In its 2019 Commercial Real Estate Outlook, the Deloitte Center for Financial Services surveyed 500 global institutional investors to learn the main factors that are influencing CRE investment decisions around the world. The five strategic CRE areas researched by Deloitte were:
- Capital allocations,
- Technology use,
- Cyber risk management,
- CRE talent,
- Proptech.
More than 97% of the institutional investors surveyed are resolved to increase their capital commitment to the CRE industry over the next 18 months. Here are the key facts and findings of this year’s outlook report, along with recommendations on how CRE professionals can take action to meet these changing investor preferences.
#1 Global Capital Flows
Of the 500 global institutional investors surveyed, 97% plan to increase their capital commitment to commercial real estate over the next year and a half. Portfolios will be diversified with more investment in newer and emerging business models and thematic investments.
More than 50% will invest or increase their existing investments in property with flexible leases, and over 40% in property with flexible spaces. This change in capital allocation is driven by the realization that investments must be tied to the changing nature of work and tenant preferences.
Key findings for global capital investment
Other key findings of how global capital flows into CRE investments will change include:
- Mixed-use and non-traditional property types will see increased capital investments;
- Data centers, health care, and senior housing are the most preferred non-traditional assets;
- The top six CRE markets favored by global investors are the U.S., Hong Kong, China, Canada, Singapore, and Japan.
How CRE firms can attract more investment capital
To become more agile in attracting institutional capital, CRE firms should:
- Rebalance property portfolios to more closely match the objectives of global CRE investors,
- Increase tenant centricity by reimaging the tenant experience and integrating proptech and other technology throughout the tenant lifecycle,
- Diversify the investor base by providing a growth strategy for the generalist investor and by expanding outside of core markets.
#2 Technology
More than 80% of the global investors surveyed expect commercial real estate firms to upgrade their digital strategy and infrastructure by prioritizing the use of predictive analytics and business intelligence. In addition, more than 25% of investors believe CRE companies should prioritize their use of IoT technology in designing and redesigning buildings.
Key technology findings
Other key findings on how investors expectations for CRE technology include:
- Retail is the top asset class for IoT design technology,
- IoT data, social media data, and geospatial information are the top three alternative data sources for CRE investment decisions,
- The top five technology tools investors want CRE companies to use to make buildings future-ready are: predictive analysis, business intelligence, social media, Internet of Things, and robotics and cognitive automation.
How CRE companies can be more agile with technology
CRE firms should embrace technological innovations to meet investor expectations by:
- Having an enterprise-wide digital strategy,
- Developing a robust and agile digital core,
- Enhancing data-gathering and analytics capabilities.
#3 Cyber Risk Management
Global investors expect CRE companies to stop reacting and start being more proactive with cyber risk management. Key investor concerns with cybersecurity breaches at CRE firms are damage to reputation, financial theft and fraud, and theft of personally identifiable information (PII).
Key findings for cyber risk management
As technology advances, business becomes more complex. Key cyber risk management concerns from investors are:
- Geographic market risk, tenant risk, including industry concentration, and financing/interest rate risk are the top three risks that investors say they face when making CRE investment decisions.
- Only 25% of global investors say they are very satisfied with their CRE companies’ preparedness against cyber attacks
- The top five cybersecurity challenges CRE companies face are: rising complexity created by rapid IoT changes, lack of detailed response by CRE management, ineffective security solutions, poor understanding of cybersecurity and risks, and the shortage of skilled cyber professionals.
How CRE firms can better manage cyber risks
Global institutional investors say CRE firms can do a better job of managing cybersecurity and risks by:
- Taking ownership of risk governance and oversight,
- Conducting cyber risk assessments and using technology to strengthen sensing capability,
- Improving employee awareness of cybersecurity risks.
#4 Talent
Nearly 90% of global investors focused on retail property and about 70% of investors focused on industrial property somewhat or strongly agreed that CRE companies aren’t doing enough to nurture the talent in their firms.
Key findings on commercial real estate talent
Gearing up for a digitalized workforce and work environment are two major expectations that institutional investors have for their CRE firms. Other key findings regarding talent in CRE firms are:
- Nearly 80% of all global investors say CRE companies are not doing enough to bring next-generation talent into their workforce,
- Nearly 80% also say CRE firms aren’t doing enough to re-educate the Baby Boomer talent they now employ,
- Nearly 90% of all investors globally believe that more diversified CRE company boards help generate better investment returns.
How CRE companies can improve their talent
CRE firms aren’t meeting the talent expectations that global investors have. Three ways CRE companies can improve their employment base are:
- Attract next-generation talent by tapping the open talent economy, enriching the employee experience, and being more open to the newer generations’ work-life needs and expectations,
- Redevelop existing internal talent pools with retooling and retraining,
- Diversify senior leadership and executive board membership.
#5 Proptech
Investors are increasingly seeking out opportunities for proptech – property technologies – in all parts of the real estate value chain. Property technology companies such as Open Box, which offers automation services based on a RaaS (robots as a service) model, and Leverton, which provides real estate document abstraction services through AI-powered learning are two examples of proptech firms that are attracting global proptech investment.
Key proptech findings
Nearly 90% of the global investors surveyed for the Deloitte CRE 2019 Outlook believe that proptech will have a moderate to significant influence on the CRE industry. Key proptech findings include:
- Hospitality, multifamily, and mixed-use property will benefit the most from proptech,
- On average, global investors plan to commit 14% of their available CRE capital to proptech,
- Nearly 60% of the survey respondents prefer to invest in or partner with proptech companies by launching or participating in accelerators
How CRE firms can better engage with proptech
The majority of global institutional investors have a preference for proptech. Nearly 33% also say that the degree to which CRE firms engage with proptech will influence their future investment decisions with those firms.
There are two primary ways that commercial real estate companies can become more agile at engaging with proptech:
- Change the mindset to view proptech as an opportunity rather than a threat,
- Operationalize the engagement strategy with proptech.
Summary
The commercial real estate industry continues to be disrupted and redefined by change agents: new competitors with new business models like coworking, extensive use of proptech, and changing tenant and investor expectations such as space as a service.
CRE business models will be increasingly affected by advancements in technology and interconnectedness. Commercial real estate firms are being forced to find ways to realign their businesses to adapt to the changing demands of stakeholders and investors.
The CRE companies that improve organizational fluidity and continuously innovate by running pilot programs with a “fail early, fail fast, learn faster approach” will be the likely winners in the contest to attract capital from global institutional investors.
