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How The 2010s Changed CRE Forever: Part 2

Take a character from Mad Men out of the 1960s and plop him down in most U.S. office spaces until about 2010 and — except for desktop computers and women in positions of authority — things would look pretty similar to him.

Bring him forward to today, however, and he'd be in much less familiar terrain.

Fundamental change has come to the office sector over the last 10 years, in the way it looks, the way people interact with it, and the way landlords go about their business. Apartments might have been the darling of commercial real estate in the 2010s, but office space has changed even more.

People-sitting-in-front-of-computer-monitors

Not so long ago, offices were sterile places of business, full stop. Now they are much more: American offices have opened up during the last decade, with a new emphasis on worker collaboration, creative amenities, hospitality and technology to link the workplace with everyplace else.

No single social or economic factor drove the change. Instead it was the dynamic interplay of new ideas about what work should be, a large new generation of workers and advancing communications technology.

In this environment, a new industry was born: coworking. WeWork might have stumbled in 2019, but coworking and flexible office space emerged this decade as permanent fixtures in the office market.

The Reinvention Of Office Space

Open offices went from budding novelty in the early 21st century to standard layout in the 2010s, with employers choosing open-floor plans in numerous settings, according to a recent study by Clutch, though a fair number of workers dislike or even hate the design.

As open-plan offices grew in popularity, and fewer workers wanted to be tied to a single work location — a cubicle, for instance — the concept of shared office space morphed in new directions. While shared office and short-term leasing aren't new, the model has evolved over the last decade to become more community-focused and collaboration-driven, Cushman & Wakefield Tenant Advisory Group Director Matt Hoffer said.

"New flexible space providers have moved away from segmented drywall offices to panel glass with large communal spaces, while also offering shared benefits that encourage interaction among members," Hoffer said. "These additional offerings, coupled with lease flexibility, have attracted tenants that would have otherwise leased space in a traditional lease arrangement."

Though coworking and flexible office space still account for only about 5% of U.S. office space, according to JLL, their growth during the 2010s was astonishingly rapid, considering that 10 years ago, the amount of such space on the market wasn't even a rounding error of the current total. 

The sector's growth during the decade also positions it for future growth as an established part of the office market.

"Coworking is no longer trendy, it's solidified," IWG Vice President of Network Development Michael Berretta said. "People demanded more workplace options outside of the traditional corporate office, and we expect that trend to continue into the 2020s."

JLL predicts that coworking space could account for as much as 30% of all U.S. office space by 2030. If that comes to pass, it will be because of the solid foundation for coworking established during the 2010s. Why has it caught on?

“Coworking has solved some of the most perplexing problems plaguing tenants in the quest for office space," Sevenco Director of Operations Andrew Nadhir said. "It has allowed tenants to circumvent the complexity of leasing traditional office space — a six- to 12-month process that locked them into the space for five to 10 years.  

Sevenco is a coworking space provider with locations in California and Michigan. Today, Nadhir said, a tenant can show up at a coworking space without having to hire a broker, architect or lawyer to negotiate the deal, and begin working out of the new office the next day. Tenants no longer have to worry about buying furniture or committing to multiyear phone and Internet service contracts.

While companies came to coworking for its flexibility, they are staying for the experiences it provides, said Dan Zakai, the CEO of coworking company Mindspace.

"Coworking has essentially revolutionized the way people work, and the benefits of coworking have had a far-reaching impact on the future of work as employees began to expect a beautifully designed office, community, activities and other benefits as the standard in their workplace," Zakai said.

Dan Zakai Mindspace
Mindspace CEO Dan Zakai

As a result, Zakai said, coworking has also started to change the dynamics between tenants and their landlords, putting the pressure on landlords to provide more than just space and to offer flex space in their buildings, activation of the space and the community, and a different standard of design and tech.    

"As traditional office occupiers embrace coworking, it’s driving demand for this type of space, pushing landlords to have to accommodate this type of space, and encouraging capital markets to understand this type of business," said Ryan Hoopes, a principal leader in Cushman & Wakefield’s Global Flexible Workspace Advisors practice.

It’s driving a fundamental shift in real estate overall, Hoopes said, citing Uber as an example. The company is establishing a large regional HQ in Dallas and needs hundreds of thousands of square feet of space. 

"One of their primary questions was, ‘How are you going to accommodate our needs for flex workspace?’" Hoopes said. "Because as they’re waiting for their traditional office space to be built out, flex space is a big part of their need.”

Out of coworking has bloomed the new class fo flexible office providers, like Knotel, that sign short-term deals with businesses but operate private offices for them.

"While coworking brought initial attention to the space, owners, brokers and investors alike have passed through it to find a deeper, all-weather model in flexible workspace," Knotel CEO Amol Sarva said. "It's like how eBay brought attention to online commerce before being displaced by Amazon.” 

Coworking has also had an arguably healthy impact on office space from the landlord's point of view, despite the financial problems WeWork is having.

"The office sector was weak during the first half of the decade, but is finishing strong, partly because of tech sector demand, but also because of the growth of coworking space," CBRE Chief Economist Richard Barkham said.

Knotel co-founder Amol Sarva.
Knotel CEO Amol Sarva

Blame It On Millennials

The large post-WWII baby boom, from 1946 to 1964, was a function of the prosperity of those times. When the baby boomers themselves got around to having children in earnest, the group they produced, born generally between 1981 and 1997, depending on who you ask, was supersized as well.

Now millennials have entered the workforce, and their presence represents a sea change for parts of commercial and residential real estate.

"Millennials are driving the workplace design conversation," Spacesmith Director of Business Development Roger Marquis said.

Spacesmith is a New York-based architecture and interior design firm.

"They have some very real needs, wants, desires and expectations from their employer about how the workplace is designed and what it offers," Marquis said. "Part of this speaks to technology, connectivity, remote work options, flexible desk options, collaborative vs. private space, and amenities."

The straightforward explanation for the influence that millennials have on the office and residential markets (and retail, for that matter) is numbers. In 2015, millennials became the largest demographic group in the workforce, according to Pew Research.

At the beginning of that year, 53.5 million workers were millennials, outdistancing Gen X workers, who totaled 52.7 million. The total number of millennial workers continued to grow after that, with its youngest members entering the workforce toward the end of the 2010s. 

Discussions around millennials and their wants and needs has become ubiquitous in the real estate industry over the last 10 years. During the 2010s, any attendee at a real estate event, such as Bisnow's, foolish enough to take a shot of whisky every time someone said "millennial" would have been blotto long before the event ended.

"Millennials are having a great impact on office and residential amenities, as they're a growing influence in both markets and reaching key decision-making positions," LandDesign Managing Partner Brent Martin said. LandDesign specializes in urban planning.

Millennials' savvy with technology and social media has driven developers and homebuilders to develop engaging platforms to reach them, providing amenities allowing for connections to be made in the digital space, Martin said. 

"In developments large and small, we’re seeing that millennials are relatively sophisticated and highly discerning consumers, in part because many of them will or have relocated to master-planned communities from urban environments," Martin said.

Cellular phones in building

PropTech Comes Of Age

Another industry-redefining trend of the decade, one that has changed all of real estate, has been PropTech. The change is all the more remarkable because even in the middle of the 2010s, real estate was still an infamously lagging industry when it comes to tech

The mindset has shifted, and that has been the real impact during the decade, L.D. Salmanson said.

Salmanson is the CEO at Cherre, a real estate data startup specializing in a software-as-a-service platform modeled after high-frequency trading platforms.

"We see the beginnings of workflow automation everywhere, the explosion of new datasets, the willingness of such players to work together for the first time, and the rapid experimentation and adoption of new technology across the board," Salmanson said.

PropTech is a Hydra-headed phenomenon, with new tech introduced during the 2010s to do a lot of different things. Robotic process automation is doing CRE's repetitive tasks and blockchain has a number of applications in real estate. Apartment buildings are embedding smart technologies, exemplified by Amazon's move to insert itself into residential spaces.

PropTech is changing how office tenants experience their workspaces, even down to HVAC systems control and replacing security badges with less cumbersome, smartphone-oriented entry systems.

PropTech companies also had a way from going from zero to disrupting parts of CRE during the decade. For instance Reonomy, founded in 2013, is planning to build a universal CRE data language. Other members of the recent generation of PropTech companies include VTS, Katerra and Opendoor.

"The commercial real estate industry’s adoption of technology has absolutely improved the way professionals conduct business on a day-to-day basis," Reonomy CEO Rich Sarkis said.

Investment in PropTech has ballooned: During the second half of 2019, venture capital funding into PropTech firms totaled $12.9B, more than the entire year of 2017, when the total was $12.7B, according to CREtech data. Back in 2011, total investment in PropTech was $320M.

Though best known for its misguided enthusiasm for WeWork, Japanese conglomerate SoftBank went whole-hog for PropTech in recent years. Among other companies, SoftBank has put capital in digital residential sales platform Opendoor and resi software company Compass, valued at $2B and $4.4B, respectively, and it has invested in Clutter, a tech-oriented storage-space business, in tech-led construction startup Katerra. It pumped $1.1B into smart glass company View.

SoftBank is hardly alone in its desire to fund PropTech expansion. Other examples — among very many — include Fifth Wall, which is active in modular housing, construction robotics, data and analytics and AI.

Concrete VC has been supporting startups in sensors, tenant apps and smart-building tech, to name a few. MetaProp has been an aggressive investor in PropTech, putting money into more than 50 companies, as well as hosting new startups in its New York office.

New technologies have sometimes posed do-or-die situations for companies in recent years, according to Nitin Vig, the chief operating officer of Mobile Doorman, which builds custom mobile apps for the multifamily industry.

"You only have to look at adjacent industries — hospitality travel, retail — to see how players who embraced tech fared compared to their peers who did not," Vig said.

"Take retail, for example. While some players vanished, such as Circuit City, or became a shadow of their former self, such as Sears, others have emerged bigger and stronger, such as Best Buy. Why? They embraced tech wholeheartedly to not just break away from their competition, but also avoid being disrupted by ... Amazon."

"Just as technology has redefined other industries, such as transportation and investing, there are now proven, cost-effective solutions — many of which are built by real estate professionals — to alleviate common, costly burdens, increase transaction velocity, and satisfy the most demanding consumers," said Lou Baugier, the CEO of tenant-screening app company Vero. 

The growth of property intelligence platforms, for instance, has given the industry access to property data that is accurate, organized and connected between systems, so that professionals can increasingly extract actionable insights, Sarkis said. 

This shift has sparked incremental improvements in every area of the business — from simplified prospecting and research becoming more precise, to valuations becoming more clear-cut and rises and dips in the market more foreseeable, Sarkis added. PropTech might have been born before 2010, but in this decade, it came of age.