Start with what is right rather than what is acceptable.
Franz Kafka
Sep 17, 2013, 10:25am MST Kristena Hansen Reporter- Phoenix Business Journal
The cycle of creative destruction has caught up to the commercial real estate sector in recent years, as new advances in technology are changing several core aspects of the industry.
In his presentation last week at the Urban Land Institute’s Technology Reshaping Real Estate seminar at SkySong in Scottsdale, Cassidy Turley’s chief economist Kevin Thorpe gave a detailed explanation as to how innovation has been transforming the industry
SHRINKING OFFICES
Thorpe said demand for office space has been improving in this economic recovery, but is overall still “subpar.” The nation is currently absorbing an average of 12 million square feet per quarter, down significantly from 20 million before the downturn.
“Phoenix has absorbed 2.4 million square feet of office space … but it’s about 60 percent less than what Phoenix was doing before the recession,” he said.
But the economy can no longer be blamed for this, Thorpe said. That’s where new technology comes in. Mobile connectivity has been the main culprit.
With the proliferation of devices like smart phones and tablets, employees — especially the younger Millennial generation — now prefer working remotely at a coffee shop or with their feet up at home.
This trend has been mostly welcomed by employers, who have responded by reducing their office footprint as a way to cut costs.
Thorpe said the average space per worker has dropped from 225 square feet in 2010 to about 165 square feet today, and the number is expected to decline further in the future. For instance, a company with 400 employees that pays $50 per square foot in monthly rent would save $1.5 million annually by reducing its square footage per worker from 202 to 177.
When employees do come to the office, they no longer care for old-school floor plans equipped with fancy conference rooms and secluded big corner offices, he said.
So office spaces are now being built or renovated with the collaborative workspaces, open concepts and glass partition walls they now prefer.
WINNERS & LOSERS
While mobile connectivity has been the game-changer for office space, the explosion of e-commerce has created a market of winners and losers for the industrial and retail sectors, Thorpe said.
“The downside of e-commerce is that it’s resulted in some retail casualties,” he said.
Netflix wiped out Blockbuster, iTunes wiped out record stores, e-readers wiped out big-box book stores such as Borders, etc.
With only one-third of the world’s population connected to the Internet today, the e-commerce trend is sure to amplify in the future. Online sales are projected to jump from 8 percent of all retail sales nationwide today to 30 percent by 2017, Thorpe said.
So instead of opening more stores, many traditional retailers are shifting capital toward growing their e-commerce platforms by expanding their warehouse footprints.
This has caused record demand for industrial space in this recovery, he said. In fact, e-commerce makes up about 45 percent of all industrial absorption this year.
Phoenix is at the forefront of this trend. It has absorbed nearly 20 million square feet of positive industrial space since 2010, the third highest amount in the nation, Thorpe said.
Opposite of the trend in office space, industrial users are demanding larger warehouses too. The average size of a new bulk warehouse has gone from 100,000 square feet to at least 300,000 square feet, he said.
Conversely, the e-commerce explosion has rattled the retail market.
That sector is now reinventing itself, Thorpe said, learning to thrive off of business platforms that can’t be replicated in cyberspace. Restaurants, entertainment venues, discount stores and luxury retailers are examples of those who will survive, he said.
Kristena Hansen covers residential and commercial real estate.
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