Commercial Real Estate Mastery: Episode 34
How Technology Changes Brick-and-Mortar Investing
Who would have ever imagined that a computer could kill off giant office buildings? Or that the friendly Amazon logo could throw big-box retailers into bankruptcy? But that’s the reality of the impact of technology on real estate, and it’s still evolving today. In this Commercial Real Estate Mastery podcast, we’re going to explore how technology shapes real estate and where that trend is heading.
Episode 34: How Technology Changes Brick-and-Mortar Investing Transcript
Which is mightier? Millions of pounds of brick and mortar or a one-pound laptop? Well, the truth is, it's the laptop. This is Frank Rolfe with the Commercial Real Estate Mastery Podcast. We're gonna talk about how technology is changing the future of real estate. And it's doing so in a very, very permanent way. And these are all things that no one would have ever believed possible not that long ago. Back when I got into commercial real estate back in the 1980s, we didn't have the internet, and we didn't have laptop computers. And so all of these things today just seem completely foreign. When I got into commercial real estate, we didn't have cell phones. If you want to call a client, you had to go find a pay phone. It was a whole different world back then. So what in the world is technology doing to brick and mortar real estate? How in the world can a one-pound laptop bring down an empire of stick-built structures?
Well, of course, there are some easy observations of how technology has had such an impact. Obviously, the computer has brought forth remote work. It really got hit with a turbocharger during COVID, of course. And now that many people work remotely, the one thing they don't need is office space. On top of that, with AI, we have the need for fewer workers. Again, what does that do? It means you don't need office space. So across America, office buildings have all become, for the most part, white elephants. In St. Louis, the nearest major city to where I live, downtown office occupancy, unless it's changed recently, is below 50%. There's no way those buildings can ever be profitable. There's no way they can ever get their loans renewed at 50% occupancy. So in that way, technology brought the office industry pretty much to an end. And then, of course, the internet, Amazon, all of those websites, Walmarts, they have brought the end of retail. Because why in the world would you want to get in your car and drive to a store and buy a dehumidifier and load it in the car yourself and drive all the way home? And you just burned $60 in gasoline, and you just burned two hours of your time when I can do the exact same thing on Amazon and have it delivered right to my door. Don't have to lug it around, no gasoline, no time, just a few seconds to go online. And we all shop like that today.
Initially, it was young people. Today, even baby boomers, octogenarians, are all using the internet to buy things. And what do you see as a result? You see lots of vacancy in retail, a lot of shopping centers where there's, in some shopping centers in America, half of all the stores are empty with lights turned off. Even in strip shopping centers, it's not uncommon to see a strip shopping center with five tenants, of which two of the five are gone. So the internet has just ruined retail. And then, of course, things like Zoom have ruined the hotel business. I know people say, "Well, no, wait, I know people who are still going on vacations." That's not where hotels make the money. Hotels make their real money through business conventions, things like that, because they make a lot of their money through concessions of food and drinks. And those business things are where they make the money. When you stay at the hotel, you're not staying in the ballroom, you're not eating in the restaurant, typically if you're a tourist. And the problem is that between Zoom and these other online abilities for people to interface, they don't have to go meet together. Today, instead of renting a ballroom and having a thousand workers go to this ballroom to hear speeches, you can just send out a Zoom invite. Everybody can jump on there. The business saves all the travel cost and, of course, all the travel time, and most importantly, all those hotel charges.
So those are some of the easy observations. But what are some of the harder-to-spot observations out there of technology causing problems for brick and mortar real estate? One is that the technology is now going to cause changes in the job market in a big, big way. And we call this concept the Wired Belt. Just as we have the Rust Belt in America, which literally are often states and regions where there was a lot of steel activity and old-fashioned methods, and that became known as the Rust Belt. That was an expression that went back to the 1970s, 1980s. There's a new expression now called the Wired Belt because there's about 10 million jobs they believe AI is going to eliminate. But of those 10 million jobs, 40% are only in the top 10 locations of the Wired Belt: cities like San Jose, California; Palo Alto, California; Dallas, Texas. These are all at-risk Wired Belt markets in which a lot of the technology jobs that bolstered those areas are going to be lost now to AI. So it boomed, it blimped up with technology jobs, and then it just takes them all away. It just yanks the rug out from under people.
So that's something that technology is going to be creating. It's happening right now that people really just never anticipated. In some ways, the people doing all that programming in some of those places, like San Jose, California, didn't realize they were kind of digging their own grave when they were coding in all of this AI, but that's how it's worked out. Also, AI itself has created a new hot real estate niche. So this is one case in which technology is actually bolstering brick and mortar, and those, of course, are data centers. These data centers are enormous. They're typically 1 million square feet, even larger. They use huge amounts of electricity and huge amounts of water to cool them. And a lot of cities are declaring war on them. Just recently, Kathy Hochul in New York has put a moratorium on building new data centers in the state of New York. It's probably a bit of overkill that she would do that, maybe just trying to grab headlines. But there's no question that people don't really fully understand. They have not unlocked the byproducts of these giant data center facilities, oftentimes bigger than a regional shopping mall. But again, AI created those. So in that way, it's not taking away from real estate; it's actually adding on.
Also, technology is also making some industries even more valuable, perhaps, because there's a whole new market in real estate for those who can get creative and work around these obstacles. There are a lot of people out there who devoted themselves trying to retrofit, for example, office buildings into multifamily. There are people who are trying to find ways to retrofit regional shopping mall vacancy into other uses. At a mall in St. Louis that I go to infrequently, the Nordstrom went out of business. It's being replaced by Dick's Sporting Goods playing fields. They're trying a new product out where they're actually gonna build playing fields inside the Nordstrom store. Probably a soccer field, tennis courts, basketball courts, and they're gonna sell athletic products out of those courts. So you can go in and say, "Hey, you know, I wanna buy that soccer ball. Here, go test it out on the field, see what you think." So anytime you have problems happen in any industry, there are those who suddenly come up with creative solutions. And that's kind of where we're at in many different facets of real estate today is there's a broken playing field. Now, some people will tell you a broken playing field is a wonderful thing. William Kaiser, the steel industrialist, once said that problems are only opportunities in work clothes.
Okay, that makes sense. So if you like to come up with solutions, if you've got a good creative mind, this is a really good time to utilize it. Because a lot of times when we have these things that break apart, who it really impacts are those who already own these things. But people who are not burdened with ownership, who are on the outside looking in, they can often see these creative solutions that others have not and take the ball and run with it. Real estate has always been an arena where creativity has abounded, but in modern times it's accelerated. There was no such thing as Airbnb not that many years ago. Didn't exist. And then some people saw a way to harness technology in a new and creative way to build a whole new real estate asset class. The bottom line to it is that we all wanna be aware of the things that technology is breaking, but we also wanna be thinking about the way we can fill in those gaps, to fill in those holes, to make money from problems created by technology. This is Frank Rolfe with the Commercial Real Estate Mastery Podcast. Hope you enjoyed this. Talk to you again soon.
