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Fast Tracking Technological Transformation in Commercial Real Estate

Two-hour, same day, and next day delivery – what do these key value propositions for e-commerce businesses and commercial real estate (CRE) have in common? More and more, CRE is providing a competitive advantage to retailers as they compete to lead their industry’s e-commerce transformations and meet delivery commitments to consumers and businesses around the country.

E-commerce and CRE are increasingly working in cooperation, particularly thanks to the “last mile” real estate boom. Although most brands founded as e-commerce businesses do not have a large real estate footprint, they need distribution facilities in close proximity to their customers to get essential (and non-essential) items to them quickly. This explains the success of warehouse and logistics real estate sectors, but another, less obvious, real estate sector is getting into the e-commerce business too. The prevalence of quick turn delivery commitments explains the conversion of a growing number of unleased retail spaces to fulfillment centers also known as last-mile distribution facilities, a phenomenon that has accelerated during COVID-19.

What has brought the e-commerce and CRE industries closer in recent years besides the need to meet delivery promises? It is clear that innovative new technology is bringing them together and helping to fuel the digitization of CRE. The rise of Artificial Intelligence (AI), Property Technology (PropTech), and Internet of Things (IoT) are redefining and transforming the commercial real estate industry as a whole.

As AI drives the proliferation of automation, robots can now be used in fulfillment centers – big and small – to sort and distribute packages. AI and data analytics can determine where to place these facilities and how much inventory is typically needed to satisfy consumer demand. Ironically, a growing number of U.S. employees who once worked at retail shopping centers are now finding work in e-commerce fulfillment centers, and in some cases in roles that direct robots.

Technology has allowed the commercial real estate industry to grow and create more opportunities for investors across nearly a dozen sectors. CRE is no longer exclusively high-rise apartment buildings, hotels, and shopping malls. In recent years, CRE has been ushering in exciting new possibilities and frontiers for both safe and adventurous investors with ghost kitchens, data centers, and last-mile e-commerce fulfilment centers. Thanks to the emergence of new industries built upon technological innovations, CRE is transforming rapidly.

Now, during the pandemic, digitization of services is accelerating and CRE is adapting how its spaces are best used.

We have all had our fair share of stay-at-home dinner date nights or bagels delivered to our door during pandemic. As we mull over the choice of a fast food burger, Italian meal, or a Mexican dish on a delivery app, these choices are increasingly produced in ghost kitchens – facilities that house kitchen equipment necessary to produce restaurant quality meals and prepare delivery-only or take-out meals.

One retailer recently said that restaurant tenants are making sure they have sufficient outdoor seating, covered, heated places for curbside pickups and also options for operating as a ghost kitchen in the event they’re not able to offer in-person dining.

Even certain grocery chains have implemented the “ghost” model, by opening online-only stores known as ‘dark stores’ that are not open to the public or walk-in customers, but operate to fulfill online orders for grocery delivery and curbside pickup.

A single ghost kitchen can produce multiple menu choices for one restaurant or provide space for multiple restaurant brands to use. While ghost kitchens were flourishing prior to COVID-19 – Brookfield Properties and Simon Property Group were working on ghost kitchen collaborations before the pandemic – the model is seeing heightened interest from food brands, restaurants, and chefs dealing with dramatic reductions of in-person dining.

The revenue being created from CRE spaces that house ghost kitchens is impressive. According to the Food Institute, global ghost kitchens revenue reached $43 billion in 2019 and is expected to grow to $72 billion by 2027.

Another mainstay of many American families’ stay-at-home orders these past eight months has been access to technology and data. Of course, “the cloud” that stores our data and powers our connectivity is not in the sky, rather it exists in the form of servers housed in buildings with floors of even more servers. Emails and text messages sent through cell phones, movies streamed on tablets and laptops, voice, bio and facial recognition systems at home and at the office that identify and send images and sounds, are all stored in the cloud. The COVID-19 pandemic has led to more remote workers and more students engaged in virtual learning. In turn, this has also increased the use and demand for data centers, so much so that in the first six months of 2020 alone, businesses stored a record breaking 340 megawatts of capacity at data centers.

Looking to the future, driverless cars are expected to process 4,000 GB of data after only one hour of driving, and with everyday household devices becoming smart devices, from refrigerators to televisions to video doorbells, we will require more and more space for data to be stored.

Thus, as the demand for cloud storage continues to increase, additional data center buildings are necessary to meet the growing needs of consumers and businesses. This is yet another example of the growing digital transformation of commercial real estate, with public cloud spending expected to double from $229 billion in 2019 to nearly $500 billion by 2023.

COVID-19 has propelled technology adoption by landlords and building operators as they’ve worked on supporting safe re-entry into their buildings, and real estate investors should consider the wide array of dynamic technological capabilities that are transforming CRE. There is growing recognition that in our current state, if business leaders don’t change and adapt their product, their product will change. Real estate is no exception, and building managers and landlords know that physical building assets are valued for their location and space, in addition to the services they can provide and innovations they can deploy in the digitized economy.

As the real estate industry shifts into this new chapter, technology will enable the industry to be the most durable part of the American economy for decades to come.

John Jones is senior vice president of government relations at Nareit, the worldwide representative voice for real estate investment trusts (REITs) and real estate companies with an interest in U.S. real estate. Jones focuses on the intersection of real estate and technology. Nareit produces research on 21st Century Real Estate

, which outlines the value of CRE, through REITs, in a diversified investment portfolio.

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