A friend — a top consultant in security and fire protection — recently sent me an article from a top full-service brokerage team out west and told me, “thought that you would enjoy reading this, you will need to put on some boots to keep the bull? hit off your shoes.”
I’m always intrigued by messages like this, so I took a look.
The article was about what is going to happen over the next decade, and the firm’s final forecasts. I read it, did a deeper dive into the content, and wrote back to my friend with my comments.
He said, “you are right on the money. You should publish your comments because they actually provide clarity and insight.”
So after cleaning my boots, here are my comments with their predictions.
Brokerage Team Comment: The war for talent is still growing. The pool of workers is shrinking. Technology will have to replace some of these workers because there are simply not enough.
My Take: Duh. What do you expect when people don’t want to work anymore. There’s a moral crisis going on. People have forgotten the joy of work.[1]
Brokerage Team Comment: AI will make an impact on how companies use their office space. We don’t know how yet, we just know it will. The C2 Voice will be covering this topic as it evolves.
My Take: Duh. It’s going to screw things up royally in all sectors. How? I asked Chat GPT and it told me the following, which you think these people would know to do too. 😊
My Question to the Chat: How will AI make an impact on how companies use their office space?
ChatGPT Response: AI is poised to revolutionize how companies use their office space in several ways:
- Space Optimization: AI-powered analytics can provide insights into how office space is being utilized. By analyzing factors such as occupancy rates, foot traffic patterns, and workspace preferences, AI algorithms can optimize office layouts to maximize efficiency and accommodate changing needs. This may involve reallocating space, redesigning work areas, or implementing flexible seating arrangements based on real-time data.
- Predictive Analytics: AI can forecast future space requirements based on historical data, seasonal trends, and workforce projections. By predicting fluctuations in demand for office space, companies can proactively adjust their real estate strategies, lease agreements, and facility management plans to optimize resource allocation and minimize costs.
- Employee Experience: AI-powered technologies can enhance the employee experience by personalizing the workplace environment to individual preferences and needs. For example, smart building systems equipped with AI sensors can adjust lighting, temperature, and air quality settings based on employee preferences and occupancy levels, creating a more comfortable and productive work environment.
- Remote Work Support: As remote and hybrid work models become increasingly prevalent, AI can help companies optimize their office spaces to accommodate a more flexible workforce. AI-driven scheduling and booking systems can facilitate the seamless reservation of workspace and meeting rooms, ensuring that employees have access to the resources they need, whether they are working in the office or remotely.
- Energy Efficiency: AI-powered building management systems can optimize energy consumption and resource utilization within office spaces. By analyzing data from IoT sensors, AI algorithms can automatically adjust lighting, heating, cooling, and ventilation systems to minimize energy waste while maintaining optimal comfort levels. This not only reduces operational costs but also contributes to sustainability efforts and environmental conservation.
- Safety and Security: AI technologies such as facial recognition, biometric authentication, and video analytics can enhance safety and security measures within office spaces. AI-powered surveillance systems can detect and respond to potential security threats in real-time, while occupancy monitoring systems can ensure compliance with social distancing guidelines and capacity limits to mitigate health risks.
Overall, AI has the potential to revolutionize how companies use their office space by optimizing resource allocation, enhancing the employee experience, supporting remote work, improving energy efficiency, and ensuring safety and security. By leveraging AI-powered technologies, companies can adapt to evolving workplace dynamics, drive operational efficiencies, and create more agile and resilient work environments.
Brokerage Team Comment: We will figure out what occupancy vs. vacancy truly is. As workers normalize flex schedules and companies create standard operating procedures.
My Take: I don’t believe flex scheduling will ever be “normalized.” Chaos on working habits will rule, especially since the definition of “work” is shifting daily. Besides, Google knows what these words mean: Occupancy in real estate refers to the number of units that are leased out and being used at a given time. Vacancy, on the other hand, is the number of units that are not leased out and are not being used. Duh.
Brokerage Team Comment: We will see a fair amount of office space get repurposed. Not as much as publicized, but a fair amount.
My Take: Good luck with that. I have articles saying that converting these things is not all it’s cracked up to be. One WSJ article noted: “Only 3,575 apartment units were converted from office space last year. The already fraught process now faces even more challenges.”[2] And even if the cities with the highest office demand still have too much vacant office space, the logical question is what will happen to all this unused inventory?[3]
Brokerage Team Comment: We will see more offices get demolished, if there is no need for more Class B or C offices. In fact, there will be a lot less demand. We will see the value of Class B & C buildings come down to land for whatever purpose is contemplated.
My Take: Makes sense when you first read it. However, in researching, here is what I saw in our construction database. 29,475 projects are going on in commercial construction. 15,577 are offices. 980 have the word “demolish” in them. I wouldn’t classify 6% as “more.” 8,206 is the number with “demolish” in the description in education, elementary schools out of 29,937. That’s 27%, and I would say that is “more.” 70,412 is the total projects going on in education from which 20,459 has “demolish” in the entire education category, which is 29%. So that really is “more.” I guess it depends where the observer is.[4]
Brokerage Team Comment: We will continue to see Class A be the office product of choice for users. The war for talent is not going away. Office space can and will be used as a recruiting tool.
My Take: But what if people don’t want to go to the office? This one was and is a puzzle.
Brokerage Team Comment: We will see years of downward pricing pressure on office buildings as we go through this cycle. The most pressure will be on Class B, while quality Class A will hold its ground. High construction prices for tenant improvements will help inflate rates and hold values.
My Take: I hate pronouns. What does “this” cycle mean? I don’t know these ABC ratings. And when I researched it, it all depends on who does the ratings. There’s no “consistency.”
Brokerage Team Comment: Regional Banks are shrinking, making loans harder to get. There will be almost no office loans nor new construction for at least the next 3 years.
My Take: Not just office loans. WSJ reports: “Now waves of commercial real-estate loans are set to come due, threatening to put more pressure on the smaller banks that hold high concentrations of them. Borrowers either will have to refinance at much higher interest rates or hand over the keys to properties that have declined in value in recent years, which could stick banks with big losses.”[5]
Brokerage Team Comment: Lenders and borrowers who want to blend and extend will not be able to hide over time. There will be a reckoning at some point. Why? Because the market will not rebound quickly enough for the extensions to work.
My Take: Didn’t understand this one. I researched it and found that in commercial leasing, a blend and extend amendment is what allows a tenant to extend their lease and negotiate a new rate, merging, or “blending” the new and old rents. During periods of particularly high vacancy, commercial landlords will often agree to a blend and extend amendment that lowers a tenant’s rent, in order to keep their property occupied for an extended period of time.[6] Once I found that out, I agreed with their prediction of a “reckoning” coming about. It’s coming for a lot of things. Besides, words have consequences.[7]
Brokerage Team Comment: More manufacturing jobs will create more office jobs. This is HUGE for us. Arizona has become a great place to manufacture and these jobs bring additional office jobs. IF there is one great big bright spotlight for future office space, this is it.
My Take: There are only 3,451 projects in manufacturing going on according to the database we use, ConstructConnect®. Arizona has 141 of them – 4%. I wouldn’t call that HUGE, would you? And of that 3,451, 233 have the word “office” in the specifications – 7%. So where do they get their data is the question.
Brokerage Team Comment: There is a need for Class A offices and by the end of the next decade we will see offices become an investment of choice for institutions looking to acquire quality offices with stable rent rolls.
My Take: So I looked up A, B, C. “Commercial real estate buildings vary drastically when it comes to condition, amenities, age, proximity to city centers and other factors. That’s why commercial real estate investors classify properties into Class A, Class B and Class C based on these factors, and more broadly, the investment’s risk. While this classification system is nuanced and subjective, it provides investors with a simplified, universally understandable way to communicate about properties within respective markets.” Which means each investor can rank a property A, B or C. There is no consistency or code (i.e., NEC) to govern the ratings. So, how do they define A?
Now What?
Anyone can make predictions, but reality has a way of defining what happens regardless of what you or I say. A few years ago coming out of the COVID era I wrote, 77 Biggest Challenges in Business Today Boiled Down to One. It’s amazing when I re-read it how it mirrors what the Brokerage team was saying. Frankly, it’s amazing how things change and stay the same. Perhaps more important, whether you’re talking tenants, owners or customers, the one thing driving everyone in business is, after all, business. How you get it is what’s changing every day.
Hope you enjoyed it and didn’t get your own shoes too dirty. Send in your comments.
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[1] See Solve the Working Problem in a Virus-Infected World with Hustle.
[2] Turning Empty Offices Into Apartments Is Getting Even Harder by Konrad Putzier and Will Parker, Nov. 6, 2023 in WSJ.
[3] So Much Empty Office Space, So Few Easy Options by Dylan Burzinski, Dec. 13, 2023, in WSJ.
[4] See Heisenberg’s Uncertainty Principle where you need an observer to make sense of anything you observe.
[5] Signs of Trouble at Regional Banks Reignite Sector Fears BY Gina Heeb, March 1, 2024 in WSJ.
[6] Janover Commercial Real Estate Loans. Commercial Mortgage Brokers Commercial Real Estate Financial Intermediary and Advisory Services