Office Hesitancy is Scaring Away CRE Innovation

It’s almost every startup’s dream to find that next downtrodden product or strategy that turns into a game-changer – but the office asset class might be at a major disadvantage right now given the weak fundamentals and uncertainties that remain.

With the shift to remote work, offices have taken a hit. While the asset class has been recovering, it’s been a slow path in some major markets.

Era Ventures, which focuses on investments in innovative startups, is seeing a lack of appetite for newcomers in the office space.

“We’ve seen less of a focus on innovation around the commercial real estate space than we had, a few years ago,” Clelia Warburg Peters, founder and managing partner for the New York-based firm said.

“A notable thing to me in this period has been even though we all know that office as a category is in a period of crisis and that can often foment innovation, we’ve actually seen very little innovation. I think that founders are scared of commercial like the office category in particular.”

And you can see why some might be shying away. As of July 2024, office occupation was 330 basis points lower nationally when compared to the same month five years ago, recent Placer.ai data showed.

Office has had a major weighing impact on CRE. However, Peters is noticing ”more innovation” in other asset classes like industrial and hospitality.

“We’re seeing more and more technology enter into the logistics space writ large,” she said.

Peters attributes this to there being elevated technology-related construction activity, which she claims has been “more than at any prior point” in the past decade or so.

Currently, Era Ventures is mostly focused on residential investments with a direct-to-consumer concentration. One example of its investment in AI platform for autonomous buildings, PassiveLogic, which has technology that can connect to multiple property components such as MEP, and HVAC systems.

To continue with its strategy, Era Ventures recently launched an inaugural $88 million fund, where the venture capital plans to deploy investments in multiple stages. It has identified several business models it intends to spread its capital around including AI, marketplaces, embedded fintech, hardtech ventures, and SaaS.

Some other examples of those categories the company has already invested in include digital handyman subscription servicer Honey Homes; insurance platform, Shepherd; and AI platform, Indigo.

In the U.S., Era Ventures values “nationally scaled platforms” in contrast to those that are just regionally focused.

“That’s one of the key value drivers we see for innovation in the entire real estate category, is the way that technology can unlock platforms that can sit across multiple businesses and multiple geographies,” Peters said.

She added that if a company was locked into just one city or region, Era Ventures would probably avoid investing in it altogether.

For CRE as a whole right now, a multitude of uncertainties remain. This includes the pending outcome of the presidential election and interest rates, which have scared some buyers away. In the past year or so, the industry has seen some volatility.

Peters still expects a “somewhat bumpy ride” in the short term.

Particularly, she spoke on regional markets in multifamily that experienced higher rent growth, which could headed for a downturn.

“I think there’s some markets that seemed really hot a year or two ago that I think probably overinflated in terms of rent, where we’re now going to see a correction,” Peters said.

And she also admitted office is in a “complicated position,” as a big chunk of employees continue to work from home.