Real Estate Portfolio Management Software

Investment Analysis

The Future of Commercial Real Estate

The high rates per square foot and long-term leases have historically provided great returns for investors, drawing capital investments from around the world into the office space sector. The square foot for commercial property typically spans from $60 to $100. In addition, utilities, maintenance, parking and cafeteria maintenance can often double the square foot rate, which is passed on to tenants. The growth in advertising, business consulting, education, financial services, healthcare, and technology have driven the demand in the segment.

During casual discussions with former colleagues and clients – who hold leadership positions in finance – I learned that work from home was a luxury before COVID-19 for technology-enabled businesses. To adapt to the changing environments, many companies’ primary focus is to cut expenses; they aren’t focused only on layoffs. By reducing office space, they can lower lease payments. This is truly a challenging time for office space leasing.

While this is a common scenario for the small and mid-size segment, the market leaders – Blackstone Group (nearly 200 million square feet) and Duke Realty Corporation (138 million square foot) – are already ahead of the game; they are shifting from office space to e-commerce enabled commercial space. In 2009 Duke’s profits from office buildings segment was 55%. The corporation accurately predicted the shift in e-commerce and diverted its real estate investment holdings to warehousing and reduced its profit from office buildings to 1%. Blackstone entered into a single $18 billion deal in logistics real estate investments, the largest deal ever known in real estate.

The constant pursuit of a successful business model and the ability to adapt to change, propelled these titans in the right direction. Yet the ordinary investor is seldom able to predict the future and doesn’t have the financial muscle to move in and out of sectors. Conclusion: COVID-19 certainly changed the future of workspace. While employers are largely focusing on remote work solutions, they also continue to downsize the workspace. These are highly unpredictable times for office space rental. We expect that there will be many more defaulters in commercial real estate, as tenants will not renew their lease, or will seek to downsize.