In the previous edition we delved into macro-economic trends that will reshape the commercial real estate industry in ways we have never seen before. I touched on the ongoing banking crisis, debt markets, behavioral shifts, negative population growth, artificial intelligence, increasing cost of doing business and unique strategies worth considering. In this edition, I am introducing a concept known as the Exponential Age.
We are entering the Exponential Age, which is the next notable era in human history. It is succeeding the most recent era we know as the Information Age, which succeeded the Industrial Revolution. The Exponential Age will be a period in which technological progress, particularly in the areas of artificial intelligence, biotechnology, blockchain, renewable energy and automation is advancing at an unprecedented rate never before seen in human history. During this era, innovations are not progressing linearly but exponentially, with each breakthrough leading to even more significant developments. In era’s past, these types of changes have been integrated into society over multiple generations. The accelerating technological change in the Exponential Age will be so rapid that it disrupts industries and reshapes economies in a matter of years, rather than decades and like it or not we all get to experience it firsthand.
Consider this simple example—If you take 30 linear steps, you end up on the other side of the room. But, if you take 30 exponential steps you will have traveled far enough to circumnavigate the globe 25 times! I love this example because it illustrates just how powerful and unintuitive exponential growth can be.
The implications to the economy, business, investments, and society are nothing short of profound. The potential for job displacement due to automation, shifts in economic power, ethical considerations surrounding technology and the need for rapid adaptation and learning are just a few that come to mind.
Critics will say policymakers and regulatory actions will slow or even stop these changes in its tracks. This strategy has been successful in the past and perhaps they can slow the progress to some extent in the short-term but over the long-term it will prove to be a futile exercise for two reasons. First, software and entrepreneurship move at a much faster pace than policymakers. By the time a piece of legislation makes it through the circus that is Washington, DC it will likely be irrelevant and outdated. Second, this is a global phenomenon so it would behoove Congress to take a thoughtful and reasonable approach to policy because overly burdensome regulation (or “regulation by enforcement” that we are witnessing today) will only drive innovation to more friendly jurisdictions and ultimately, put the American people at a competitive disadvantage. Innovation and entrepreneurship are on par with reserve currency status as America’s greatest advantage.
As we embark further into the Exponential Age, traditional industries and business models will face significant disruption, while new industries and opportunities emerge. I’m already seeing this firsthand. Established businesses, once considered prime acquisition targets, are watching profit margins deteriorate with the rising costs of everything while start-up’s utilizing the latest technologies keep overhead low and can adjust their strategies on demand to absorb changes in the marketplace. They have caught up to the incumbents in rapid fashion and will surpass them in short order.
Commercial real estate will not be spared in this transition. From what I can see at this moment, implications to CRE assets will revolve around how spaces are used, the types of properties that are in demand and how they are valued. If you are considering a divestiture in the near-term, say 1-3 years, you’re likely waiting for interest rates to come down, lending to rebound and the market to find some level of stability. Academics refer to this as recency bias. I struggle to see a scenario in which those stars realign, which leads me to believe most assets were worth more yesterday than today and more today than tomorrow. Conducting a comprehensive assessment on your entire portfolio and divesting from certain assets sooner than later, even if that means taking a haircut, may prove to be a wise decision come 2026 and beyond. Flexibility is a reoccurring theme in this market environment and having access to liquidity so you can take advantage of opportunities is part of that strategy.
If you plan to hold your real estate assets for the medium & long-term, what do you do? The short answer: Invest in your assets! Deferred maintenance should be addressed immediately. This is non-negotiable. Once that is completed, your focus should be retrofitting the asset for the Exponential Age. Applications will vary by property-type but ask yourself, “What upgrades will be relevant in an increasingly digital world?” Here are four I have come up with thus far:
Flexibility is critical. Real estate designed and built to serve multiple purposes can better withstand market fluctuations and changing tenant needs. For example, office spaces that can easily be reconfigured for different team sizes or functions are more resilient and will attract a broader audience.
Energy efficient buildings will be a triple threat. 1: They are cost-effective, saving on utility and maintenance while also commanding higher rents and lower vacancies. 2: As regulations around carbon emissions go into effect, energy-efficient properties will ensure compliance and avoid future costs or penalties. 3: The asset will experience greater demand from both tenants and investors.
Automation is all about efficiency. It reduces operational costs by streamlining property management tasks, enhances the user experience and provides real-time data that facilitates better decision-making.
Technology is essential. Properties with superior connectivity and back-up mechanisms are no longer optional. Integrating PropTech solutions such as IoT devices for monitoring building systems and enhancing management, leasing and tenant services will offer a competitive advantage.
It is not lost on me that these are not small capital expenditures and require a significant upfront cost. As you consider various solutions your research should also include what types of tax credits, financing and incentives are available. I can tell you from my own research there are plenty of options and it’s only growing. Lastly, take advantage of the depreciation rules in the tax code and consider doing a cost segregation study.
As we stand on the cusp of the Exponential Age, this is not a time for half-measures or tepid steps. Don’t forget—the old rules do not apply. The decisions we make today will determine the relevance and resilience of our investments for decades to come. The steps I’ve outlined here are the keystones for future-proofing our properties and businesses in an era that waits for no one. As a trusted advisor and steward of my own real estate, my obligation is clear: to anticipate change, embrace the opportunities and inform as many people as I possibly can so we can all shape, leverage and participate in the incredible future that lies ahead of us.