Building technology is advancing quicker than ever, and landlords are facing difficult issues regarding how they will invest to attract and retain commercial tenants over the next decade. In reality, the next five years are crucial, especially if you're hoping to land large corporate tenants or innovative organizations.
What Is the CRE Industry Saying About Attracting and Retaining Commercial Tenants?
According to Deloitte's real estate and construction industry practice, organizations are increasingly aligning their workplace strategies with broader business strategies, especially in the areas of sustainability, flexibility and high-tech integration. There is an emphasis on health and wellness from the millennial generation who, according to the 2016 Deloitte Millennial Survey, prefer employee wellbeing initiatives over "personal income/rewards" or "short-term financial goals." Additionally, millennials prefer increased flexibility in the workplace and an integrated, open work culture that enables them to work from anywhere, writes Surabhi Sheth, Research Leader of Real Estate for Deloitte Center for Financial Services, in Commercial Real Estate Redefined.
By 2025, Millennial and Generation Z workers combined will comprise about 60% of the U.S. workforce, according to the U.S. Bureau of Labor Statistics (as long as you crunch the numbers correctly).
In July 2017, National Real Estate Investor magazine posed the question of whether the WELL Building Standard certification is worth it for developers. Rachel McCleary, Urban Land Institute senior vice president, says "Health is a key component to real estate for the long-term," when she discusses the healthy workplace movement that has been boosted by the work of the U.S. Green Building Council (USGBC) and International Well Building Institute (IWBI) collaborating to streamline the processes for LEED and WELL certifications.
The USGBC cites several reasons why commercial tenants and consumers view LEED-certified / green buildings and sustainable business practices as positive, accretive differentiators. More productive employees and happier customers are revenue positive, which gives you more tools to retain tenants who will like the abilities to increase wages, pursue additional employee/customer retention initiatives and/or make new investments as margins grow, aided by energy cost savings and other operational efficiencies.
The Urban Land Institute's (ULI) 2014 study "Building for Wellness: The Business Case" highlights that of the 13 developers interviewed for the study, the most frequent metric reported was "market response," which "exceeded developers' expectations with rapid lease-up and sales rates, higher rents than pro forma projections, rent and sales premiums, and waiting lists."
Developers reported that development costs attributable to wellness component tenant improvements were minimal as a percentage of the overall budget. The IWBI states that these costs can be less than $1 per square foot.
In 2013, a ULI survey found that 96% of executives think CRE firms have a critical role in promoting health and wellness. Additionally, 92% of executives think health and wellness features incorporated in the property impact market success and economic value, strengthening the tenant's corporate brand and improving productivity.
What Is the Future of Smart Buildings, Wellness and CRE?
The Deloitte real estate and construction team believes smart building infrastructure is still in the "value-added enhancement" category, but will quickly transition to an expectation of commercial tenants. Space-as-a-Service (SPaaS) is gaining traction with large corporate tenants and innovative organizations.
Source: Deloitte — "Attracting and retaining tenants: The value of a consistent tenant experience"
Further, service providers will be expected to provide advanced and predictive technologies while CRE pricing models will need to evolve beyond cost-per-square-foot. The new performance-based models will require enhanced metrics and predictive analytics.
Enhanced metrics and the new performanced-based models don't have to be complicated. The IoT devices and algorithms that enhable machine learning and cloud computing crunch the big data of building analytics into digestible chunks that help facility managers and CRE managers prove value and efficiency to commercial tenants.
As commercial and retail buildings become more dynamic, flexible and adaptable, end-users will be able to see and interact with how their buildings are managing resources and improving indoor air quality. This creates value for CRE firms and investors looking to be ahead of the curve as methods to attract and retain commercial tenants evolve.