Blog March 25, 2020

Accelerated adoption of technology and potential impacts on real estate

By Brian Zrimsek

Change comes slowly, almost imperceptibly, until it doesn’t.

Now, in the midst of the COVID-19 pandemic, is a moment when substantial change has been thrust upon us, without much warning, without much preparation, and so broadly that it is not hyperbolic to say that it is happening on a global scale.

The changes that many of us are adapting to are driven by social distancing practices, stay-at-home decrees and shelter-in-place orders:

  • Business: only essential business and employees are working in normal locations with others either working from home or out of work.
  • Healthcare: hospitals are eliminating elective procedures and driving more routine visits to tele-medicine.
  • Retail: essential brick-and-mortar retail remains, non-essential retail has closed, and online sales are skyrocketing.
  • Dining: restaurants have shifted to delivery and take-out or have closed.
  • Entertainment: movies whose theatrical runs were cut short were released for streaming while still “in theaters,” and all other live entertainment, including the lights on Broadway, are currently suspended. Some artists have live streamed events to fans.
  • Sports: NASCAR held a virtual race driven by actual drivers while all other live events have been suspended, delayed or cancelled, including the 2020 Summer Olympics.
  • Education: K-12 schools are closed, having moved online along with most colleges and universities.

Be thankful that it is 2020 and that we are able to move many things online so quickly.

The networking technology of the internet was invented in the early 1980s, the World Wide Web construct came in 1990, Netscape in 1994 and Internet Explorer in 1995. In the early 1990s, we were all using dial-up connections at speeds of 9.6 kbps. By 2000, broadband was emerging, at 244 kbps, a 25x increase in bandwidth. By 2010, we had 10 Mbps in bandwidth, a 40x improvement. And today, in 2020, broadband services are commonly available at speeds of 400Mbps (another 40x improvement) with Google Fiber delivering 1000Mbps (100x over 2010).

In 30 years, bandwidth has increased by at least 40,000x and, while noticeable, it was not an event – it was a gradual change over time. And because of this relatively slow change, we can now leverage greater bandwidth to enable the forced and rapid change in our collective behaviors.

The various applications of technology that we are suddenly using were not just invented. Instead, we have been slowly adopting them on our own terms, as our budgets would allow and where markets demanded. Now, suddenly, we are all in the deep end together, figuring it out and making it work, accelerating adoption.

As a result of this forced change, of the sudden movement of our collective cheese, we are getting over the fear of change. We’re having to adapt quickly, and as we do, some of the changes we now make under duress will stay with us and they will impact commercial real estate.

Business and Healthcare

A substantial part of the non-essential workforce has been working from home, full-time, for a week or more, including those in G&A functions, financial services, software and other knowledge worker parts of the economy. No doubt you’ve seen the screen captures of group meetings that look like a digital Brady Bunch reunion. If you think about it, it is quite amazing that so many people have been able to transition to telecommuting so quickly. Because it has gone well, it may have substantial impacts in the future. Considerations include:

  • Will enterprises, bullish on newfound success with telecommuting, begin to reduce needed office space?
  • Will apartment demand change, requiring more dedicated work-from-home spaces and better sound proofing?
  • Will the urban migration of the millennials shift back to the suburbs so they can live with less expense and be closer to family? This would reshape supply and demand for apartments and also impact the broad array of retail, dining and other service establishments.
  • Will enterprises further leverage digital collaboration in place of physical meetings and conferences, taking back travel time to be more productive? Clearly, the hospitality and travel sectors would feel continued impact.
  • Will our healthcare “supply chain” be reworked, changing the location and focus of facilities and requiring re-working of facilities?

As an aside, a reduction in people commuting will have a direct and positive impact on the environment, will drive demand for oil lower, resulting in better quality of life by transitioning the daily commute into more home time.

Retail, Dining, Entertainment and Sports

Since Amazon was founded in 1994, there has been great upheaval in retail. Big box retailers have had to adapt or die. Stalwarts, like Sears and K-Mart, cling to life. As retailers have changed, so have the operators of retail centers and malls. There has been a concerted shift away from simply shops and a food court (the quintessential 80’s mall) to a mix of goods and services inclusive of entertainment and a wide array of dining venues.

The diversification of retail was the right move for owners and operators to evolve. Unfortunately, there are few sectors immune from the current state of things, and retail, dining and entertainment are greatly impacted.

Live entertainment and sporting events are a critical cultural component globally, and many retailers, especially restaurants and bars, are in close proximity to theaters, stadiums, arenas and other facilities.

What might their future hold:

  • Will “stay at home” directives lead to more home cooking, and a reduction in overall dining out volume? Also, does this spell an end for Blue Apron and other meal prep services? Will apartments need more well-equipped kitchens to differentiate?
  • Will drive through and carry out become a new habit? Will some restaurants move to take out or delivery only, limiting their space requirements to only kitchens and pick-up windows? Will landlords scramble to better enable drive through and pick-up for their tenants and customers?
  • Will live streaming of events, potentially in a pay-per-view format, find a place in entertainment, leaving venues more vacant and decreasing event venue traffic?
  • Will production companies increase simultaneous releases of feature films for streaming and in theaters? Will theaters have to do more than provide popcorn to differentiate?
  • Will virtual physical fitness devices and classes accelerate their take of market share from traditional gyms and studios?

Education

Another amazingly fast transition has been the shift from classroom-based learning to online learning. The good news is that the generation of children of current school age have been born with a device in their hands. Notionally, they have been training for this their whole life. Plus, as we know, kids are resilient. Even with success, however, it is unlikely that kids don’t go back to school, as parents’ work schedules are reliant on the K-12 infrastructure as a form of childcare in addition to foundational educational advancement.

College students, also sent home to complete the semester, pose a different situation if they find success in remote learning, raising the following questions:

  • Will colleges and universities increase their use of remote learning, especially for foundational classes, keeping control of the curriculum, and their brand, while increasing access at discounted rates?
  • Will college students and parents, faced with increasing costs and mounting debt, seek higher quality/lower cost educational alternatives, shunning junior colleges, for remote programs from brand name institutions?
  • What kind of impact will a change in delivery of higher education have on student housing operators as well as the other cottage industries that rely on the seasonal influx of population to college campuses?

Technology is the unheralded hero of the moment. We have quickly adapted to a rapid change in our day-to-day life and we are dependent on digital connectivity to maintain a sense of personal engagement and productivity. What is yet to be seen is the degree to which our new behaviors will remain after things return to a recognizably new normal, and how that new normal will drive change in real estate.

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