Richard D. Baier
President, Building Owners and Managers Association (BOMA) International
Managing Director, C.B. Richard Ellis, Kansas City, Missouri
The most influential issue
of the year 2000 - technology - made itself
evident on the very first day of the year
as we all worried about what "Y2K" would
bring. Of all the forces shaping our economy
and society, none had greater impact in
2000 than technology. Technology is changing
the way real estate organizations are doing
business, and, as a result of such rapid
change, special challenges have developed
and new trends are emerging for the future.
Trends: Technology
affects every day business and communication
The Internet is best at breaking down barriers, improving information
flow and speeding decision-making processes. Since real estate tends
to be paper-intensive, time-intensive and information-intensive, it's
the ideal industry to embrace e-commerce solutions.
In general, real estate
firms are using the Internet so clients
can: take virtual tours of properties;
shop for and secure preliminary financing
for loans; access leasing information 24-hours
a day, seven days a week; check the status
of impending deals; and make data available
online for asset managers. Brokers can
research, post property listings, and e-mail
maps, photos and data. We can, depending
on our licensing, conduct business across
geographical lines more easily; if a client
in another location wants to do business
in your location, it doesn't necessarily
mean anyone has to travel. You can do the
job by sending photos and data electronically.
And perhaps most importantly for owners,
we can send financial data hourly.
The Internet has also
spurred some innovative thinking and new
ways of doing business. Hillwood, a real
estate firm in Texas, put 80,000 square
feet of industrial space on the Internet
auction site, e-Bay, for bid - a first
for the industry! They received two bids,
with one being $2 per square foot over
the minimum-bidding price. Although they
ultimately leased to a tenant off-line,
they considered the auction a huge success,
as it opened up market avenues and provided
exposure they never would have had otherwise.
On April 25, 2000, CB
Richard Ellis, Jones Lang LaSalle and Trammell
Crow formed an alliance to develop e-commerce
initiatives and new Internet-based client
service capabilities. We collectively spend
close to $7 billion for goods and services,
and this alliance would allow us to develop
Web-based services to assist brokers with
deals and Internet portals for the 1.2
billion square feet of office buildings
we control.
Then, on May 4, CB Richard
Ellis joined 10 other major office owners
and a venture capital firm to create Project
Constellation, which will form, incubate
and sponsor real estate-related Internet,
e-commerce and broadband enterprises; acquire
interest in existing "best of breed" companies;
and act as a consolidator across property
sectors in the emerging real estate technology
area. Deutsche Bank/Alex Brown called the
creation of Project Constellation "A
defining moment for the real estate industry."
Project Constellation
could well serve as the basis or prototype
for the redefinition of real estate company
valuation in the new economy, because in
the new economy, Wall Street has made it
clear that they will look to professional
property management teams to enhance the
value of their portfolio by creating and
strengthening the intangibles such as services,
brands, and partnerships.
BOMA conducted a telecom
and technology survey of tenants and owners/managers.
This survey formed the basis of our newest
resource book, Critical Connections. From
the survey we learned the scope of technology's
impact, what tenants need right now and
how tenant mix impacts what a building
offers in technology and telecom. We had
a great response to the survey, with almost
3,000 buildings and 400 million square
feet of office space represented.
Three-quarters of respondents
said that telecom/tech services have resulted
in major increases in productivity. Nearly
40 percent reported an increase in economic
performance. And nearly 30 percent said
telecom/tech services had a strong impact
on their ability to attract and retain
staff. All of these are obviously some
pretty strong motivators.
Our survey showed that
they most value: e-mail, voice mail, local
area networks, competitive long distance,
a company Web site, and high speed Internet
access (T1 or higher). All of these priorities
undoubtedly rank so highly because they
are widely available and improve tenants'
ability to serve and communicate with their
clients and customers.
The future: e-commerce
E-commerce will also affect construction significantly, especially with
online project management that allows individuals to send data more
easily among construction
team members, many of whom are at different
locations and companies. For example, blueprints,
contractors schedules, supply orders, budgets
and anything related to the logistics of
a construction project can all be made
available on the Web, reducing paper costs,
labor costs and approval process time.
The early results of such project management
programs look promising, with construction
time being reduced by two to six months
- a time savings of 10 to 15 percent. Efficiency
of construction also drastically improves,
creating up to 20-30 percent in construction
savings. The cost savings of even single
components of construction can be huge.
Construction companies, for example, spend
more than $500 million annually on overnight
services for blueprints alone!
All told, Forrester research
shows that e-commerce will account for
$7 billion within the construction industry
by 2001, will double that in 2002 and double
again in 2003. By 2004, it will likely
be near the top five industries in terms
of business to business e-commerce dollar
volume.
While technology has clearly
had a huge impact on the office building
industry, it could be argued that it has
had just as big an impact on suburban warehouse
and industrial buildings, primarily because
fulfillment has become the biggest end-result
of e-commerce. Most notably, e-commerce
has created enormous demand for warehouse
space, as the whole distribution chain
has been compressed and increased in velocity.
Think of it this way: as consumers purchase
items directly from manufacturers, the
retailer's store shelves are not playing
as important a role and are being replaced
with warehouses. Meanwhile, product distributors
will have to change the way their systems
operate: they're more accustomed to moving
products in bulk, on huge pallets. Now,
distributors handle individual shipments
- one book at a time, for example.
Warehouses of the future
must also be near major transportation
modes, such as airports, shipping ports
or railroad stations, rather than in the
suburbs or in rural areas. This becomes
even more important when you learn that
70 percent of all air freight is carried
on passenger flights - not cargo planes
- so warehouses located near passenger
tarmacs are best as next day and "just
in time" deliveries have become a
way of life.
Warehouse design must
also change. In order to be ideally suited
for e-commerce, they should feature on-grade
docking, flat flooring and greater clear-height
ceilings. Cross-docking capabilities are
also important, allowing trucks to load
and unload almost simultaneously.
Demand for data centers is up too. As tenants' technology needs increase,
their space requirements for their hardware and software is increasing
too. And, data centers that can house such sensitive equipment are completely
unique. They need to have high ceilings of up to 14 feet for computer
racks; uninterruptable power sources delivering 50 to 100 watts per square
foot instead of the standard 15 to 20 watts; on-site generators; waterless
fire protection systems; massive climate control systems that can keep
computers cool, filter dust and control humidity; 150-lb/square foot
load bearing floors; and minimal windows.
The need for data storage
is also likely to increase: A report by
Bank of America showed that data storage
is expected to triple by 2001, so companies
are being forced to reduce their physical
storage needs and focus instead on electronic
alternatives, which usually means using
less-expensive industrial and warehouse
buildings to house servers that electronically
store client libraries. Western Union,
in fact, is building an office in Australia
that will not have any file cabinets-
everything will be filed electronically.
Special challenges
presented by tech companies' needs
One of the unique challenges faced by commercial real estate professionals
in the late 90s and 2000 was satisfying the special needs of high tech
tenants. These tenants are a different breed with a whole new set of
challenges - the fastest growing companies in the world today have less
than 100 employees. For example: what happens when, in a few months,
they have hundreds of workers and need 50,000 square feet instead of
5,000 square feet? It does happen, particularly after a successful IPO.
We need strategies to help them lease additional space and expand their
operations as their space requirements change.
Oftentimes, developers
will build in a campus-style location where
land is available for expansion. Functionality
is also taking priority over aesthetics,
with larger floor plates, more parking
and stronger infrastructures for technical
components.
In the warehouse sector
of the industry, these high tech tenants
are breathing new life into older warehouses
as high-tech companies are attracted to
high ceilings, open and flexible workspaces
and interesting atmospheres. Wireless technology
is also making up for older warehouses'
lack of hard wiring. As a result of this
surge in popularity, Class B and C buildings
are seeing huge increases in occupancy
rates since the mid-90s. In Houston, they're
seeing a 15 percent drop in vacancies since
1995; Baltimore, a 12 percent drop; Manhattan,
a 16 percent drop with rents up 50 percent
in some areas; Seattle, a six percent drop;
and San Francisco, a 12 percent drop. The
U.S. aggregate is down nine percent.
Technology even impacts
deal-making
Meanwhile, the way that deals are carried out is being impacted too,
particularly in the context of speed: In working with the high tech sector,
we need to develop leases that don't take months to close, because these
businesses don't have months to spare. Some of our industry's firms are
doing some creative things to help. Equity Office, for example, in collaboration
with its customers, has introduced the FasTrack lease document that is
both shorter in length and written in plain English. It has accelerated
the lease cycle time and reduced the level of professional fees the customer
incurs since protracted lease negotiations can be avoided.
Some landlords are asking
for long-term letters of credit insuring
a large part of the rent will be paid if
the dot-com goes bust, while others are
demanding warrants - or options to buy
stock in the company at pre-initial public
offering prices. In one recent example,
a firm negotiated with a dot-com for a
$1.6 million security deposit - one years'
worth of advanced paid rent - to lease
53,000 square feet. Another cable online
service had to pay a whopping $10 million,
or three years' worth of rent. Other landlords
are demanding less up-front, but refuse
to fund any tenant improvements, leaving
that entirely to the tenant.
It's necessary to help
recoup costs if the dot-com goes out of
business and leaves the building with years
left on its lease - or leaves space so
specific to their business we're forced
to spend huge sums making it leaseable
again.
Today's New Economy, created
by high-techs, has creating a clustering
effect. The top cities for Internet access
and its cluster effect include San Francisco;
Austin, Texas; Seattle; Washington, DC;
Boston; San Jose; San Diego; Minneapolis/St.
Paul; Atlanta; and Dallas.
M-commerce
E-commerce is not the only story today. Be on the
lookout for "m-commerce," or mobile commerce, in the future.
Our growing number of cell phones and PalmPilots are making it easier
to make purchases over the phone. The true market for m-commerce lies
in combining information and purchases.
Cell phones today are
already allowing users to connect to the
Internet - to check e-mail, stock quotes,
weather or flight information. Nokia has
even introduced a phone with infrared so
that you can update information between
your phone and computer. In short, mobile
phones will become portable, mini-PCs with
the additional benefit of knowing that
everyone already knows how to use them.
They will be the key to all commerce. Think
of how big Internet commerce already is,
and then transfer that to the phone. Wireless
Internet is going to be the second generation
of the Internet.
Outside the U.S. though,
the rules change, and that's important
for global firms. Technology has created
a "digital divide" between developed
and developing countries and between the "haves" and "have
nots." Up to a third of children in
the US and Asia do not have access to the
Internet at home or at school. Sub-standard
phone capabilities also exist in many developing
countries. This will definitely affect
the commercial real estate industry in
the future.
To wrap up the impact
of technology on our industry - a discussion
which could fill this page and then some
- according to Moore's Law (Moore was a
founder of Intel) the power of the microprocessor
roughly doubles every 18 months. So, in
2017, the computers on our desks will be
more powerful than the most powerful supercomputers
today. Bank of America expects that market
capitalization of public real estate e-companies
will increase seven-fold by 2002 to over
$100 billion. We can't afford to relax.
We're living in a connected world, with
highly educated and demanding customers.
Time has become one of our scarcest resources,
and we have to be prepared to do business
around the clock. |
