5G and CRE

Commercial real estate professionals who have been scrambling to keep up with the latest building tech are facing yet another major game changer — the pending arrival of 5G.

Fifth generation wireless, or 5G, is a major step forward in the continued evolution of cellular network technology. Its massive capacity will allow networks to accommodate a greater density of users at significantly higher speeds. 5G also has the added benefit of ultra-low latency — or, in layperson’s terms, super-fast response times in transmitting data — that will open the door to new applications in virtual reality, telemedicine, robotics, entertainment, and autonomous vehicles.

“I think everyone has the giddiness that 5G is going to be the next big thing, and it likely will be simply because of the speed, bandwidth, latency, and efficiencies it can provide,” says Jeffrey Sheehan, CCIM, a senior vice president at the Site Selection Group in Houston. Yet a pretty steep learning curve awaits commercial real estate professionals when it comes to understanding 5G and what it means for connectivity and networks both inside and outside of buildings. “Ultimately, we are all going to get used to having much higher bandwidth connections straight from our cellular carrier to our phone,” says Aaron Lapsley, co-head of Smart Building & Workplace Technology at Cushman & Wakefield in San Jose, Calif. So, what people have been leaning on Wi-Fi to do, such as connect to the internet or stream videos and music, people will be able to easily do with their cellular connection.

Cellular carriers are working to bring 5G network technology to their customers in all aspects of everyday life. That means establishing coverage both outside and inside buildings, which creates broad implications for commercial and multifamily real estate. “The big question is how much 5G is going to substitute for Wi-Fi,” says Lapsley.

For example, financial institutions are not going to be comfortable substituting 5G for private corporate networks. They’re going to want people on their own network for security authentication and access control. However, over the next five years, every individual employee is going to get used to having a much, much faster data signal. “I have to believe that buildings that have much stronger signal strength are going to be able to market that and get value out of it,” says Lapsley.

The 10-Year Rollout

Commercial real estate professionals need to be forward-looking when it comes to 5G and the implications for both landlords and tenants. What strategies do landlords and developers need to put in place now to future-proof buildings and be able to monetize 5G technology? How will 5G change a building experience and drive location decisions for space users? These are critical questions even though the U.S. is still in the early stages of its 5G rollout.

The U.S. is just starting Year Three of what is expected to be a 10-year rollout, and a lot of work remains to get 5G networks up and running. The major wireless carriers, including Verizon, T-Mobile, and AT&T, all have plans in motion to establish 5G networks. Carriers must calibrate their radios to transmit a 5G signal. New and upgraded infrastructure needs to be built to transmit that signal to devices. In addition, phone manufacturers need to start selling phones with 5G chips that allow devices to receive the signal. (Samsung’s Galaxy S10 is one of the few 5G-capable cell phones out now, with Apple expected to release its 5G model later this year.)

One of the big changes with 5G is that it operates on a much higher spectrum and frequency versus 4G LTE. Although the existing network of macro towers will still be used, 5G will require adding significantly more small cell towers — likely hundreds of thousands of such towers — across the U.S. over the next decade. Many of those towers will be placed on light poles, which have a ready power source.

Cellular service providers need a much larger footprint to roll out the smaller 5G cell towers. Property owners will have an opportunity to monetize 5G with leases for small cell towers on rooftops and parking decks, as well as light poles and other structures. In addition, 5G signals are having difficulty penetrating solid surfaces, such as walls and even some coated windows. Having access to real estate and partnering with building owners is going to be critical for carriers, notes Rick Varnell, executive vice president of Valuation & Advisory Services heading the building technology consultancy division at CBRE.

5G is expected to improve performance to 50 times what consumers currently experience.

Will Consumers Want 5G Everywhere?

People are excited about the potential of 5G. Although some have touted the power of 5G at 100 times current levels, the reality is that type of performance will take time to achieve. According to Deloitte, initial 5G capacity in an urban environment will be about double that of 4G LTE. In three years, that will grow to 10 or 20 times and then to 50 to 100 times in five years; although, 50 times current performance is likely to be the ultimate max capacity, notes Dan Littmann, a principal and national sector leader of telecommunications at Deloitte. Coverage will depend on a variety of location-specific variables, such as the number of cell towers and density of users.

The expectation is that once that power is turned on, people will want it everywhere. Its availability within buildings will become even more important, especially as millennials and Gen Z play a bigger role in both the workforce and apartment renter pool, notes Sheehan. These younger generations have grown up accustomed to mobile devices, and 5G will likely play a significant role in live-work-play location choices in the future.  From a real estate and asset management perspective, it is smart to be investing in the capability to offer the latest technologies as tech continues to evolve, he adds.

5G will put even more emphasis on the growing focus and value surrounding tenant experience and tech-enabled operating efficiencies. For example, Deloitte’s Commercial Real Estate 2020 Outlook surveyed 750 CRE executives in 10 countries around the world. The survey found improving tenant experience was a top priority. In fact, 92 percent of respondents said they plan to maintain or increase their tenant experience–related technology investments. “The old real estate mantra of location, location, location for real estate morphed into location, information, and analytics as the three drivers. Now we believe the new mantra is around location, experience, and analytics,” says Matt Kimmel, a principal and U.S. real estate leader at Deloitte. “That experience and analytics is largely driven by the technological capability of mobility and apps. 5G is going to have a profound impact.”

Landlords Consider Options to Monetize 5G

Landlords are in the early stages of trying to figure out how to monetize the technology by leasing space for new 5G cellular towers on site, as well as developing strategies to deploy and control private 5G network and data rights within their own properties.

Property owners are exploring different opportunities to leverage 5G to add value:

• Qualified leasehold improvement property;
• Reducing operating costs by running more sophisticated systems that create added efficiencies;
• Improving cyber and building security;
• Supporting tech and amenities that enhance the occupier experience; and
• Generating more revenue through fees and/or higher rents.

There is a strong business case to add tech infrastructure to attract tenants. One example of that is the 111 8th Avenue building in New York that Google bought for $1.9 billion in 2010. That location is a nerve center of connectivity in Manhattan, notes Enoch Lawrence, a director in the Capital Markets Group and co-head of the Sports & Entertainment advisory group at Cushman & Wakefield. The tech companies that have located in and around that Hudson Square area and near Google are primarily driven by the access to that connectivity. “It is starting to be quantified now in terms of how buildings are being positioned and the type of tenants and rents that tenants are willing to pay to be in that type of environment,” Lawrence says.

“The old real estate mantra of location, location, location morphed into location, information, and analytics as the three drivers. Now we believe the new mantra is around location, experience, and analytics.- Matt Kimmel, principal, Deloitte

According to the Deloitte Commercial Real Estate’s 2020 Outlook, respondents believe tenants are willing to pay a rental premium to be housed in smart buildings. Forty-three percent believe tenants would pay a 6 to 10 percent premium to be in a smart building, while a quarter believe tenants would pay 11 to 15 percent more. “There is some real interest for landlords to look seriously at further capital investments to upgrade their assets to drive that deeper tenant relationship or tenant experience,” adds Kimmel.

In the past, third-party entities have generated revenue that could be staying with property owners. Owners have the opportunity to develop a master strategy to own and control the 5G deployment and network rights and data rights within their properties.

Private 5G networks within buildings will be a viable option because there is potential for property owners or third-party companies to tap into unlicensed spectrums that will be made available in mid-2020. The more challenging questions for property owners are how to manage internal 5G networks and what do 5G strategies look like, says Matt Davis, executive vice president of the building technology consultancy division at CBRE. “There is so much optionality that each building needs its own business analysis,” he says. However, it is important that, whatever strategy is put in place, that it is scalable and future-proof, he adds.

Laying the Groundwork

Discussions with property owners about 5G at this stage involves a lot of education of what 5G is, what different strategy options look like, and some of the do’s and don’ts in developing a 5G strategy for a property or portfolio of properties. At the same time, technology is evolving rapidly, and there are a lot of unknowns on how it will change behavior, business applications, and demand. “It is hard for the real estate industry to stay abreast of what the changes are, how 5G is being rolled out, how it monetizes things differently, and how it changes behavior,” Davis says.

Most property owners are still in the early stages of mapping out strategies to manage their own properties with 5G inside their building and their own 5G network. The first step for property owners is to evaluate current infrastructure and technology components. A significant amount of fixed cost has already been deployed for those buildings that already have good, modern fiber, distributed antenna systems and back-up power already in place.

Step two is to build a strategic roadmap and capital plan based on where you want to go with 5G. The strategy for a Class A office building in a downtown might be very different from a three-story office building in a suburban office park, an apartment complex, shopping mall, or distribution and fulfillment center.

“We are just on the cusp of where this is starting to happen,” says Lapsley. Once more 5G phones are in the hands of consumers and they can connect to a 5G signal, that’s when the industry is going to start to see what the demand really looks like,” he says. “What I would encourage decision-makers to do as they wait for that uncertainty to play out is plan for the case where you have the most options,” he says. “So, build sensible infrastructure that is going to be useful even in a world where there isn’t a lot of leasing demand for 5G.”