The Impact of the Sharing Economy on Commercial Real Estate
WRITTEN BY GREG PEACOCK
The growth of the sharing economy began with new platforms, such as Uber and Airbnb, allowing communities to lend and borrow underutilized assets for a fee. The global sharing economy is projected to grow to $335 billion by 2025. This figure is largely driven by Gen Z and millennial demand, as they prioritize experience, convenience, price, and sustainability.
The growth trend increases as members of Gen Z, born from 1995-2010, enter the workforce. Each asset class will be impacted as sharing platforms continue to emerge and disrupt, creating new challenges and opportunities within the commercial real estate industry (CRE).
Residential and Hospitality
Unlike older generations, younger demographics prefer to spend their disposable income on experiences rather than material items. With around 48% of millennials living paycheck to paycheck, many traditional hotel and travel services are out of reach. Platforms such as Airbnb have provided affordable and convenient travel accommodations, while the emergence of co-living spaces has created a new and affordable option for living. As the popularity of these shared units increase, many developers and landlords are investing in properties for the purpose of short-term or temporary rentals (for example, Niido powered by AirBnb).
Currently, there are over 21,000 short term rental properties in the GTA alone. These investments within the residential market are likely to increase the competition for residential property and consequently raise the cost of home ownership. As home ownership levels decrease, many lenders in the industry will be forced to adapt as mortgage demand changes. Mortgage distribution may shift from home-owners to companies that are looking to make investments in properties as the popularity of short-term rentals increase. The change is also driven by the amount of debt held by millennials, making it difficult for many to afford buying homes.
With the growing popularity of ride-sharing services, there is concern amongst many in the industry that the need for parking lots and garages will decline, thereby impacting the valuations of residential and office buildings which rely on parking revenue. Although such concerns are understandable, the data to date does not indicate that car ownership in Canada is on the decline and consequently such concerns are likely overstated.
The trend growth for vehicle ownership in Canada remains relatively constant as the growth rate has only modestly declined from 2.33% between 2000-2009 to 2.09% between 2010-2019. Although ride-sharing has made vehicle ownership less desirable for certain demographics, the income producing opportunity has made it much more affordable for others, therefore keeping car ownership levels at consistent levels. The premature speculation surrounding the decline in vehicle ownership may create purchasing opportunities for assets with parking spaces as many are likely to undervalue such parking without the right data supporting these assumptions.
As more sharing platforms emerge, BCG suggests that the future of real estate will be ‘everything as a service’, which poses a threat for how traditional transactions are completed. For example, Haus is a new service that allows for full transparency in bidding processes. Typically, communication that is required for residential transactions are made through agents, however, Haus has allowed users to compete for properties in a transparent manner; raising the likelihood that properties will be priced and sold more efficiently. Many millennials are already struggling financially, and this will reduce the likelihood of finding homes at discounted value.
In the United States, the housing market is experiencing major disruption through iBuyer companies. Opendoor is the largest iBuyer in the industry and recently completed a $4.8B USD merger with special purpose acquisition company (“SPAC”) Social Capital Hedosophia. While business models vary slightly, most iBuyers will make an instant all cash offer within 24 hours when a homeowner chooses to list their home through the platform. The iBuyer will conduct any value added repairs and subsequently sell the property. The iBuyer profits from the fees associated with these transactions along with the capital gains when reselling the property.
In 2019, Opendoor purchased over 10,000 homes and there are clear tailwinds that should anchor more disruption
moving forward. Over the last year, nearly all consumer goods have become available online due to the global pandemic, with the exception of housing which is an enormous industry that is completely fragmented. iBuyers benefit from a scaling advantage in the sense that the more transactions they complete, they broaden their geographic coverage and secure access to cheaper capital, thereby allowing them to make more offers. Additionally, the vast amount of data that they collect on local housing markets allow for more informed decision-making regarding offers, repairs, and pricing. While there are only a few boutique iBuyers in the Canadian market to date, the high concentration of 7.3 million millennials position the Canadian market as a strong candidate for iBuyer growth.
Office
Co-working spaces allow millennials and Gen Z, who are predicted to make up over 75% of the workforce by 2025, the desired flexibility in their work environment. Many smaller companies and start-ups prefer short-term leases as they pose less risk than being locked into a longer-term contract. Prior to the Covid-19 pandemic, the popularity of co-working spaces bolstered the demand for office space as they reduced barriers for smaller companies looking to rent space. As opposed to a traditional multi-month leasing process, a tenant can provide a credit card and start working instantaneously. The pandemic has also provided a learning lesson for many firms that the flexibility offered through shorter-term co-working spaces is deeply valuable and this model will continue to disrupt traditional office space leasing into the future.
Industrial
While traditional shopping involves a physical retail store, show-rooming has become an increasingly common phenomenon whereby people browse in-store and subsequently purchase online to find lower prices. Additionally, people look online for reviews and comments to help mitigate the risk of online purchases. The ‘amazon effect’ has created an expectation amongst consumers for expeditious delivery, which has increased the need for industrial warehouses and last-mile distribution. Last mile delivery refers to the shipment from a warehouse to the final destination (usually a residence). To deal with the high costs associated with last mile delivery, many companies have turned to crowd-source platforms, which find 3rd party operators to deliver packages.
While crowd-sourcing has worked for some businesses, there are still many challenges with this model that present barriers for companies to provide expeditious delivery. For instance, the quality and reliability issues associated with crowd-sourcing create problems for products that are expensive to replace when damaged, lost, or stolen. According to Mckinsey, autonomous technology such as drones, vehicles, and droids provide a much more cost effective and reliable mechanism for last mile delivery and will comprise 80% of last mile delivery by the end of the decade. As the technology improves and becomes more reliable, this will unlock demand for industrial assets as retailers will be more encouraged to provide expeditious delivery through these channels. Consequently, the recent capitalization rate compression in the industrial real estate asset class should persist over the course of the decade.
Retail
Sites such as Ebay, Rent the Runway, and Etsy allow consumers to purchase and sell second-hand goods at a lower price, increasing the accessibility of items while providing a sustainable way to shop. As these services grow in popularity, by 2029 it is predicted that the second-hand clothing market will overtake the fast fashion industry. Although the rise of online shopping platforms may depress retail demand, there is still a high preference amongst consumers for visiting a physical location. It is important for landlords and retailers to create experiences that drive foot traffic to physical locations as consumers will purchase online if a store is closed or unavailable.
Both the desire for in-store experiences and the rise of e-commerce will likely increase retailer demand for pop-up store locations, such as Yorkdale Mall’s CONCEPT space. In the UK, ‘AppearHere’ is a platform for retail pop-up spaces, which has been used by influential brands such as Chanel, Apple, and Nike. A deal can be made between the landlord and retailer in as little as three days, creating short-term leases that are typically higher in rent. For landlords, pop-up spaces allow for new tenants that can drive more foot traffic to retail locations, however, pose a vacancy risk through tenant turnover.
Looking Forward
The rise of the sharing economy has been strong, yet the long-term impacts of the global pandemic are still unraveling. Many sharing services must update cleaning and sanitation standards in order to build consumer trust. The economic fallout of the pandemic has left younger demographics out of work, increasing the need for low price options that sharing platforms have previously helped to provide. The sharing economy will continue to disrupt and challenge the demand for physical spaces and how they are utilized. Professionals in the industry must be adaptive, flexible, and forward thinking to continue responding to millennial and Gen Z demands.