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Deloitte: Sharing economy will affect PERE investments

Smart investors will have the opportunity to earn out-sized returns, the firm said.

Near record-low office vacancy rates and all-time-high deal making have made 2015 a great year for the office real estate market.

In an era of technological disruption, though, change is coming to the traditional office space, and it’s not just treadmill desks shifting the way employees work, meet and play. The collaborative economy – a tech catch-all term that covers services from Uber to Airbnb – is starting to reshape office space. In this digitization of the traditional bartering system, consumers pay for goods on demand, eschewing car ownership to take Ubers or buy rental memberships. Consultant giant Deloitte examined this and other trends affecting the commercial real estate space in a report released this week.

In the office business, the collaborative economy means rethinking how and where people work, shifting to short-term leases with flexible use arrangements, for example. This is a trend New York-based Deloitte identifies in its early stages, a movement that will change the industry more by 2025 than in just the next year.

“The accelerating trend of disruption caused by the new sharing/collaborative economy will have an increasing impact on the design, use and financial returns from real estate,” Bob O’Brien, Deloitte’s head of real estate, told PERE. “The new sharing/collaborative economy creates both opportunities and threats to value creation in the private equity real estate investments, and investors that appropriately adapt to the changing needs of tenants across property types will have the opportunity to earn out-sized returns on their investments.”

The winners and losers of the collaborative economy are still to be determined in this early stage. Emerging leaders, O’Brien said, are harnessing new technology not only to attract customers, but also to use data mining capabilities to better understand clients’ needs and predict future usage. For companies with fluctuating office needs, flexible office space could serve fluctuating employee numbers during seasonal cycles or even days of the week. Instead of individual workspaces for consultants that remain empty Monday through Thursday, for example, a firm could lease space for its employees just on Fridays.

New leasing ideas can also change how private equity real estate firms value office buildings that have co-working spaces and technology startups, O’Brien said, because credit and other considerations are different from an office building with more traditional business tenants.

Co-working spaces and real estate startups have taken off fastest in New York and Silicon Valley, and San Francisco by extension. The pricy cities are on the cutting edge of technology trends and also house some of the most expensive office space in the world, incentivizing creative commercial real estate strategies.

The market looks great outside of these primary markets, too. National vacancy rates are at near record-lows, according to CBRE Group: In the second quarter of 2015, office vacancies downtown were under 11 percent and suburban vacancies were just over 15 percent. Private equity firms are taking advantage of this hot market, continuing to ramp up fundraising with $2.1 billion raised for office-focused funds in the first half of 2015, according to PERE Research & Analytics.

Deloitte pointed to one example of a five-year-old company taking advantage of this good market and the new way of thinking about office space. WeWork Companies, valued at $10 billion in June, caters to startups and small companies. The New York-based company leases about 3.5 million square feet of space across four countries. The New York-based subleaser teamed up with the more established Vornado Realty Trust to create a co-working space and an apartment building south of Washington D.C. last year.

This type of partnership – technology-based startup paired with a proven real estate player – could help legacy firms keep up with changing real estate demands. O’Brien recommends private equity real estate firms establish relationships with startups and technology firms to better understand and act in the collaborative economy.

“For example, there are a number of recently formed firms developing innovative tools and technology to support and disintermediate leasing activities, monitor and predict customer traffic at retail centers and facilitate tenant relationships,” he said. “Existing players are probably tied more to the legacy way of doing things, and new players are a little more open minded.”