter. 

• Income is consistent and predictable: Students will always return to campus regularly.
• Demand continues to grow: An estimated 46 million students will need housing by 2031.
• Student housing is considered “recession-proof”: Although no investments are guaranteed, student housing remains profitable, even in a tight economy.
• Leases are secure: Requiring a co-signer means that rent is more likely to be paid.

Data Centers

Remember all that data generated for use in CRE investing? It has to be stored somewhere, and in a very Inception-like twist, data centers are a trending investment opportunity.

Data centers house large computing systems that are responsible for processing and storing vast quantities of data. These have specific requirements in terms of temperature and security, and many buildings can be re-purposed to meet them. Once those systems are in place, data centers require little maintenance but can provide a lucrative ROI. 

Storage Space

The demand for self-storage space continues to rise along with the profits. Savvy commercial investors have recognized that the relatively low construction and maintenance costs are quickly recouped, as units fill quickly and regular income starts flowing in.

Parking Lots

As cities become more crowded, parking lots and garages enjoy a high ROI (return-on-income). This is due to low maintenance costs and consistent monthly income. For example, drivers can rent a monthly parking spot in Manhattan for as much as $1,400.

The Bottom Line

While no one can predict the future, commercial real estate will likely be shaped by these trends and more. As the industry continues to evolve, it will be interesting to see how these trends develop and what new ideas emerge to shape the future of commercial real estate.

 

Ben Mizes is the Co-Founder and CEO at Clever Real Estate, the nation’s leading real estate education platform for home buyers, sellers, and investors.