When AI, Real Estate Meet

By Scott Baltic, Contributing Editor

Amy Erixon, principal & managing director, Investments, Avison Young

The increasing presence of computers, robotics and related technologies in the workplace is causing major changes in how work gets done, and those changes are placing new demands on the spaces where work is housed, according to a new white paper from Avison Young.

Titled “Architecture of the Fourth Industrial Revolution: Distributed Networks and Artificial Intelligence,” the report was written by Amy Erixon, principal & managing director, Investments.

A common feature of numerous expanding technologies, including open-source platforms, e-commerce, big data, artificial intelligence and cyber-physical systems (think autonomous vehicles), the report notes, is that “they redistribute work—inputs and outputs—creating the potential for disruption and opportunity for real estate providers.” These technologies are so compelling that a building’s connectivity could, in many cases, become even more important than its location.

As people and computers (even robots) increasingly work side by side, changes in workplace culture or a building’s functionality and engineering requirements are likely. The report predicts that “sociologists and systems engineers will be important partners for real estate professionals….”

And tech disruption isn’t limited to tech companies. Traditional companies, too, “report that their real estate needs are evolving …. Physical space must provide digital connectivity to their global enterprise, layout flexibility to accommodate ever-evolving arrangements for individual and group work and continuous training environments while meeting security concerns….”

Data center demand continues to surge. Microsoft, the world’s second-largest operator of data center and cloud computing space (after Amazon), leased 125 MW of space in 2016, more than all of the space that was built and planned in Canada that year.

In part to offset the costs of technology investments, major North American banks are pursuing sale/leasebacks for their branch operations. On the other end of the scale, new construction of high-performance downtown assets for the financial service industry is higher than it has been for three decades. In the years ahead, the CRE industry “will likely see increased use of technology and, accordingly, increased power, cooling, connectivity and security requirements” in such buildings.

Retail sector both stalls and grows

E-commerce is far from peaking, the report says, but rather is taking a disproportionate percentage of growth in annual retail sales. According to the U.S. Census, e-commerce currently represents 8.5 percent of total sales of goods, or an estimated $394.9 billion in 2016, a 15.1 percent increase from 2015.

The expansion of e-commerce has fueled growth in distribution space requirements, in both large consolidation facilities and last-mile fulfillment centers.

Meanwhile, of course, big-box retail outlets typically are downsizing and increasingly functioning more as showrooms. Department stores, after years of aggressive consolidations, are also reducing their total footprint through store closures and the construction of smaller stores.

The report points to examples of new hybrid store setups, such as e-commerce fulfillment centers in traditional office buildings (Nordstrom in downtown Seattle) and co-location of company offices, e-fulfillment and showrooms in a single location (REI, also in downtown Seattle).

A revolution in transportation

Converging trends in personal transportation “could have significant impacts on real estate locations and configurations.” First, the increase in ride-sharing and ride-hailing options corresponds to a significant reduction in the need for parking spaces in major cities and rising tolerance for distance commuting.

Second, electric vehicles’ rapidly improving performance and falling cost will continue, but will require a different refueling infrastructure. Because electricity is even more broadly distributed than gasoline, refueling stations are likely to pop up everywhere: at work, shopping malls, hospitals and libraries, in addition to home.

The bottom line for all of these trends, the report emphasizes, is that “dynamic environments create outsized opportunities for experimentation, innovation, profit or loss.”