CRE Forecast: Focus on Tenant Experience

The commercial real estate world is changing, according to an insightful Deloitte survey of CRE executives. Location, while still important, may no longer be the prime driver of success. Today, tenant experience is at the forefront, say leaders in the field from more than 10 nations. Their assessment may alter the focus of future development.

Here is what to look at for 2020 and beyond.

Rather than focusing on the physical, the new emphasis is on something a bit more difficult to define and analyze. It's an evolution of sorts, based on a 2016 prediction by Deloitte analysts that the "new mantra" for commercial real estate would become a three-legged stool of "location, information, and analytics."

Those same analysts now say the industry has further evolved. Experience, they say, should now replace information as one of three key concerns for success. Specifically, the tenant experience.

The shift may not be a surprise to anyone in the field. The changing nature of real estate has been obvious, and many commercial real estate companies have already made the shift to technology. What is worthy of note is the extent to which developing technology, user need, new business alliances, and the "trajectory of global economies" influence decisions.

More than 90% of respondents noted that they plan to "maintain or increase" tenant-related technology spending in 2020. That's a significant increase.

Outlook for the Near Future

The 2020 Deloitte survey tallied responses from 750 CRE leaders. Questions were designed to identify what this group views as fundamental to the decision-making process regarding location and memorable tenant experience. The emphasis was on how emerging technologies play a role in that process, and to what extent the analytics affect response.

Basic findings include:

1. A shift in tenant preferences: Not surprising, given what Deloitte identifies as "increasing urbanization and globalization." However, new expectations and demands are also related to emerging workforce options, including flex space and telecommuting, and continuing technology advancements now include greater reliance on Artificial Intelligence (AI) and the Internet of Things (IoT).
2. Tenant experience: This response is a bit surprising. Although survey respondents consistently chose overall tenant experience as a primary concern, most admitted that digital tenant experience is not a "core competency."
3. Ancillary benefits: The executives were united in expressing the belief that technology is not limited to enhancing the tenant experience. They invariably cited the increase in operational efficiency and lower costs as additional benefits of outfitting commercial space with the latest technology tools.

Just What Does It Mean?

There is no doubt that modern life and business is technology-driven. But in the context of commercial real estate and tenant experience, what are the prime technologies that provide an edge over the competition?

First, any applications that ease scheduling and booking, connect previously disparate devices and sensors, and leverage "machine-learning algorithms" are deemed advantageous. In the eyes of tenants, technology that can be employed to analyze mobile data is also highly ranked and appreciated.

In some locations, particularly China, facial recognition software, mobile apps and personal assistant software that create personalized and efficient experiences is prized. IoT technology has "come of age," for everything from smart-home and "smart-office" voice-controlled apps and security to simple convenience.

While it is expected that new technologies will continue to be developed and embraced by commercial tenants, new technologies also come with a cost. Balancing the cost against expected return is the tightrope-walking aspect of the decision-making process when it comes to CRE implementation. The survey also addressed those issues.

Weighing the Value

Deloitte's economists sound a warning note about the heightened volatility of U.S. and global economies and worldwide political uncertainty. Nevertheless, the conclusion is that the U.S. CRE market "remains on strong footing," despite some talk about a coming recession. More than 70% of surveyed executives plan to maintain or increase technology spending even if there is a slowdown, although U.S. firms with more than $10 billion in revenue report that they would scale back. The report notes that this may be due to already high spending and decreasing need for new investment in technology.

In strictly local terms, the report is encouraging:

• Two-thirds of U.S. office property respondents look forward to a growth in rental rates in 2020, and one-third expect a decline in vacancies in the coming year. Multi-family property owners, however, anticipate higher vacancy levels.
• Almost three-quarters of U.S. executives expect higher transaction volume. In the office sector, 74% look forward to an increased availability of capital, and 26% see a decline in the cost of capital. The numbers in other sectors are not as optimistic.

Responses to the Deloitte annual survey are similar in many ways to the 2019 survey. Overwhelming concerns, as in past years, continue to include geographic market issues, interest rate fluctuations and tenant concentration risks.

But all signs point to continuing growth and stability of the CRE market. Despite the continuing challenges, and a heightened focus on tenant experience, it's a year to greet with enthusiasm.