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JUNE 1997

What is the Impact
of INFOTECH on
Commercial Real Estate?

by Mark Borsuk*
Managing Director
The Real Estate Transformation Group
property strategies for the informationageSM
mborsuk@ix.netcom.com

Presented to:
Real Estate Roundtable
Stanford Business School Alumni Association
January 16, 1996
Copyright 1996 by Mark Borsuk
ALL RIGHTS RESERVED

INFOTECH, the integration of computer hardware, software and telecommunications, deracinates place from activity. INFOTECH eliminates "place" from workplace and takes the "shop" out of shopping. Creating wealth will also take less space. INFOTECH will have a profound impact on commercial real estate demand by uprooting the person from the location. What are the implications of this technological shift for office and retail property owners, tenants, lenders and brokers? How much commercial space will become redundant? Will it depress rents? Is adaptive reuse possible but at what price? What role will brokers have in this brave new world? Can investors discern the winners and losers?

I. Informational Technology is the Driving Force Behind the Demand Shift.

The impact of information technology on commercial space demand is an emerging issue.1 The impact is the natural consequence of the economy's transition from one dominated by production, the industrial age, to one founded on the creation and manipulation of knowledge, the information age. The increasing use of an integrated computer hardware, software and telecommunication systems exerts a powerful force on human interaction within organizations. In the office context, it is the interaction between INFOTECH and the hierarchy that is creating the opportunity to shed unneeded space. INFOTECH permits forms of organizational groupings leading to new social and economic interactions.2

    A. How Organizational Change Impacts Office Demand.

    There is context for understanding how technology impacts organizational forms. Each phase of economic progress has an organizational and political dimension. In the Agricultural Age, hierarchy and feudalism were predominant. In the Industrial Age, bureaucracy and democracy were on the ascent. In the Information Age, the networked organization and universal human rights reflect the Zeitgeist.

    The difference between the Industrial and Information Age organization is 90 degrees: it goes from vertical (bureaucracy) to horizontal (networked). Characteristic of the networked organization is knowledge work based on teams, human networks, new types of jobs, serendipitous communications, ad hoc collaboration and brainstorming.3 INFOTECH removes layers of management, permits work outside the office and promotes outsourcing of functions. New thinking about organizational efficiency, adding value to shareholder wealth, increasing productivity and providing greater customer satisfaction focuses attention on use of corporate real estate.

      1. Use of Corporate Real Estate as a Strategic Asset.

      The movement to re-engineer and downsize organizations has drawn attention to real estate holdings. Leased and owned space is now an asset for advancing the firm's strategic goals and no longer a fixed cost of doing business. This is radical thinking.

      The concept is not new but its acceptance by corporate America is recent. Competition and technological upheavals are forcing corporate leaders to recognize real estate as an undermanaged asset. Occupancy cost is the second largest corporate expense. Two studies published in 1995 give organizations the fortitude to substantially reduce their real estate holdings while improving productivity, profitability and customer satisfaction.4 The Harvard Business Review (HBR) piece legitimizes the issue, offers methods of analysis and will recruit converts.

      HBR conveys an important message to office building owners: Class A space that does not support a tenant's strategic goal is no longer worth leasing. It is the end of the "edifice complex." Corporate management now knows the irrelevancy of a prestigious location and curb appeal to making money for the firm. Instead, all present and future space requirements must be vetted from the standpoint of providing a competitive advantage. The old peer group benchmarks and industry standards are discarded. Rather, work space a nd location are assigned as needed and not given as an entitlement. This suggests the commodification of office space and a policy of making real estate decisions based on competitive factors. How much space per employee, the location and class of space (A, B or C) and occupancy costs have new relevancy in the strategic mix.

      PacBell's drive for competitive advantage is an example of how this philosophy works. PacBell is reducing its administrative office space by 28% from 9.5 million sq.ft. to 6.8 million sq.ft. over five years with an expected 25% percent drop in occupancy costs. Achieving this goal is possible in part by reducing the employee space requirements from 322 sq.ft . to about 150 sq.ft. including common area.5

      Managing leased and owned real estate is becoming a priority for organizations. The impact on profits, customer service and meeting competitive pressures make this so. It bodes well for many companies and this applies to non-profit entities as well. However, in the private sector the laggards may draw the attention of a new class of corporate raiders: Cybersurgeons.

      2. The Rise of Cybersurgeons.

      The implications of INFOTECH for squeezing profits from corporate balance sheets and reducing operating costs is not lost on corporate raiders. Corporate raiders will meld the techniques advocated by the HBR and IDRC studies into their valuation models. With these new weapons in their arsenal they will transmogrify into Cybersurgeons seeking fresh prey. Corporations with large holdings of space, amenable to downsizing become their prey. The Cybersurgeons will substitute software for staff to reduce headcount, impose telework programs on employees to cutback on space needs, sell corporate holdings and renegotiate leases. Cybersurgery will force landlords and lenders to become unwilling participants in corporate machinations.

      New forms of organizations, maximizing value from real estate to achieve corporate objectives and Cybersurgeons dumping space all bode ill for landlords and lenders. Another negative factor on the horizon is the possibility of government action.

      3. When the Government Downsizes, What Will Happen to Office Space?

      Voters are becoming increasingly upset about the government's inability to deliver quality service. Many feel it is an oxymoron to talk about an "efficient government." However, it is possible that the electorate will become so frustrated, they will demand the same drastic reforms as those visited upon the private sector. Does it make sense to go pull a permit at the building department, when by computer you can complete the form from your office or home computer and make payment?

      One observer notes "The so-called reinvention of government is not possible without reinventing the delivery system for government, and in doing so, dramatically reducing costs and improving the services government provides to its customers."6 Few believe government unions, senior bureaucrats and politicians would ever voluntarily relinquish their job security, perks and pay. These are powerful constituencies. Nevertheless, the downsizing of the government (federal, state and local) would place a substantial amount of redundant space on the market and have severe consequences for office building owners and lenders.

      The rapid diffusion of information technology allows organizations to transform themselves from ossified bureaucracies to flexible networked teams and permits direct link of strategic goals and real estate needs. Government implement of private sector heuristics will rationalize employment, improve productivity and reduce space needs. All these competitive efforts will benefit society except for office building owners and lenders. For them INFOTECH is a negative miracle. In addition, another group of property owners are about to feel INFOTECH's negative impact.

    B. INFOTECH Shifts Retailing from Marketplace to Marketspace.

    The impact of on-line shopping for retailers is between three and five years away. On-line shopping is a new form of distribution that will compliment shops and catalogs. However, it would be very short sighted to consider CyberMalls and Virtual Stores a fad.

    There already exists a critical mass of consumers and the enabling technology for on-line shopping. Home PC ownership is 36% and 7% of US households access the Internet.7 Retailers and service providers are following the phenomenon, developing WEB sites and exploring how to best capitalize on the trend. The rapid popularity of the Internet and WEB in particular caught even Microsoft off-guard. The on-line shopping market is still in its infancy but a number of retailers are beginning to explore its possibilities.

    The establishment of an on-line distribution channel will over time work against the physical channel: the store. See the Journal of Computer-Media Communications, Vol. 1, No. 3 devoted to "Electronic Commerce" (http://shum.huji.ac.il/jcmc/vol1/issue3/vol1no3.html). This is the irony of cyberspace for landlords. The retailers will continue to sell whatever product or service suits the consumers' fancy but property owners have only one item to offer: space.

      1. Its Not Just Location Anymore-Stupid!

      "Location, location, location" and progressively larger building size have dominated the post WW-II evolution of retailing. Indeed, it has been a cannibals' banquet as newer, larger stores devoured smaller rivals and bypassing older distribution channels. Just think about the 2,000 sq.ft. market that became the 20,000 sq.ft. supermarket in 1961 and evolved into the 50,000 sq.ft. supermarket thirty years later.

      While each iteration in store size offers greater choice and selection, the cyberstore has no physical constraints. It can offer more by having no constraint on inventory or shelf-space. One cyberstore, Seattle's Amazon Books (http://www.amazon.com) is offering one million titles at discount pricing. By bringing the store to the consumer, retailers' enhance their reputation, increase volume and reduce inventory, overhead and rent expense. New cybersellers have an immediate advantage by not having to replicate the retail chain.

      However, even the growing base of on-line users and retailers is not a guarantee for the evolution of cybercommerce. On-line shopping will become the norm when consumers adopt a new shopping habit.

      2. Shopping Is A Learned Pattern.

      Consumers learn to shop, it is not intuitive. In the Post WW-II era shopping followed the development of the suburbs. The rise of the suburbs has offered an unprecedented opportunity to enjoy consumption and leisure time. New patterns and expectations emerged as the suburbs developed. Going to the central city to shop became progressively easier for suburban residents to forgo as specialty shops and major retailers and department stores entered their areas. For a whole generation, "main street" and "downtown" have no meaning.

      Each wave of retail store size expansion gives consumers greater choice for goods and services, created new forms of social interactions like "hanging out at the Mall" and reinforces consumption. Retailers and retail property owners, especially Mall owners, continue to seek new concepts for enticing consumers. Entertainment is an important component of the new retailing mix.

      Thus, Post WW-II retailing, especial from the late 1970s, is characterized by a progressively larger box or Mall offering an ever wider array of goods and services. Cyberspace represents to retailers a dream come true: almost unlimited selection for customers with minimal fixed costs.

      3. Will Consumers Learn To Shop On-Line?

      Is on-line shopping the natural evolution of retailing? If price, selection and convenience are hallmarks of the "Big Box" and "Power Center", then on-line shopping offers an enticing alternative to getting in the car. What factors will influence the consumers' decision to cruise on the Freeway or the Infobahn?

        a. On-Line Market Size.

        A survey by FIND/SVP estimates the number of households accessing the Internet or the commercial on-line services is 5.9 million or approximately 20% of the total households with PCs (http://www.findsvp.com). The Commercenet/Nielsen survey found 24 million people aged 16 an over using the Internet (http://www.commerce.net/). The later survey found 2.5 million people purchased goods and services through the WEB. The FIND/SVP survey noted the likely 100% increase in Internet users in 1995. On-line users are believed to have higher income and to be better educated than the average population. This critical mass of early adopters presage a rapid growth in cyberspace.

        b. The Need for Female Participation.

        One critical group necessary to the development of on-line shopping is women. Acknowledged as the ones making the largest percentage of buying decision, women are unlikely to come on-line if they can not save time.8

        c. Home Banking Prepares the Way for On-Line Shopping.

        The time is ripe for financial institutions to make home banking work. Banks are leading the charge to offer on-line services to reduce the real estate and overhead costs of outdated branch banking. It is likely consumers using the benefits of on-line banking will be predisposed to exploring shopping on-line. Thus, home banking may be the catalyst for the popular acceptance of cybershopping.

        d. Business to Business Transactions On-Line.

        On-line commerce is having an impact on business to business transactions. Some believe it will development much faster than the consumer market. Electronic commerce will reshape distribution channels by lowering barriers of entry, reductions in marketing costs, consolidation among participants and distribution channels.9 Greater public awareness of the change and benefits will inure to the consumer market.

        e. Demonstration Effect.

        Finally, the demonstration effect will also create a favorable climate to experiment. Kids will teach their parents, spouses will teach each other and the younger generation will already be doing it at college or at work. The expansion of the on-line market, growing female participation on the Internet and commercial services, the use of home banking will all spur development of this new retail distribution channel. Simultaneously, retailers and cybermall developers will be going on line to test formats, sales formats and promotions on how best to market to their customers.

      4. Where Location Based Shopping is Vulnerable.

      Even before marketspace challenges marketplace for customers, several of on-line retailers will prove themselves. Commodity items like books, computers, software, electronics, car parts and recorded music are naturals for on-line purchasers. These products are fungible and location based retailers adding very little value. Consumers for the most part are presold or just need information. See The Internet Shopping Network (http://www.internet.net) for computers and software; CUC International (http://www.cuc.com) for a wide selection of items; and Intouch (http://www.worldwidemusic.com) for recorded music. Restocking household items may also be ripe for cyberization. Why is it necessary to go to the grocery store or the Price Club to buy aspirin, toilet paper and ketchup when all can be ordered on line and shipped to the customer's door? The brand, quality and price are known with the merchant adding no value.10 Even clothing (http://www.levis.com) may begin to work on-line.

      5. When Will Retailers Bail From Stores?

      The key question for property owners and their lenders is how much do sales have to migrate from a location before the retailers bailout? Rent is a fixed cost for retailers. Above a certain percentage, the store is likely unprofitable. One early warning sign for landlords will be a decline in percentage rent. If the retailer's total sales are growing but store sales are declining, then cyberization may be at work. Retailers, noticing the trend will seek to renegotiate rents, reduce any percentage rent paid, downsize or terminate the lease. A corollary of Moore's Law is working against landlords: the cost of offering on-line shopping for retailers is dropping as their rent increases. In 1996, few will believe such a forecast but in 1999 retailers will be actively plotting strategies.

      6. Exit Strategies for Retailers.

      The International Council of Shopping Centers (ICSC) is an organization comprised of developers, retail property owners, tenants, lawyers and brokers. Annually it hosts a law conference for lawyers involved in the shopping center industry. The theme for the 1995 conference was tenant exit strategies. While the theme related to the present situation of retailer consolidations, closures, kick-out clauses and bankruptcies, it was prescient. Smart retailers sensing the trend to on-line shopping may begin bargaining for a very different kind of lease.

        a. Future Shock-The Pure Gross Lease (PGL)

        It is conceivable retailers will want to hedge their location bets by converting from a fixed rent lease with or without a percentage rent to one based on store performance. The main features of a PGL are: the tenant pays rent based on percentage of sales with no fixed minimum rent; a shorter term of lease with many short term options; and the tenant pays no other landlord charges. Such arrangements have existed but not in the shopping center world. One significant drawback to this lease form is how to convince lenders to lend or refinance.

        However, while lenders may show the owner to the door initially, the present situation is not much better. Bankruptcy or the threat of bankruptcy is being used as a competitive tactic by retailers to renegotiate or terminate leases to regain profitability.11 Recent filings by Wherehouse Entertainment, House of Fabrics, Editions Brothers (closing more than 19% of their stores) and Clothestime (closing 26% of their stores) all point to greater uncertainty for center owners and lenders. In addition, to the tenants, some malls are shaky. According to the Equitable Real Estate report "Emerging Trends" for 1996, 15% of the malls in business in 1990 will be out of business by the millennium. This is the third year Equitable has made the same prediction.12

        In summary, on-line sales may in several years re-ignite the need for retail downsizing, consolidation and liquidation. This will erode landlord equity, possibly leading to foreclosure and a new cycle of property markdowns. There is close parallel with the office building sector since each suffers from the same malaise: uncoupling of place from activity. The corporate need for flexible real estate commitments and possible downsizing by retailers suggests a forthcoming change in the commercial real estate cycle.

II. Will INFOTECH Change The Real Estate Cycle?

One possible consequence of INFOTECH's impact on commercial real estate is to increase property price volatility and shorten the cycle time. Typically, commercial property goes through a boom and bust cycle over a long period of time.13

REAL ESTATE CYCLE Chart 2

However, INFOTECH may induce a shorter cycle with greater price volatility.

A number of factors could create a shorter cycle thereby creating greater uncertainty over returns for owners and lenders. The HBR article advocates using real estate as part of the firm's strategic goal. This will hasten the pace of space turnover, downsizing and lease renegotiation. Retailers may also parallel the office market by shrinking store size into a showroom formats, terminating locations and renegotiating rents. In addition, changing tenant needs can make the buildings obsolete. Greater price swings over shorter time periods would likely feedback into investor expectations about holding times, returns and financing options. Thus, the commercial property market could enter into a period of systemic fragility. INFOTECH can also influence use by making space quickly obsolete. The North American Legacy Office Building and Big Box retailers are examples.

    A. Future Ghost Towns?

    The North American Legacy Office Building describes the problem of mismatching office building design (vertical) with organizational forms (horizontal). Their layouts are no longer conducive for knowledge work and information manipulation. Many of these buildings are in urban CBD making them less attractive for many tenants. Detroit is an example of what can happen. Their pre-war cousins became Class C buildings or worse: abandoned.14 Today, Big Box retailers are popular because of offering a wide selection of commodity items like computers and software. The risk to investors is INFOTECH's ability to bring a broader selection at likely lower prices to consumers on-line. Are these Big Boxes also destined to be abandoned? 15Abandonment, defaults and loss of equity will harm owners and lenders not to mention drastically reducing property tax revenues. This has important implications for society.

    B. We Be Landlords

    Ownership of commercial real estate is institutionalized. Today, institutions like pension funds, insurance carriers and REITs own $235 billion in real estate equity.16 They are investors in office, retail, warehouses, hotels and apartments. Any significant decline in value caused by INFOTECH would harm a great many individuals. One way to help stabilize property values would be to modify the federal tax law to promote the reuse of existing commercial properties.

    C. Reversing The Trend.

    Current tax law does not favor the reuse of commercial space. It does permit change but stretches deductions over long periods, limits rehabilitation credits to a small group of structures, does not permit expensing demolition costs and acts generally as a disincentive.17 Providing tax benefits could help cushion prices.

    The impact of INFOTECH on space demand calls into question many of the assumptions underlying the taxation of commercial property. Existing policy assumes a continuing demand for space. The major debates have been over raising revenue versus offering tax benefits. A stagnant or falling demand shifts the debate. While the present system permits readapting commercial properties, it does not lend itself to providing the financial incentives necessary to convert the substantial amount of office, retail and warehouse space made redundant by INFOTECH. Thus, tax policy hinders the market's function.

    The tax code is a broad and fertile field for revision. Changes made to one section can conflict with others sections or generate less revenue. This presentation does not consider all the ramifications: that is part of the debate. The proposals target specific code sections. They provide financial incentives for the market to better adjust. The proposals are not exclusive, they represent a way to achieve the goal. There are other ways to achieve the same goal. The critical issue is accepting the underlying assumption for the information age.

    The tax code applies to each phase of the real estate cycle: development, ownership, and disposition. Each phase needs revision.

      1. Development

      a. Offer tax credits for rehabilitating contemporary structures. This is a benefit enjoyed by a limited number of buildings (I.R.C. Sec. 47). Tax policy favors giving new life to buildings of historic value: a laudable but limited inducement. However, the underlying premise supports expanding the definition to include newer structures for upgrading and reuse.

      b. Make demolition costs deductible. Existing owners or purchasers of commercial property must add the cost of demolition to the value of the land. The cost is not deductible (I.R.C. Sec. 280B). This out-of-pocket expense should be deducted in the year paid.

      c. Allow renovation period deductions. The present rule requires spreading the cost of interest, taxes and other expenses incurred during construction or renovation over the property's depreciable life (I.R.C. Sec. 263A). Like demolition costs, there should be a deduction in the year paid.

      2. Ownership.

      a. Realign depreciation with reality. The write-off period for residential property is 27 1/2 years and for non-residential property 39 years (I.R.C. Sec. 168). This effectively negates depreciation as an incentive to convert offices, shopping centers, factories and warehouses. A benefit offered over decades does not comport with the necessary flexibility in the information age. Congress is considering a non-residential leasehold improvement write-off period of ten years (H.R. 1171 introduced on March 8, 1995 by Congressman Shaw). Expanding the provision to benefit existing properties without a lease and making it applicable to converting property into residential use would be in keeping with the needs of the information age.

      b. Allow passive activity losses and credits generated from existing property to offset ordinary income when taxpayers readapt commercial properties (I.R.C. Sec. 469). Enacted in 1986 to curb abusive tax shelters, this provision prevents full realization of the investment incentives.

      3. Disposition.

      a. Extend the period to complete a deferred exchange. The maximum period of six months to acquire replacement property is too short (I.R.C. Sec 1031). The minimum period needs to be considerably longer. Two years, the same as for personal residences (I.R.C. Sec. 1034), should be considered as a minimum.

      b. Defer tax on the discharge of indebtedness. Under certain circumstances relief from mortgage debt may create taxable income (I.R.C. Sec. 108) Consideration should be given to deferring any tax liability to assist in transferring the property for reuse.

      c. Make capital gains promote change. Real estate owners have little incentive to sell aging properties outright due to large taxable gains created by inflation (I.R.C. Sec. 1231). A reduction in the inflationary component of the gain provides a strong incentive to sell. This gives the market a better opportunity to convert older properties into productive use.

      d. Sanction an exit strategy. A taxpayer may take an ordinary loss for the "extraordinary obsolescence" of a building (I.R.C. Sec. 167; Reg. Sec. 1.167(a)-8 and Reg. Sec. 1.167(a)-9). The impact of INFOTECH on property is a form of "extraordinary obsolescence." Moving to a flat tax would not significantly alter the situation since mortgage interest could not be deducted. Thus, modifying tax policy should be viewed as an act to ameliorate INFOTECH's impact on commercial property.

III. Adapting to the New World of Commercial Real Estate.

    A. Dealing With Denial.

    INFOTECH is changing the commercial real estate business. Some will suffer from cognitive dissonance whereby their beliefs and assumptions are contradicted by new information leading to conflict. Thus, many at first will dismisses INFOTECH as a possible problem, then they will grudgingly accept there is a problem and finally they will seek to resolve the problem.

    It is likely we are still in the early part of the dismissal phase. It is too easy to dismiss INFOTECH's impact. Many will say the acceptance of INFOTECH in the home and office will unlikely change organizational needs and consumer habits. They will point to falling office vacancies and development of speculative office building as a return to normalcy. For many on-line shopping impact on retail space demand will be marginalized or dismissed as a fad. Another reason for many to deny INFOTECH's impact is due to its nature. INFOTECH is an abstract concept with minimal physical presence. Whereas, real estate is concrete and readily perceived. Unfortunately, all the signposts point in the same direction: change is here and accelerating.

    B. A New Role For Brokers.

    There is a significant risk of not adapting for brokers. They risk being "disintermediated" or cut out as middlemen in the deal.18 Unless they can add value to the transaction, their role and income will decline. Information and negotiation skills are a broker's stock in trade. The rapid deployment of the Internet is making their proprietary information much less valuable. For example, BOMA (http://www.boma.org) will begin offering to the public via the Internet information on member buildings throughout the county. Retail property owners, like REITs, are also offering information on space availability (http://www.krt.com). The CCIM (http://www.ccim.com) page is an example of brokers creating have/want pages. These informational pages will begin parallel the broker's proprietary information. Other Internet providers will offer public MLS for commercial and residential offerings. Even local boards, like the San Francisco Real Estate Board, are offering agents the opportunity to list on the WEB. It is only a matter of time before competitive pressure puts property information on the Internet making it free.

    To survive, brokers will need to move higher in the value chain. For example, in representing the landlord, they need to understand the tenant's business but also the business of the tenant's customers. They will need to involve themselves much more in the details of the deal and understand the ramifications both economic and legal of all the significant lease clauses. In representing sellers or buyers, they will need to provide greater analysis of the transaction. Those that believe today's level of service is appropriate will increasingly be left behind.

    C. Property Owners And Lenders Need To Adapt.

    The most important task facing property owners and lenders is to study the question and devise defensive and offensive strategies for dealing with INFOTECH. Property owners should consider selling or trading out of properties likely negatively influenced by INFOTECH. Alternatively, they should consider rehabilitating structures suitable for INFOTECH uses, e.g., home-office lofts and seeking tenants less influenced by INFOTECH. Geographical diversification may also moderate INFOTECH's influence. Lenders can meet the challenges of INFOTECH by reconsidering the sectors they lend to, developing new forms of credit risk analysis, selling loans with vulnerable collateral and shortening loan terms to meet the risks of the Information Age.

    D. Investment Opportunities Ahead.

      1. Adaptive Reuse or Demolition.

      Whether tax policy aligns itself with the Information Age or not , the basic strategy remains the same for investors. They will seek to acquire assets where value can be increased. Under the present tax law values will need to fall further before justifying investment for reuse. In addition, investors will likely require municipalities to reduce property taxes, change zoning a nd grant other concessions for redevelopment to occur. Investors unable to obtain price or government concessions will avoid properties leading to their demolition. Assuming a hospitable climate, what properties are candidates for investment in the information age?

      2. Retail Properties.

      Consider a one million sq.ft. mall when retail users can no longer generate sufficient income after the anchor tenants depart. Possible adaptive uses could include use for educational purposes, installing a theme park or Zoo or converting it into religious use. "Church World" would be for multiple denominations and related services all under one roof. In addition to churches and temples, there could be parochial schools and religious book stores. Creating a Necropolis is another idea. An indoor cemetery does offer significant benefits like controlled climate and parking. Combining mortuary and cremation services, religious rites, on-site crypt and columbarium and flower shops would be a great relief for many.

      Single tenant or single use properties need a different type of analysis. Here the investor needs to anticipate an early lease termination and conversion of the property. The ability to reconfigure the building at minimal cost with appropriate zoning and use changes is critical. Wal*Mart has experimented with constructing locations reusable as apartments.19 In the strip and community center market replacing retailers with service providers, restaurants and cafes suitably wired is a strategy. Centers with medical and dental offices, vocational schools and businesses offering telework locations would add value. Finally, all the bank branches coming on the market are another opportunity for conversion to residential lofts or commercial use.

      3. Office Buildings.

      It is unclear whether the design of high-rises office buildings will lend themselves to residential conversion.20 In considering an office building in vestment, it will be necessary to review whether the main tenants are subject to INFOTECH's impact and the prospects of locating tenants that are likely to stay. In that regard, investments in parking lots will need an analysis to determine INFOTECH's impact on demand.

IV. Conclusion.

The dynamic nature of the American economy may rapidly absorb the redundant space INFOTECH creates. However, one should plan for the worst and hope for the best. INFOTECH will impact how brokers, property owners, tenants and lenders do business. It will create fear, uncertainty and doubt for many market participants. In this environment some will make things happen, some with watch things happen and some will ask what happened. Where will you fit in?

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Footnotes:

1 - James Young, The Information Age and the Potential Effects on the Commercial Real Estate Market SIOR Journal (Summer 1995), pp. 16-20, 32; Michael Pittas, AIA, A Virtual Reality, Architecture California, November, 1994, pp. 58-61; William J. Mitchell, City of Bits (http://www-mitpress.mit.edu/City_of_Bits), MIT Press, 1995; Mark Borsuk, Commercial Real Estate: Road Kill On The Info Highway (http://www.microtimes/realestate.html), Microtimes, October, 1995, page 92.

2 - Don Tapscott, The Digital Economy: Promise and Peril in the Age of Networked Intelligence (http://www.mtnlake.com/paradigm), McGraw-Hill, 1995; J. Lipnack and J. Stamps, The Age of the Network: Organizing Principles for the 21st Century (http://www.tiac.net/biz/tni/), Omneo/Oliver Wright Publications, 1994.

3 - Tapscott, page 28.

4 - Franklin Becker and Michael Joroff, Reinventing the Workplace, The Industrial Development Research Foundation (1995); M. Apgar, IV, Managing Real Estate to Build Value, Harvard Business Review, November-December, 1995, pp. 162-179. See also, J. Lyne, IDRC's Real Estate Revolution: Occupancy Costs Plummet, Productivity Crests, Site Selection, April, 1995, pp. 198-220.

5 - A. Feuerstein, PacBell wants to hand up on huge property portfolio, S.F.Business Times, Real Estate Quarterly, December 1-7, 19995, page 7A.

6 - Tapscott, page 36.

7 - 1995 U.S. Home PC Benchmarks, FIND/SVP , Inc.

8 - M.V. Rafter, Getting Women To Go Online, San Francisco Chronicle, November 24, 1995, page E-1. See also, J. Broadhurst, Bridging the Gender Gap (http://techweb.cmp.com:80/techweb/programs/cmp_waisgate?RF=823554203.19806&num=0#head), NETGUIDE, January, 1996, pages 85-88.

9 - R.L. Segal, The Coming Electronic Commerce (R)evolution, Planning Review, November-December, 1995, pp. 21.

10 - E. Rubinstein, Peapod picks, delivers groceries ordered by PC, Discount Store News, September 18, 1995, page 99; Grocery stores may earn more bacon with 'egs', Discount Store News, September 18, 1995, page 103.

11 - B.A. Hogan, Owners seeking new tenants as discounter woes continue, Shopping Centers Today, January, 1996, page 1.

12 - Malls face uncertain future, study says, Shopping Centers Today, January, 1996, page 3. See also, I. Barmash, Only the best will survive retail saturation, Shopping Centers Today, October, 1995, page 84.

13 - S.R. Grenadier, The Persistence of Real Estate Cycles, Journal of Real Estate Finance and Economics, Vol. 10, No. 2 (1995).

14 - R. Hampson, Prewar Skyscrapers Facing Their Twilight, San Francisco Chronicle, Monday, October 23, 1995, page A8; J. Bennet, A Tribute To Ruin Irks Detroit, New York Times, Sunday, December 10, 1995, page 12.

15 - J. Garreau, Edgier Cities, WIRED, December, 1995, page 158; C. Lockwood, Edge Cities on the Brink, Wall Street Journal, Wednesday, December 21, 1994, page A 18.

16 - N.K. Webman, Real estate report says funds 'at crossroads', Pensions & Investments, October 16, 1995, page 38.

17 - M. Borsuk, Real Estate Tax Policy For The Information Age (http://www.telecommute.org/borsuk.html), Real Estate Review, Winter 1996, pp. 73-78.

18 - Tapscott, pp. 56-58.

19 - D. Goldstein, Easing a Wal-Mart into the Environment, New York Times, Sunday, February 5, 1995, page 28.

20 - M. Pittas, supra.

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* Mark Borsuk is a commercial real estate broker and attorney practicing in San Francisco. He is Managing Director of The Real Estate Transformation Group Property Strategies For The Information Age SM. Office address: 1626 Vallejo Street, San Francisco, CA 94123-5116, (415) 922-4740, FAX 922-1485, mborsuk@ix.netcom.com. "All rights reserved, except the reader may copy this article into electronic form or print for personal use only, provided that: 1) the article is not modified; and 2) all such copies include this copyright notice."

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