A lot of people don’t think Barry Libert knows what he’s talking about. But if he’s right and they’re wrong, the nation’s $3.3 trillion commercial real estate industry is in for a long, grim, downhill slide.
Technology is shrinking the demand for commercial space, according to Libert, an intense 41-year-old management consultant and managing director of Arthur Andersen’s Real Estate Transformation Group. And it’s only just beginning.
As the technology explosion makes physical location increasingly less important for conducting business, Libert said in a recent interview, commercial real estate will lose its appeal as a vehicle for generating wealth and protecting against inflation.
He pointed to the 10-year slump in commercial real estate values that began in 1986 with the government’s phaseout of special tax advantages. Most of the industry sees that slump as a predictable sequel to the 1980s real estate boom, to be followed eventually by another upswing.
Not Libert.
Commercial real estate is never going to regain its previous luster, in his view. Or, as he put it in his sometimes hyperbolic fashion: “Real estate is going away.”
Most real estate professionals think Libert is overstating the case. Sure, technology permits some workers to stay away from the office and keep in touch electronically. And some companies no longer reserve separate space for all their office employees but have them share common space on an as-needed basis. But the extent of “telecommuting” and “hoteling,” as these techniques are known, will remain limited, say skeptics.
Timothy Weinhold, senior vice president at the Leggat McCall/Grubb & Ellis brokerage firm, said most office workers need to be in the office most of the time.
Technology “may nibble around the edges, but I don’t think it will create any huge change in the demand for real estate,” he said.
Demand may not grow as fast as it did in the past, said Spaulding & Slye vice president Roy Hirshland. But that is not to say the need for commercial space will “go away or be significantly decreased.”
Libert and partner William Ribaudo are undeterred. From a nest of swank offices high above South Station, they run an eight-person operation that offers to help real estate companies radically recast the way they do business.
Just because commercial real estate is in for a pounding as a whole, under the Libert scenario, not everyone has to get hit. Nimble players — presumably with Libert’s clients as prime examples — will be able to prosper by maneuvering through the new landscape and taking advantage of less savvy competitors.
Libert acknowledged this viewpoint is still regarded with suspicion in the industry, as reflected in the 3,000 employees Arthur Andersen has doing traditional real estate consulting compared to his tiny group. But as he and Ribaudo crisscross the nation speaking to industry groups and aggressively pursue media coverage, their message is getting out.
“We just got the largest property company in the world to engage us — billions, tens of billions of dollars in assets,” Libert said. The unnamed concern “did a global search to find a company who could answer the question about the impact of technology on real estate, and they found us.”
One Boston real estate professional who thinks Libert may be onto something is Whittier Partners executive vice president Eric Bacon.
“Barry’s always seen around a few more corners than most people,” Bacon said. He thinks the “information revolution” will slow the growth in demand for real estate. But so long as new buildings need to be built “real estate as an investment will continue to be worthwhile,” he said.
A one-time McKinsey & Co. management consultant who also has experience in real estate investment, Libert founded Aequus Partners 2 1/2 years ago to help real estate companies deal with the changes he saw coming. Agreeing to be acquired by Arthur Andersen last March, Libert joined with Ribaudo, a consultant and partner in Andersen’s Boston office.
It makes sense that their business, focused as it is on how corporations are shrinking their need for space, would find a home at Arthur Andersen. The big six accounting firms, including Arthur Andersen, have been at the forefront in testing strategies for reducing their use of office space.
But Libert and Ribaudo think the effect of the technology explosion on corporate space requirements goes far beyond the office. They said shop floor reengineering is helping manufacturers produce more goods in less space. And with retailers getting larger, they can buy in bulk from manufacturers, reducing distributors’ need for warehouse space.
It probably comes as no surprise that the Libert-Ribaudo team sees the same thing happening with retail space. Technology, in the form of on-line services, television and 800 numbers, allows people to shop without leaving home.
As more customers “conveniently purchase in nonphysical venues, retailers will need less store space,” the group explains in a brochure.
Count William Wheaton among the skeptics. Wheaton, director of the Massachusetts Institute of Technology’s Center for Real Estate acknowledged commercial property has lagged other investments for a decade. But he doubted the trend is permanent.
“That’s a cyclical thing,” Wheaton said. “People that looked at the decade of the ’70s up through the early ’80s believed commercial real estate was too good to be true.”
Most people cannot do their jobs without going to work, he said. Instead of reducing the demand for space, technology is changing the nature of that space. Buildings now have to be “smart,” capable of handling large energy and heating loads and sophisticated telecommunications networks.
Wheaton also doubted technology has done much to reduce manufacturers’ space needs and suggested it is actually increasing them in some areas.
“Robots need space too, not just workers,” he said.
Libert cites BayBanks Inc. as a prime example of technology reducing a company’s demand for space. A leader in electronic banking, BayBanks is known for its extensive network of automated teller machines (ATMs). Last month, following the lead of Bank of Boston, it announced plans to let customers pay bills and perform other banking chores using their home computers.
Donald Isaacs, BayBanks vice chairman, said that even though electronic banking has contributed to a reduction in the size of the average BayBanks branch, the addition of 500 ATMs and growth in its overall business means the bank now uses more retail space than it did 20 years ago. And it is still adding branches.
But electronic banking has resulted in BayBanks needing less space than it would otherwise, according to Isaacs. He predicted the bank’s retail space would eventually decline as home banking gains in popularity, along with ATMs.
Libert argues that real estate companies need to act more like other businesses to be successful and reward their shareholders. That means treating tenants like the customers they are and working to serve their needs. It also means moving beyond the scattershot approach of doing individual deals and working instead to develop a corporate strategy that produces more steady and predictable earnings.
The revival of real estate investment trusts as a means of accessing public capital is pushing companies in the right direction, Libert believes.
Even though REIT values have risen only moderately the last couple of years and he sees the REIT structure as having built-in limitations, Libert argues the transition to REITs requires a more systematic approach that will prod managers to improve their businesses.
