Posted on October 20, 2023
How The Rise of AI Is Shaping Commercial Real Estate Markets
It’s no secret that Generative AI use has exploded in 2023. Once the stuff of fiction, the technology is now everywhere, with a third of organization leaders saying they now regularly use AI tools, according to a recent survey.
There’s no denying the impact that AI is having on our daily lives. So, how will AI change commercial real estate and commercial appraisal? LPA Senior Associate Researcher Andrew Burns and Research Associate Ashley Travis weigh in on what’s happening and what it means for you.
AI is Already Having a Direct Impact on the Data Center and Industrial Markets
Data centers have been a growing CRE asset class over the past several years as businesses expanded cloud services, consumers embraced streaming content, smartphone use became universal, and social media replaced traditional media as a primary source of information. The switch to remote education and hybrid work during the pandemic further fueled the demand for data processing and storage.
“As AI becomes more popular and more in demand,” says Andrew, “the need for more data centers, and additional industrial warehouses, is going to increase. AI uses up so much more energy and power than normal software that current data centers are running out of power, and room, to keep up with demand. Companies are either going to spend money to build more data centers or lease industrial warehouses, but either way, the data center and industrial markets are going to benefit.”
The computing power needed to meet today’s demands require state-of-the-art facilities with advanced HVAC systems, abundant, reliable power supplies, and strong security. Maintaining and updating an in-house data center can be cost-prohibitive for many businesses, creating a need for data centers to provide space, power, cooling systems, and physical security. This demand has resulted in a strong market for data center real estate with features that vary based on data center type.
The Impact of AI in CRE will be Felt in Both Expected and Unexpected Locations
Data center capacity, measured in megawatts, is not growing fast enough to meet demand, which in turn is pushing up lease costs. CBRE reports that data center customers in Northern Virginia have seen a nearly 8 percent rate increase over the past year, while Silicon Valley rates are up 43 percent over the same period. And demand continues to rise despite the inflated prices, opening new opportunities for CRE investors.
JLL Research estimates that the real estate footprint of AI companies will reach 1.6 million square meters by the end of 2023. Major metro areas with established tech markets are seeing the most data center development, with the most growth occurring in the Washington D.C./Northern Virginia region, Silicon Valley, and Dallas/Fort Worth.
According to Ashley, “It seems as though the cities with the biggest tech imprints are benefiting significantly more than the rest of the cities. This is due to the existing technological infrastructure in place, including established tech companies and research universities. Being able to tap into the research and data that these colleges and companies provide gives certain cities a leg up on the rest.”
Developers must, however, also consider the cost of land when scouting a site. Tier 1 cities are experiencing a considerable rise in land prices, pushing developers to the suburbs and rural areas. For example, over the next 20 years, Amazon plans to invest $35 billion to expand its data center business in Virginia’s northern suburbs. As Ashley notes, “Areas with large plots of land available have the potential to benefit from the AI boom. Vacant office buildings could also potentially be converted into data centers.”
Greater Demand May Mean Higher Construction Costs and Property Values
While the pandemic-related surge in construction costs has abated, supply chain issues and labor shortages continue to affect building costs. Datacenter structures may resemble ordinary warehouses, but the vast amount of energy they require (nearly 2 percent of the nation’s electricity use, according to the U.S. Department of Energy) demands that centers be equipped with costly energy-efficient hardware and state-of-the-art HVAC systems. Additionally, the growing demand for data processing and storage facilities is inflating land prices in areas best suited for data center development.
AI is also Creating Efficiencies in CRE
Even as prices rise, CRE owners and management companies may be able to tap the power of AI to streamline costs.
“Based on my experience,” says Andrew, “AI has made construction less expensive. This is due to AI being able to optimize the allocation of labor and materials, quality control the work, and overall make things more efficient. AI has become and will continue to be an integral part of the construction as it lowers costs, enhances site safety and maintenance, and increases overall efficiency.”
And as with robotics in the automotive industry and autonomous checkout systems in retail, AI has the potential to reduce labor costs. Technology such as AI can free employees to do the work that only humans can do — innovate, create, and make connections with customers and clients.
“AI can help employees do their job more efficiently and be a great complement to their success,” says Ashley, “or it can potentially make employees obsolete. Overall, it depends on how each company will use AI in the workplace, either to help their employees or work closer to automating their company.”
Andrew sees the potential impact as well. “Companies need to start learning how to best utilize AI or else they risk being left behind by their competitors. AI in the CRE marketplace can be a game changer for certain companies, depending on usage, that would help streamline analytics and increase efficiency. However, clients still want the human touch, so there would need to be a balance of human interaction and AI usage.”
Artificial Intelligence is no longer just an unsettling concept found in science fiction. It has gone mainstream. It isn’t an enemy to be feared, but it is going to have an ever-increasing part in shaping the world of commercial real estate with impacts on commercial appraisals. Those who embrace the changes AI is fostering will find new opportunities open to them as a result.
The team of experts at LPA can help you understand these opportunities and provide the intelligence you need to make informed decisions about your property. Contact us today to learn more about the impact of AI on commercial real estate and for all your commercial real estate valuation needs