The Platform

Commercial real estate in New York City. (Daniel Foster/Flickr)

The same paradigm shift that hollowed out the commercial sector is now gnawing at the foundations of residential real estate.

2020 marked the advent of a colossal paradigm shift within the real estate industry, a shift that is not merely transient but continues to redefine the sector’s contours. The commercial real estate market has already been buffeted by three formidable tsunamis: the spike in vacancy rates, the inundation by a “deluge of debt,” and the precipitous decline in building valuations and appraisals. These are not fleeting disturbances but permanent, irrevocable transformations that have left an indelible mark on the marketplace.

As we grapple with these changes, a fourth tsunami has emerged, casting its shadow across the entire market and mirroring the upheaval experienced on the commercial front. It’s now evident on the residential landscape. Immunity was once presumed for the residential sphere, but such optimism is untenable, especially as segments of the workforce have anchored themselves in a home-working reality.

The epiphany is just beginning to dawn upon real estate professionals that the commercial sector’s formidable waves of change have not just nudged but have fundamentally altered the residential market’s trajectory. The remote work model is precipitating parallel impacts on both domains of real estate. The reverberations of this seismic shift are profound and far-reaching.

Owners of residential buildings who fail to inject their properties with the requisite technological enhancements, the kind that tenants have grown to rely on, will soon find themselves presiding over edifices with waning occupancy. The neglect will manifest in depreciated property values as marketability plummets. This same paradigm shift that has begun to hollow out the commercial sector is now gnawing at the foundations of residential real estate.

As the remote work option cements itself into the fabric of modern work culture, becoming more pervasive and permanent, residential buildings that lack robust connectivity will fall out of favor compared to those that offer such amenities.

All traditional real estate strategies are being challenged as the workforce bifurcates. Previously, a go-to strategy for many was to do nothing, to weather the storm until the market rebounded or returned to business as usual. Accepting a quarter or even half a year of losses was deemed acceptable, with the expectation of recouping losses once the market recovered and monthly rents and leases surged. Such strategies will not suffice in the current climate.

The workforce has now divided. One faction adheres to the conventional work in the office model, commuting daily to office spaces in urban or suburban locales. This group anticipates a return to the status quo. Conversely, a growing faction has embraced the remote work model, severing the daily commute tether, with no inclination to revert to the old ways.

This paradigm shift has not only reshaped the commercial office building industry since 2020 but is now inundating the residential market with similar dilemmas. Residential property owners must modernize their amenities to maintain robust occupancy rates. Those who disregard this imperative will witness their buildings fall from grace, becoming increasingly technologically obsolete to apartment or condo seekers who demand work-from-home capabilities.

Immediate action is imperative for building owners and property managers who aspire to stay afloat. Clinging to a technologically obsolete building with expectations of leasing as in bygone days is a recipe for failure. As companies increasingly prioritize buildings that support their mission-critical applications with redundant power and broadband, so too do remote workers demand residences that meet their connectivity needs.

Many industry leaders harbor the illusion that governmental intervention will salvage their fortunes as in 2008. However, anticipating a bailout of such magnitude is a fantasy unlikely to materialize.

The future will reveal that wealth assumed secure in physical structures may swiftly diminish as new metrics evaluating a building’s intelligence quotient supplant the old appraisal systems rooted in a bygone era.

The return to the status quo is a mirage in the commercial sector, with a significant portion of the workforce settling into permanent remote work arrangements, signaling that pre-pandemic occupancy levels are a relic of the past.

Executives must awaken to the reality that confronts residential real estate: as more tenants elevate the importance of high-speed broadband connectivity in multi-tenant residential buildings to accommodate remote work lifestyles, so must the buildings adapt.

The relevance of geographic-specific amenities, such as flood sensors in certain locales, is rising, and the integration of environmental, thermostat, or mechanical sensors could be a wise investment, yielding a swift return. These enhancements make buildings more attractive to a new class of tenants who seek amenities that support their remote work arrangements.

The fourth tsunami of change is not merely on the horizon—it is surging through the residential markets. As building values face potential decline, those who have anticipated and adapted to the remote work revolution will stand resilient against the tide.

James Carlini is a strategist for mission critical networks, technology, and intelligent infrastructure. Since 1986, he has been president of Carlini and Associates. Besides being an author, keynote speaker, and strategic consultant on large mission critical networks including the planning and design for the Chicago 911 center, the Chicago Mercantile Exchange trading floor networks, and the international network for GLOBEX, he has served as an adjunct faculty member at Northwestern University.