Revolutionizing Commercial Real Estate: Tech Advances Transforming the Way We Build, Lease, Plan, & Invest

So, let’s review 10 emerging trends in commercial real estate (with thanks to PWC and the Urban Land Institute for many of these insights) and look for the patterns that explain why specific technologies are gaining traction:

1. Normalizing fundamentals. U.S. commercial property had a great run during COVID with some of the strongest returns, rent growth, and price appreciation rates ever recorded. However, over two years later, we see that remarkable growth and profits eventually fall back to earth—a “return to the mean,” or normalizing.
2. Some things, however, may never fully return to normal. The pandemic forced structural shifts in how and where we live, work, and recreate in ways that seem to be here to stay.  Business travel is unlikely to recover for a few more years, meaning business hotels, fine dining, and conference facilities will continue to face challenges. Of course, the impact on office use and leasing is still developing. Will companies be successful in bringing everyone back into the office?
3. Capital is moving to the sidelines. Perhaps the biggest headwind to getting deals done now is uncertainty over where prices will settle. Buyers are concerned about overpaying. Sellers don’t want to sell their assets short and then see them re-traded at higher prices once the markets improve. Finally, everyone is waiting to see how long the Fed will keep raising rates.
4. Issues with affordability. Home prices and rents have soared relative to incomes while affordability has fallen to its lowest level in over 30 years. Our recent period of super low mortgage rates (nobody wants to sell) and everyone wanting to live to 120 yet “age in place” has only exacerbated the chronic under-supply of housing. Sprinkle in government policies that limit new supply, increased construction costs and a labor shortage, and it will get worse. The simple answer is to build more housing, but it’s far from simple to achieve.
5. Investors and developers are looking for either quality or niche opportunities. There is much less appetite now for riskier opportunistic investments. We are seeing bifurcated demand in the hotel and office sectors where hotels are divided between the post-COVID-19 recovery in the leisure and the much slower business market recovery. Resorts and destination hotels are commanding record revenue while many convention and business hotels languish. And then there is office, where tenants are increasingly choosing newer, more modern buildings and abandoning everything else—especially pre-1990 buildings.
6. There’s a move to convert older offices for residential uses, or upgrading them into modern offices, where feasible and supported by the market.  However, these conversions are often much easier to envision than to execute. The value loss that owners may need to recognize in order to justify the transformative investment could be the greatest barrier to project feasibility.
7. The flight to the “Sun Belt” might be over. Although these markets typically offer lower tax rates and lighter regulatory burdens, they grew too fast and are experiencing “big city” problems. Some of the infrastructure (access to water, etc.) is beginning to limit their ability to accommodate massive population inflows.
8. Infrastructure spending is back and after years of uncoordinated local efforts, the new national programs may provide the leadership needed. The main infrastructure bill encompasses a broad range of activities focused chiefly on transportation—including bridges and roads, rail and transit, ports and airports—but also provides funding for broadband internet, power, environmental remediation, and resilience, among other programs.
9. Climate change may alter the dynamics of where people want to live and invest. Extended drought conditions may limit new development because authorities may limit new hookups. Also, many investors rely on insurance rather than capital improvements to protect their investments, but changing investor sentiment toward climate risks may force more affirmative changes.
10. Pressure for greater ESG disclosure by real estate owners and investors is intensifying, and state and local governments are resorting to regulation to address affordability, including various types of rent control and vacancy taxes.

Ten Environmental Trends

Now it's time to look for patterns … Did you see any?  How about:

• Market stabilization (nothing so hot to pursue)
• ESG regulation (save the world)
• Customer demands (give me lower risk or very specific opportunities)
• Inventory bifurcation (old vs. new)

That said, here are a few technology trends we are seeing that specifically address the environmental ones just mentioned.

The Office Building of 2030

• IoT-connected heat pumps boost efficiency and reduce emissions. Conventional HVAC systems are inefficient and typically rely on fossil fuels like heating oils or natural gas boilers to supply heat in the winter. A heat pump is a relatively new HVAC device that is energy-efficient and provides electrified heating in the winter. These IoT sensors can further improve efficiency by introducing artificial intelligence (AI) models that actively predict where and when heating or cooling is needed, based on historical trends. AI offers the opportunity to turn HVAC into a proactive rather than reactive system, reducing the upkeep needed by building managers.
• Virtual power plants offer a new revenue stream. Heat pumps with IoT sensors can allow building managers to increase or decrease HVAC energy use as needed. In addition, buildings can use local energy-generating resources like rooftop solar panels or battery storage systems to supply power back to the power grid during periods of peak demand. As a result, buildings themselves can act as a “virtual power plant” (VPP), reacting to periods of high demand on the power grid. VPPs can become a significant source of revenue for building managers.
• Smart glass reduces temperature control needs and increases privacy. More than a quarter of heating and cooling for buildings goes out the window—literally. Smart glass tackles this challenge by changing the level of tint, or how much light can pass through a window.
• AI-assisted occupancy and security tech keeps occupants safe. Advances in AI and computing power have allowed researchers to better detect and classify images using a technique known as computer vision. Computer vision is the processing of identifying and analyzing visual data with a computer the same way that humans do. An AI algorithm will typically rely on thousands of images that have been manually classified by researchers to teach a computer how to interpret visual information.
• Digital twins help facilities' management. A digital twin is a virtual representation of a real object or set of objects, constructed with plenty of real-world data collected from IoT sensors. After an initial model is created, digital twins undergo simulations to provide performance feedback under various scenarios, without having to test the actual system. The insights gained from digital twins are used to improve the real object, and then new data is fed into the digital twin model. For example, a manager overseeing an office building’s HVAC system may want to know how much energy savings they’ll see by upgrading to a new heat pump. IoT sensors are already in place to monitor room conditions like temperature and humidity, as well as the energy consumption of the current HVAC system. Using IoT data and some 3D modeling, the building manager can construct a digital twin of the office building and run heat pump simulations on the digital twins to determine the potential benefits of installing heat pump tech.

Modular Construction

Modular construction is a method that involves manufacturing building components off-site and then assembling them on location. This approach dramatically reduces construction time, labor costs, and waste.

Improved design and customization options:

• Use of advanced design software and manufacturing techniques
• Allows for diverse architectural styles and building types
• Enhances the aesthetic appeal of modular buildings

Increased speed and efficiency:

• Parallel on-site and off-site construction processes
• Reduces project timelines and labor costs
• Minimizes disruptions and environmental impact at the construction site

Enhanced sustainability and eco-friendliness:

• Utilizes resource-efficient materials and construction methods
• Minimizes waste generation during manufacturing and assembly
• Encourages energy-efficient and green building practices

Building Information Modeling (BIM)

BIM technology has made significant strides in recent years, enabling architects, engineers, and construction professionals to create detailed digital representations of buildings. This approach not only improves the accuracy of the design process but also enables real-time collaboration among stakeholders. Advances include:

Integration of IoT and AI technologies:

• Enhances real-time data collection and analysis
• Enables predictive maintenance and energy optimization
• Automates space utilization and management

4D and 5D BIM advancements:

• 4D BIM integrates time and scheduling data
• 5D BIM incorporates cost estimation and budgeting
• Facilitates more efficient project management and cost control

Interoperability and open standards:

• Promotes seamless data exchange between different software platforms
• Reduces barriers for collaboration among stakeholders
• Accelerates industry-wide adoption of BIM best practices

Virtual and Augmented Reality (VR/AR)

Virtual and augmented reality technologies have found a solid footing in the CRE sector, with many companies using them to streamline the design and leasing processes. Matterport, for instance, offers immersive 3D virtual tours, enabling potential tenants to experience properties remotely. Similarly, AR technology allows architects and developers to visualize proposed projects in real-world environments, improving design accuracy and stakeholder communication.

Blockchain and Tokenization

Blockchain technology has the potential to revolutionize the way commercial real estate is bought, sold, and managed. Tokenization allows for fractional ownership of assets, opening up investment opportunities to a broader range of investors. Platforms like RealT and Meridio are pioneering the implementation of blockchain and tokenization in CRE, making property transactions more transparent, secure, and efficient.

AI and Envisioning Spaces

Generative AI, a subset of artificial intelligence that uses deep learning algorithms to generate new content, has immense potential to help people envision spaces and changes in layout within the commercial real estate sector. By automating and optimizing the design process, generative AI can enable architects, interior designers, and clients to explore a multitude of design possibilities with ease. Here are some examples of how generative AI can be applied to envision spaces and layout changes:

• Automated space planning: AI can be used to create optimized space plans based on specific design constraints and requirements. By inputting parameters such as room dimensions, desired layout elements, and furniture arrangements, generative AI can produce multiple design options that meet the criteria. This allows clients and designers to explore various configurations efficiently and select the most suitable one.
• Adaptive design optimization: AI can help create designs that adapt to changing conditions or requirements. For instance, it can generate multiple layout options for a co-working space that accommodates different tenant needs, such as private offices, open workspaces, and meeting rooms. By simulating different scenarios, generative AI can identify the best solutions for each situation.
• Visualization and rendering: AI can be used to create realistic and immersive visualizations of space layouts. By generating high-quality 3D renderings or even virtual reality experiences, architects and designers can help clients and stakeholders better understand the look and feel of a proposed space. This enables informed decision making and reduces the likelihood of costly design changes down the line.
• Design personalization: AI can help create personalized designs based on individual preferences and needs. By analyzing user data, such as preferred styles, color schemes, or functional requirements, generative AI can generate customized layouts that cater to specific tastes. This can enhance user satisfaction and create unique, tailored spaces.
• Integration with BIM and AR/VR: AI can be combined with Building Information Modeling (BIM) and augmented/virtual reality (AR/VR) technologies to create a seamless design workflow. For instance, generative AI-generated layouts can be imported into BIM software for further refinement and coordination with other building systems. Additionally, AR/VR can be used to overlay generative AI-created designs onto real-world environments, enabling clients and stakeholders to visualize the proposed changes more accurately.

One notable example of a company harnessing the power of generative AI in the architectural design process is Spacemaker. Their AI-powered platform generates optimized building designs based on site constraints and requirements, helping architects and developers create more efficient and sustainable projects. In summary, generative AI has the potential to revolutionize how people envision spaces and layout changes within the commercial real estate sector. By automating and optimizing the design process, it enables architects, designers, and clients to explore a wide range of possibilities, ultimately leading to more efficient, sustainable, and user-centric spaces.

AI and Investors

From data analysis and predictive modeling to natural language processing and sentiment analysis, AI technologies are empowering investors to make more informed and strategic decisions.

• Data aggregation and analysis: AI can be used to gather and analyze vast amounts of data from multiple sources, such as property listings, transaction records, demographic information, and economic indicators. By processing and organizing this data, AI can help investors identify trends, monitor market conditions, and pinpoint investment opportunities.
• Predictive analytics: AI-powered predictive analytics can forecast future market trends and property values based on historical data and real-time market information. This enables investors to make more informed decisions about buying, selling, or holding assets, as well as identifying potential risks and opportunities.
• Sentiment analysis: AI can be employed to analyze sentiments expressed in news articles, social media, and online forums related to commercial real estate. By gauging public opinion and market sentiment, AI can help investors identify emerging trends, potential market shifts, and areas of investment interest.
• Deal sourcing and matching: AI-driven platforms can match investors with suitable investment opportunities based on their preferences, risk tolerance, and portfolio strategy. By analyzing data on various properties and comparing them to an investor’s criteria, AI can suggest tailored opportunities and streamline the deal-finding process.
• Due diligence and risk assessment: AI can be used to automate and enhance the due diligence process by rapidly analyzing data on properties, tenants, and market conditions. This enables investors to identify potential red flags and risks associated with a particular investment, helping them make more informed decisions and mitigate risks.
• Portfolio optimization: AI-powered tools can help investors optimize their commercial real estate portfolios by analyzing factors such as asset allocation, risk exposure, and market conditions. By providing insights into the best strategies for portfolio diversification and growth, AI can support investors in making more strategic and data-driven decisions.

Some companies leveraging AI to assist investors in the CRE sector include:

• Skyline AI: This company uses machine learning algorithms to analyze various data sources, enabling investors to identify profitable investment opportunities and make data-driven decisions.
• Cherre: This platform utilizes AI to aggregate and analyze real estate data from multiple sources, providing investors with valuable insights and predictive analytics to inform their investment strategies.
• Reonomy: Their AI-powered platform offers comprehensive property data, advanced search capabilities, and market insights, helping investors identify and evaluate potential investment opportunities.

AI technologies are playing an increasingly critical role in helping investors navigate the complex world of commercial real estate. By providing data-driven insights, predictive analytics, and enhanced decision-making capabilities, AI can support investors in understanding market conditions, identifying deals, and optimizing their investment strategies.

That’s a wrap on the technology advances we are seeing in commercial real estate, and more importantly, why they are getting traction. For more information on what’s happening or to see some of these technologies in action, I invite you to NAR’s iOi Summit. If you haven’t attended before, iOi stands for Innovation, Opportunity, and Investment, and it has become the preeminent technology and investor conference focusing on how PropTech is driving digital transformation in real estate.

Hosted by the National Association of REALTORS® (NAR), the sixth annual iOi Summit will be the best we’ve ever held. If you can’t attend, send someone from your team to network with 700 of the smartest people from real estate innovators, venture capitalists, entrepreneurs, brokers, title officers, mortgage lenders, and more.