• The near universality of handheld mobile devices that allow “office” work traditionally bound to an immobile desktop computer to be performed anywhere has transformed the traditional rationale for “going to work.”
• The rise of the freelance economy, estimated to grow to 40% of the workforce by 2021, and the demand from this segment for workspaces that foster community, collaboration and flexibility.
• Millennials’ importance in today’s workforce – 63% of whom are as comfortable working from a mobile device as from a desktop.
• The appeal of coworking workspaces, in terms of their cool, organic design aesthetic and the opportunities they create for business owners and their employees or contractors to benefit from proximity to other firms and their talent and business offerings.
• Unlike traditional office space leases of 5 or 10 years in term, coworking occupancy obligations can be as short as 1 month and may allow for rapid growth or retraction of seats and offices. Individuals and companies taking coworking space do not have to invest capital in furniture, space build-out or technology. As demonstrated by WeWork‘s “client savings” presentation, particularly for firms that occupy 3,000 square feet or less, the higher density of coworking occupancy and the fact that tenants do not have to pay for square footage devoted to reception, conference rooms and amenity space like pantries generates occupancy and operational savings. This translates to potential occupancy savings per employee even though coworking space can be substantially more expensive per square foot than regular office space.

• I previously wrote about professional service companies de-emphasizing fixed work spaces in favor of decentralization. This trend will reduce overall demand for traditional leased office space and extends to the sales and client-oriented oriented functions of TAMI firms that otherwise want to focus and consolidate their occupancies in campus settings as Amazon plans to do with its new second headquarters facility.
• Outside of the realm of the top tier Class A office building, where owners often pre-build smaller spaces (less than 10,000 square feet) to appeal to boutique financial tenants like hedge funds and private equity firms, fewer landlords will demise and build small offices spaces because they cannot compete with coworking efficiencies and appeal.
• To compete with the flexibility of coworking space, landlords must offer tenants shorter lease obligations, even though this presents a challenge financially for them to amortize capital investments and transactional costs and incentives over shorter term leases.

Business analysts (and commentators in general) harp on our current environment of disruption, in which entrepreneurs are harnessing unprecedented breakthroughs in technology and ubiquitous connectivity to build alternative means of consumption. Many of these ventures (Airbnb, Uber, Breather, Rover, etc.) are tied to growing consumer acceptance and preference for sharing resources, fueled by the capacity of mobile devices and their addictive impact on our behavior.
In this milieu, it it simplistic to implicate retail’s current challenges, particularly the struggles of department stores, shopping centers and certain fashion brands just to the “disruption” caused by e-commerce and related trends. Clearly, tastes and shopping habits have changed rapidly and dramatically. Discount retailers are performing quite well as are the “fast fashion” category of Zara, Uniqlo and Forever 21. Certain luxury brands’ “brick and mortar” (Gucci, Goyard, Hublot, etc.) are thriving, even as internet sales continue to rise. But department stores with a lackluster, uncurated assortment of brands and merchandise are suffering, just as historically strong fashion brands that failed to update their perennially consistent style (Ralph Lauren, Ann Taylor, MaxMara, etc.) are compelled to close poorly performing stores.

While activist investors are pushing Saks Fifth Avenue’s parent company, Hudson’s Bay, to sell the Fifth Avenue flagship store, so that upper floors might be possibly converted to luxury apartments, the department store is all over the place trying to boost lagging sales. Saks is shifting its traditional make-up floor upstairs, moving leather goods to the ground floor, installing a temporary “wellery” on the 2nd floor with pop-up cross-fit classes, spa services and athleisure displays. Meanwhile, just down the street, Adidas may have hit the mark with its year-old, engaging global flagship. The store is designed to mimic a high school sports stadium interior with professional sports trainers providing free advice, plus a floor dedicated to New York sports teams targeting tourists, who don’t appear to have stopped shopping!

In less than five years, Uber and its competitors transformed the way many of us choose to get around New York City. Likewise, they disrupted the business and leisure traveler’s attachment to rental cars. Now much attention is focused on how driverless cars will inevitably transform urban and suburban life. But whether A.I.-equipped cars become widespread in five years or 20 years, the continued explosion of ride-sharing (with or without drivers) will rapidly reorder the place of the automobile in our lives. What will be the impact of this mobility revolution on how our region’s real estate is valued? What opportunities and challenges does it present?

BMW recognizes that its future is not primarily as a seller of cars but as a ride-sharing company (www.reachnow.com). ReachNow is available in Brooklyn and many European cities. The economic and flexibility rationale for paying for a shared vehicle by the minute, hour, mile or day with no need to park, insure or maintain the car will probably be too strong for all but the most enamored urban car-owning residents, commuters or visitors to withstand. In light of the fact that the average vehicle in the United States is parked 95% of the time, ride-sharing obviously reduces the need for parking and will continue to reduce traffic and congestion.

Ride-sharing and the City
Before the popularization of the automobile, cities like New York didn’t look significantly different. Buildings were not as tall and there was not as much segregation of uses on the street as there is today. I don’t think cities will change physically as personal car use declines.

However, the long-term outlook for Manhattan parking garage owners and operators, who have enjoyed one of the most lucrative businesses in real estate history, is not positive as car sharing displaces car ownership and the demand for parking. Corporately-owned ride sharing vehicles will require storage and servicing centers during lower demand periods, but in all likelihood, these will be located where real estate is not as expensive.

The Red Hook Effect
In New York City, in neighborhoods like Red Hook that are generally inaccessible by public transit, historically residential real estate has been priced to reflect this limitation. But with attractive housing options and amenities like waterfront parks, real estate should appreciate in value at a faster rate than other areas, as ride-sharing overcomes inconvenience.

The Suburbs
The earliest suburbs (like Bronxville, New York) developed as “railroad suburbs” before the popularization of the car. These appealed to residents with professional and commercial ties to the city, but with a preference for and ability to live in a private home that had a train station as well as neighborhood retail and services within walking distance. It was the automobile that helped spawn the post-war explosion of sprawling suburbs in which all activity outside the home is car-dependent. These communities now face the greatest planning and development challenges. For example, a suburban big box shopping mall can devote 75% of its land to parking – most of which may become superfluous as driving habits change.

While urban living has gained popularity among baby boomers and millennials at the expense of the suburbs, I don’t expect ride-sharing to dramatically change individuals’ or families’ preferences for one lifestyle over the other. But our already overstretched railroad infrastructure will be burdened severely as ride-sharing eliminates the expense and annoyance of train station parking. Train ridership from the suburbs into and out of New York City will inevitably increase

Retail Destinations
The current struggles of retail are well-publicized. The growth of ride-sharing may offer an opportunity for some retail to prosper and retail real estate to appreciate. Ride-sharing should make unique retail destinations with an experiential quality more attractive. For example, I foresee growth in customers (and sales) at the Woodbury Premium Outlets, which is unmatched among outlet centers nationally for its inclusion of luxury brands. Woodbury Commons is located 50 miles north of Manhattan, but ride-sharing will make this destination more accessible from throughout the metropolitan area and perhaps more attractive as an alternative to clicking on Gilt.com.

The explosion of data collection from many newer sources, including mobile devices, car sensors, wearables, smart power grids, and drones has not yet fully infiltrated the real estate investment and location decision making process. But technology companies like Brooklyn-based CARTO are starting to usher in change. Founded in 2012 by a team of experts in geospatial development, big data analytics and visualization, CARTO organizes and maps data from multiple sources and allows its software users to access and capitalize on this information. For instance, in London, CARTO developed a live interactive mapping application of London’s residential markets overlaying annual home price changes, population growth, transit connectivity, active and future residential and commercial development and infrastructure projects and other datasets. To be able to visualize integrated data sets is what provides users a way to analyze trends and forecast (and map) growth in property values and other key indicators.

As retailers face the headwinds of internet sales and changing tastes, the ability to target prospective store shoppers with the merchandise they are most likely to purchase becomes critical. Socio-demographic profiling and segmentation of population  by housing, age, income and lifestyle by data aggregators, like Claritas, has been around for decades. But CARTO has taken population segmentation data to the next level in terms of visualization and analysis. The firm worked with the 95-year-old French home improvements retailer, Leroy Merlin to integrate and map live sales information and customer demographic data to not only analyze competitors and where Leroy Merlin’s customers come from, but to continually update on a store-by-store basis exactly the households the chain should send marketing collateral. One can imagine that this mapping database will become the most crucial tool the company uses as its grows its 300 location across France and 12 other countries.

Last month Snapchat’s parent Snap, Inc. issued perhaps the largest and most significant initial public offering of 2017. One of the interesting aspects of this IPO was that Snapchat identified its lack of a corporate headquarters as a risk that could potentially undermine its growth and future revenue. Snapchat’s founders started the company in a Venice beach bungalow and have grown the business in scattered Venice and Marina del Ray locations. These are communities with a very constrained supply of available office space. Management has not articulated any plans to bring Snapchat’s staff together in a headquarters or even consolidate into fewer locations. A diffused workforce presents a challenge to collaboration, creating a consistency of culture and overall productivity, particularly in the innovation-based environments of TAMI (technology, advertising, media and information) companies. I previously wrote about how many TAMI companies like Google and Apple developed comprehensive and expansive workplaces filled with amenities that are intended to engage as well as attract and retain employees and embody the firms’ cultures (see: Time Space Workplace)

In New York City, Snapchat’s one principal office location is sited in the former The New York Times building west of Times Square. Here its growth has been haphazard as well, with new staff filling in virtually every available square foot leaving meeting and collaboration space virtually non-existent. One could argue that Snapchat’s apparent lack of a real estate strategy reflects the exclusion of real estate from overall business strategy. And this is not a common problem endemic only to new or fast growing firms.

Traditionally, the corporate real estate function has not occupied a position of prominence within most companies. As office space is typically the second largest corporate expense after payroll, most firms characterize real estate not as a platform critical to revenue and productivity, but as a cost to be managed and economized (even in growing firms) through measures like consolidation and densification (reducing square footage occupied per employee). The individuals who implement corporate real estate within a company are frequently perceived to be “order takers” and are often isolated from the actual C-Suite-based decision making process.

Truly progressive firms are starting to incorporate real estate within the C Suite, creating Chief Solutions or Chief Innovations Officer positions with principal responsibilities to rationalize a company’s real estate portfolio and integrate work place planning with the company’s overall business strategy.

I was honored to be a panelist at Columbia Business School’s annual Retail & Luxury Conference on February 17th.  Alongside chef and restaurateur Daniel Boulud and other inspiring entrepreneurs, I debated creativity in retail amidst an environment of disruption.  The conference’s keynote speaker, Geatano Sciuto, President of Fendi Americas, presented Fendi’s successful rebranding (and doubling of business) by blending a change in the “content,” new focus on fashion accessories and uber-luxury and change in the “container” (the store). Sciuto highlighted the development of the Palazzo Fendi Rome flagship into a hub of experiences, combining a ready-to wear store, private shopping suite, boutique hotel and Zuma restaurant as well as the dramatic renovation of the Fendi 57th Street New York flagship (See: Commercial Basis: Shopper as Flaneur) to captivate Fendi’s customers with “surprise and delight.”

I discussed how the new retail reality of ultra-pricey high-street store rents often requires brands to test new retail concepts and new markets with a pop-up to permanent strategy and explained why engaging uni-brand and multi-brand concept stores are the new department stores as formulaic shopping experiences continue to decline in popularity.  Finally, I detailed how brands like Adidas and Uniqlo are thinking about entire building occupancy that can convey their identity and values not only to consumers, but also attract and retain the critical creative class of workers they need to thrive.

Photo credit: Columbia Business School Retail & Luxury Goods Club

Dating back to the 19^th century, the famous department stores of New York (Bergdorf Goodman, Bloomingdale’s, Macy’s etc.) were developed and continue to be owned by the retailers themselves. In some cases, as the fortunes and appeal of certain department store brands waned, it was their real estate that actually retained value because of its locational strength.

For example, Vornado’s Steve Roth purchased the depleted Alexander’s retail chain precisely because of the value of its Manhattan location across from Bloomingdale’s and developed it into Bloomberg’s 731 Lexington Avenue mixed-use skyscraper.

After World War II, most new stores were not typically owned by the retailers, but were in space developed and owned by shopping center developers (later reconstituted into mall REITS) and leased to department stores and specialty retailers. For over 50 years most retail development was channeled into suburban shopping centers.

With the resurgence of urban downtowns over the past 20 years, the focus has returned to “main street” retail and particularly to mixed use developments and nonhomogeneous shopping centers, that often combine shopping, dining, office space and apartments. Interestingly, during the 2010-2020 period, New York City is seeing the largest investment in new and redeveloped retail projects in its history. With the exception of the Nordstrom’s tower, these projects are largely outside the upscale tourist-oriented retail/hospitality core (Fifth Avenue, Madison Avene, 57^th Street), that with New York’s tourist boom, has recently seen the largest increases in store rents in history. They follow the post-World War II model of shopping space developed for and leased to retail brands. These range from the redevelopment of South Street Seaport and Brookfield Place to the Shops at Hudson Yards and the Westfield World Trade Center. Each of these shopping centers is geographically proximate, but not necessarily spatially integrated into a much larger mixed-used development. However, with the exception of restaurant and entertainment offerings, these shopping centers are not generally attuned to the consumption habits of those who will live and work in the balance of these developments.

Another model of retail development being pursued by LVMH through its L Real Estate affiliate, which perhaps other global luxury conglomerates would be wise to consider, involves investing in and owning luxury retail-driven urban mixed-use developments in prime shopping/lifestyle neighborhoods where the prospective retail brands (owned by LVMH) generate not only value (and rent) for the investors but in essence become part of the branding of the entire project to attract the highest paying office and residential tenants. This is the basis for L Real estate’s investment in Miami’s Design District (Brand Meets Space) for L Real Estate mixed used retail-center projects in Shanghai, Ginza and Abu Dhabi.