City Deep Learning

Can Commercial Real Estate Adapt to the Self-Driving Revolution?

THE SELF-DRIVING REVOLUTION BEGINS

The advent of self-driving vehicles has been well-established, written about, and discussed at this point. It should be obvious to anyone with a pulse that autonomous vehicles are headed toward mainstream adoption. The rate of that adoption is up for debate of course.  The two biggest factors will be the pace of technology improvements and the speed and nature of government regulations enacted. Technology improvements will be critical to establishing trust with the public. Government regulations may be slow in becoming law because this would represent a massive shift in how many things operate in the US and around the globe. This article aims to provide insights into the coming self-driving revolution, and in particular, the most likely areas where office and industrial commercial real estate will feel the effects. We could extrapolate these predictions many years into the future, but I prefer to focus on the more tangible effects we could see in the next 5 years.

Let’s begin with office:

AUTONOMOUS VEHICLES AND THE IMPACT TO OFFICES

The obvious first area of impact for office buildings is parking. Let’s dig deeper into what that may really mean for owners of commercial office buildings and office tenants leasing space. There is momentum today behind the research and development of autonomous vehicles with virtually every major car manufacturer devoting resources to the cause. There are also a number of tech start-ups angling to get into the action, as detailed quite well in this Digital Trends review from CES 2018. It is clear based on the number of large companies invested in the development of this technology that many see the value and opportunities yet to be realized. With so many major players jumping in with significant investment amounts I think it also indicates that government will play ball in regulating the new technology as safety improves.

So in the near-term as self-driving technology undoubtedly improves and become more mainstream, how can we expect it to impact parking at office buildings across the United States? The impact on parking will depend heavily on how the adoption of autonomous vehicles unfolds. Some have speculated that the younger generations lack of enthusiasm for car ownership coupled with self-driving technology will yield a world in which most of our trips are handled through Uber, Lyft and other ride-sharing services. I personally think this level of adoption is decades away from reality. In truth the adoption will be much more gradual than that.

CAN I REDEVELOP MY PARKING GARAGES NOW?

Since the adoption of self-driving technology will be gradual the opportunity for owners to simply demolish and redevelop their parking garages is absolutely overstated. The majority of tenant employees will retain ownership of a private vehicle for the foreseeable future . This means parking ratios will not see a significant decline until the mix of employees is weighted more heavily toward younger generations. However, that does not mean there will not be a huge impact on parking for office building owners in the near term.

Parking today is a key determining factor for many office tenants considering where to lease office space. Accessibility of the parking garage, size and spacing of spots, & overall flow and ease of navigation within the garage are all extremely important to office tenants. It is not uncommon for this single factor to cause a tenant to exclude an office property from their short list of options when evaluating an office relocation.

So how does this relate to the adoption of autonomous vehicles? If office tenants can be dropped off at the front door of their building and the car can park itself, this may alleviate many of the concerns tenants have with the parking facilities. Some buildings with less desirable parking arrangements may actually benefit from autonomous vehicles because tenants may not care as much about those issues in the future. Older properties with outdated garage designs could benefit greatly from this shift. This means in the near-term self-driving vehicles may level the playing field for certain office properties with less desirable parking arrangements.

OPPORTUNITIES FOR URBAN AREAS

There could be opportunities in dense urban areas for office buildings to lease or purchase offsite parking facilities for their tenants. Again, with office tenants being dropped off at the front door, as long as the offsite parking facilities are within a few minutes driving time from the building, this would not be a major concern for tenants. They could, for example, call their vehicle before leaving their desks, and the vehicle could be parked and waiting by the time they exit the elevators into the lobby. For some properties with high land value, this arrangement may make sense in order to allow redevelopment of the on site parking  garages. Over time, if car ownership actually does decrease, it would be very easy to reduce the number of leased spaces for a particular office property at the offsite parking lot. By arranging for offsite parking lot use, some urban office properties may be able to re-purpose or redevelop their onsite parking facilities sooner than their suburban counterparts.

For owners of office buildings it will be extremely important to stay ahead of the technology curve for adoption of autonomous vehicles to ensure parking garages are properly equipped and configured.  The process of tenant drop off cannot work properly if the self-driving vehicle is unable to navigate the parking garage and park itself. Similarly, office buildings will want to consider the flow of tenant employees and guests entering and exiting the building – especially during high volume time periods. Properties which are not configured to handle a high volume of drop-offs and pick-ups may want to evaluate ways to improve accessibility as this technology becomes more mainstream. Building lobbies may become a central waiting area for a larger portion of tenants so amenities and areas to sit and wait will be important attributes to consider.

WHAT ABOUT REVENUE FROM PARKING?

Another concern for office building owners is related to income received from parking charges. I don’t consider this issue of particular importance though. Properties that charge for parking today will still be able to do so when autonomous vehicles are roaming the streets. And again, if car ownership begins to decrease this will occur gradually over time, giving owners ample opportunity to review the trends and make plans for redeveloping or redesigning parking facilities to maintain economic benefits for their properties.

Office tenants may be able to secure offsite parking on their own at a cheaper cost than what their building charges. Again, since the car can be triggered by the employee and meet them at a designated pick-up area, this is entirely feasible.

Another consideration here for office tenants and landlords is that the parking lot is often used as a way to control the number of employees in a given office space. A landlord will use the building’s parking ratio to justify increasing the rentable square footage of a tenant’s space. The ownership might say, “if you need to accommodate 5 additional staff you’ll need to lease another 1,000sf because we are already over-parked here”. In the future, self-driving cars may give more control back to the office tenant. If they can negotiate an offsite parking arrangement those additional 5 employees could use the existing office. No need to increase the office size simply to align with a parking ratio.

LET’S NOT FORGET ABOUT THE TRAFFIC

Anyone that lives in a major metropolitan area can attest to the horrors of rush hour traffic. Some office properties can be greatly affected by the traffic conditions on the streets and highways surrounding them. Office tenants pay attention to traffic patterns, and will actively avoid relocating to a building that could adversely affect the commute of key decision makers or their staff. Autonomous vehicles may have an impact on this situation as well. Self-driving technology, in theory, should improve the flow and efficiency of traffic on congested roadways. Decreased traffic congestion and the ability to utilize commute time for more productive activities will result in less weight being assigned to traffic congestion in the immediate area of an office building. In other words, when tenants are considering where to relocate their businesses, traffic, like parking, may become a less important factor. Just as with parking, this means that in the near-term some less desirable office properties may see an evened playing field as tenants de-prioritize traffic concerns.

Let’s shift focus and consider how this technology may begin to impact industrial commercial real estate.

FREIGHT – THE LIFEBLOOD OF INDUSTRIAL REAL ESTATE

So what about industrial commercial real estate? The first major area of impact is freight – specifically LTL and TL trucking. The shortage of truck drivers is quite concerning – with a total industry population of around 500,000 and an anticipated driver shortage of at least 60,000 by year-end 2018! This issue has increasingly become a key concern for many companies that rely on long haul trucking for movement of products to and from their facilities. It is estimated that more than 70% of all goods are moved using the trucking industry at some point in their journey. The increased demand for truck drivers, coupled with a limited supply, has led to rising freight costs (up at least 6% year over year). Additionally, the implementation of stricter laws governing the number of hours a driver can work each day, and tighter requirements for documenting and tracking those hours are only adding to the problem.

These problems, however, create the perfect environment for technology disruption. Perhaps the first area we will see a significant impact from autonomous vehicles on industrial real estate will be the adoption of long haul trucks. As noted in this Wired magazine article from November 2017, some companies, led by Tesla, Daimler, and Embark are already putting self-driving trucks on the road. The technology needed to make autonomous vehicles work on highways is much less complicated than what will be required to navigate busy city streets in populated areas. Indeed it appears the technology available today in some of the earliest AV products could be sufficient to displace many truck drivers on long haul routes. It will take far longer for AV’s to conquer the “last mile”. But with the adoption of autonomous vehicles on long haul routes, driver shortages will be a thing of the past. Freight costs will plummet, and this will actually serve to lower last mile freight costs. This could yield huge benefits for e-commerce companies and any businesses with a significant portion of their product sales online (think Amazon, Walmart, etc). This prediction will be especially troubling to brick and mortar retailers because it could serve to accelerate their demise. Last mile costs are widely estimated to account for over a quarter of the total supply chain costs for products. If early adoption of autonomous vehicles fuels a steep reduction in labor costs for freight, we could see significant impact to retailers in the next 3-5 years.

LOCATION AND BUILDING DESIGN CHANGES

Another area of impact for industrial commercial real estate will be the location and design of buildings. As self-driving trucks begin to take hold of long-haul routes developers of industrial properties will begin to consider how their location selection process and design of buildings will impact the ability of companies to utilize this new service.

Many industrial properties are positioned in remote areas of cities and often are not as accessible. Land valuation will always play a factor here, but I believe developers will start considering how close to major highways and thoroughfares they can get with new buildings. If a property can be positioned closer to major roadways that can be easily navigated by an autonomous truck, this will be valuable to a future buyer or tenant leasing the building.

Just as location will be important, so too will the design and process flow of the building become a factor. As the technology matures we will begin to understand ways to design distribution and manufacturing facilities to accommodate self-driving vehicles. In the end this may lead to changes in how these buildings are developed.

CONCLUSION

In this article we’ve covered several key ways that self-driving technology will impact office and industrial commercial real estate. As noted above, the timing of adoption of this new technology will be critical in determining how quickly property owners adapt. The driver shortages affecting the industry today will be the single most important factor causing mass-adoption of this technology. it is a safe prediction that we will see long-hauling trucking disrupting first – and in a big way. With time and successful implementation of self-driving trucks we will see the trend spread to personal cars, and that will change everything.