Internet vs Real Estate

Telecommuting, office sharing, and e-commerce are buzzwords for the new century. We all slowly but surely catch on to these practices. The Internet offers to change our lives in ways we have not even thought of. In the eighties the "paperless" office was the business theme. Now the "peopleless" office may be on the verge of reality.

With a minimum of equipment a person can set up a home office that is connected to the main office through a modem, cable modem, ISDN, and now DSL. How will these technologies affect the value of real estate?

Right now, we are probably at the same stage with the Internet as we were with the automobile back at the beginning of the 20th century. It has become more than just a fad for people to use computers and the Internet. Now, computers are often compared to cars. It is said that, if cars were computers, a Mercedes Class 30 would cost five cents and fit in your pocket.

The analogy to cars has been picked up by business. One of Microsoft's slogans is "Where do you want to go today?" When people are on the World Wide Web, they often talk of "going" to a web site. This paradigm will eventually be taken a step further with virtual presence, or three-dimensional teleconferencing. But even before that happens, many office workers will be working from home for more and more hours. High tech companies like Nortel Networks are encouraging their employees to acquire cable modems so they can telecommute during bad weather. Eventually this type of change in activity will be responsible for excess office space. While technology costs are high, there will probably be a shaky equilibrium as rents for this excess space come down and prices of the technology come down. When technology prices reach the level where an employer can provide telecommuting equipment at a cost that is substantially less than that of providing office space, the economics of telecommuting will rule.

The effect will not just be confined to the office market. As there are fewer and fewer commuters on the road, some aspects of retail are bound to be affected. Part of the retail market is already directly affected by Internet shopping. It is already faster, more convenient, and less expensive for people who are connected to the World Wide Web to shop for certain items online. When the number of consumers connected to the Internet reaches critical mass more and more retailers are likely to follow Egghead Computers (which moved its retail operations completely online at the beginning of 1998) and move their operations entirely to the World Wide Web. As a significant number of retailers move online, rents in even the most desirable locations are likely to start to decline. There will also be less need for gas stations and convenience stores. People are already willing to endure long commutes to work so they can live in areas that are more rural. As they become connected to the Internet, it will not matter as much where people live when they can commute to work at light speed.

One short article is not enough to discuss all of the ramifications of the Internet for real estate values. Certainly, in the future, the Internet will be a large factor in the value of real estate.

William T. Whiting, Jr.

The Reenstierna Associates Report is published as a service to the clients of Eric Reenstierna Associates and other real estate professionals. The views expressed are those of the articles' authors and do not necessarily reflect those of other members of the organization. Copyright 2000. All rights reserved.

Eric Reenstierna Associates
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Cambridge, Massachusetts 02141
(617) 577-0096

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