Real estate forecasting is always a challenge, even when chief economists aren’t warning about slowdowns, price declines, and rate hikes. Commercial real estate forecasts are further affected by the changing workplace landscape.
In today’s commercial and corporate real estate (CRE) environment, hybrid work and new flexible seating arrangements are dramatically complicating office use. This of course makes it harder for CRE professionals and other decision makers to actually forecast what their future space needs will be.
Real estate forecasting is both more important and more difficult than ever, requiring more complex CRE data than ever, too.
From Seattle to Austin, from Phoenix to Boise, Denver to Los Angeles, and anywhere (and everywhere) in between, companies need to layer multiple data sources to be able to prepare for the future. And (just as important) to be able to adjust to rapidly changing circumstances on the ground.
In this article, we explore real estate forecasting. We focus on how companies can future-proof their offices and make better real estate investments for the future of work.
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Real estate forecasting is the complex process of collecting and analyzing real estate analytics. These analytics can help you make (hopefully) better decisions for your real estate portfolio.
In other words, it’s making better predictions for all your real estate holdings, using every tool at your disposal.
Moreover, like Amanda Farrell at PropLogix reminds us, “forecasting is about managing the consequences of being wrong.” Creating a good commercial property real estate forecast is also about ensuring you’re able to stay agile and productive. No matter what actually happens on the ground. Whether that’s an economic downturn, a phase of unexpected rapid growth, or a global pandemic that confines workers to their home offices for an indefinite period of time.
Note that in the housing inventory context, real estate forecasting focuses on fundamentals that matter to homeowners and the Federal Reserve (Fed). That includes home values, demographics, supply chains, foreclosures, home prices, and mortgage rates. All the things that impact housing market predictions and the housing supply for single-family homes. This is true for both home buyers and lenders.
But in the office sector, real estate forecasting is about understanding how factors like office density and space utilization can impact facility planning and strategic space management. Smart facility management professionals (FMs) and decision makers in an organization can use real estate forecasting to make more informed choices for their physical workspaces. This is typically to either save money and/or account for growth, without impacting employee experience.
When this is done in conjunction with headcount planning and/or workforce strategy, it can help to ensure employees always have the right space to be most productive.
And when it’s also done with plans to test and pivot as necessary, it can lead to better workplace agility. Even in uncertain times.
Of course, as we’ll explore below, forecasting is incredibly more challenging in a hybrid office. Or in any that relies on any type of flexible work arrangement.
Corporate real estate optimization and forecasting in these scenarios almost always demands advanced workplace analytics. This is, of course, along with a willingness to test, iterate, and actually follow where those analytics lead you.
The workplace is changing, and so corporate real estate management is changing, too. There’s now broad consensus that the future of work is going to be a lot more hybrid, flexible, and dynamic than in even the recent past.
To keep pace with these new headwinds, most companies now need long-term hybrid real estate strategies and initiatives that will allow them to use space to their advantage. Even when hybrid employees lead to occupancy rates that are widely in flux.
Ultimately, the goal with CRE forecasting is to be able to rightsize your portfolio when and how it makes sense to do so.
Paying for more space than you need is wasteful, of course. But having space shortages and not having enough space for workers comes with big challenges. And potentially very negative consequences, too.
That’s why when OfficeSpace client Peloton was in a phase of hypergrowth (quickly growing from 4,000 to 7,000 employees), they turned to forecasting tools to make major decisions across their global portfolio.
“Portfolio reports within OfficeSpace helped us during hypergrowth because we were able to see each department’s space needs in comparison to lease costs,” says Director of Workplace Operations Daniel Santiago, who spearheaded Peloton’s hybrid office strategies. “We had all these different teams that were growing their headcounts so quickly. OfficeSpace empowered us to look at usage trends and determine what made the most sense in terms of space allocation. From there, we were able to confidently procure a lot of those different spaces for our teams.”
In fact, rightsizing in a hybrid office is just as likely to be about introducing flexible new work environment types than it is to be about cutting square feet to improve cash flow. For example, agile working, activity based working, and working neighborhoods can all create a more cost-effective and useful office space. This is without sacrificing employee engagement or overpaying for square footage.
While the pandemic introduced us to the many benefits of working remotely, it also highlighted how important face-to-face time is for collaboration and culture. Recent research highlights what we already knew intuitively: idea-generation is best accomplished face-to-face.
That said, take the current competitive job market. Companies are grappling with how to use flexible working options to create a more employee centric culture. Many are reluctant to mandate that employees come into the office on set days.
Instead, many are trying to create more and better collaboration spaces and other incentives. This comes attached with the goal of trying to get employees to willingly choose to come into the workplace.
Like Al Brooks, Head of JP Morgan Chase Commercial Real Estate, notes, “in some cases, the right location with the right amenities—think optimizing floorplans for collaboration, offering private outdoor space and adding onsite services such as childcare and catering—may bring employees back to the office.”
Namely, companies need to know how and where to rejig the office to boost collaboration. What meeting room setup styles are most popular? What incentives actually bring people in, and to what locations?
“We know that our clients want to invest in the things that people actually need when they’re coming into the office,” says Kathleen Williams, Senior Product Manager at OfficeSpace. “For example, if you have product engineering folks using the office, you might configure your office differently. Or have different amenities available than if it’s mostly salespeople coming in.”
Being able to include these proper investments in your real estate forecast will require deeper insights into how to outfit the office.
“Companies need to be able to use their data to answer questions like who specifically is using the office, when, and in what types of seats” says Williams.
CRE companies should see the desire to work remotely as a long-term talent trend.Jeffrey J. Smith et. al., Deloitte
CRE companies should see the desire to work remotely as a long-term talent trend.
A final trend in CRE forecasting is the pivot towards new and better hybrid workplace technologies. In short, companies that focus on net-new intelligence captured by innovative technology will be well positioned to embrace new opportunities in the commercial real estate industry.
According to a recent Deloitte survey, 56% of CRE professionals found the pandemic ‘exposed’ shortcoming with their digital capabilities. This caused many to examine how well their digital workplace solutions actually support their short-term and long-term needs.
To counter this, 53% now have a roadmap for their technology and what they’re hoping to achieve with it.
For many, this has meant turning to cloud-based lease management systems and portfolio management in general. They may also turn to technologies to create smart buildings: IoT. This increases reliance on data from occupancy sensors, employee badge data, and the like.
Ideally, these systems will be part of overarching space management software. It should also provide workplace reports and analytics about real-time office use.
Clearly, companies that don’t develop a plan for their real estate do so at their own peril. But only a third or fewer of commercial real estate leaders report their firm is prioritizing workplace redesigns. This is incredibly short-sighted. Designing the right spaces can have a dramatic impact on branding and workplace experience efforts alike. And therefore on talent retention and attraction efforts, too. And of course, that’s not to mention the risks of overpaying rent or underserving employees.
Meanwhile, there’s rising uncertainty in the commercial real estate market. This may be leading to what some are concerned will be an ‘office real estate apocalypse’ driven by declining office values.
Plus, as both internal and external factors impact the affordability of office space, there are also costs of not improving the office or adopting new technology in the workplace.
Namely, especially in the last year or two, companies have come to see the value that workplace wellbeing and employee empowerment now need to be considered when planning any workplace transformation.
Plus, promoting health and wellness can and should look different for different companies. Each determines what works best for their unique employees and workplace strategies.
All of this points to the biggest trend in the corporate real estate market: the need to right-size your portfolio with data-backed real estate forecasting.
Simply adopting a hybrid work model alone is no longer enough to create the right working conditions for dynamic teams . Today, companies also need to take into account the following three factors to create an effective commercial real estate forecast.
What does occupancy mean in a hybrid office? There’s no one answer. This is because employees (i.e.: occupiers) are using the office differently—and more dynamically—than in the days of the traditional office. And how employees use the office will vary from industry to industry, from company to company, and even from department to department.
Depending on their hybrid schedule, many offices will have peak months, days, or even hours. And there also may be other times the office is almost empty. FMs and other space planners therefore need to understand fluctuating space utilization rates so that they can plan around them.
“The dimensions of how people are using the office have changed dramatically,” says Williams. “And without advanced workplace analytics tools, people won’t have a good idea of how to see what’s actually happening in their workplace, which is where data analytics comes in.”
Beyond introducing new flex room ideas or optimizing new flexible seating options (like the aforementioned agile and activity-based working), CRE professionals will need to understand the WHY of office use. Why are people coming in? And why are they not? Why are certain types of workspaces more popular than others? What types of teams gravitate to what type of facilities?
To get at this ‘why,’ they’ll need to layer multiple data sets (including but certainly not limited to employee surveys), to create a fuller picture of office needs.
“The more dynamic your workplace is, the greater the need for analytics and real estate forecasting.”Kathleen Williams, Senior Product Manager at OfficeSpace.
“The more dynamic your workplace is, the greater the need for analytics and real estate forecasting.”
Collecting data is relatively simple; companies have been collecting it since the dawn of the information age.
But actually using data to make smarter decisions is much more challenging, demanding robust data analysis that layers multiple data sources in an intelligent way. Data silos are no longer workable for the modern office.
Specifically, CRE professionals should now collect and synthesize data from as wide a variety of sources as possible, including:
“My advice to companies is that you can’t rely on just one source of data,” says Williams. “Unstructured data won’t cut it anymore. You need to bring your large datasets together to truly solve business problems.
Finally (and as always), CRE professionals will need to take into account real estate trends writ large when making their commercial real estate forecast. Thanks to this pivot to remote working, commercial real estate may be facing what Forbes’ Richard McGahey calls “an increasingly dire situation,” with office values dropping while delinquency rises.
Notably, according to the National Association of Realtors® (NAR), office vacancy rates are on the rise in many cities. This is because of the rise in remote work. It went from 6% in San Francisco pre-pandemic to now more than 15%, for example. In fact, researchers now predict that “remote work is likely to persist and result in long-run office valuations that are 39.18% below pre-pandemic levels.”
And according to Deloitte’s 2023 commercial real estate outlook, most chief financial officers of major commercial real estate owners and investors think that issues like high inflation, workforce management, cyber risk, and climate-regulated regulatory action will impact revenue in the next year. Most also don’t believe the industry is prepared to respond to some of these issues.
That said, it’s not all doom, gloom, and volatility. According to the J.P. Morgan 2023 commercial real estate outlook, there are still ‘bright spots’ ahead, especially for industrial properties.
This conflicting data is a good reminder that commercial real estate forecasting isn’t like using a crystal ball. Unpredicted events will invariably pop up. So instead of trying to predict the future, real estate forecasts are about preparing for it. And the more historical and real-time data you have at your disposal, the easier this will be.
There is really only one way to reliably forecast real estate for office use. Layer robust data from a wide variety of sources, including data from your own internal testing.
The most successful workplace teams are those in companies that break down data silos and are willing to use their data to explore exciting new space configurations.
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