AI-Driven Deflation: An Economic Overview
Artificial intelligence is reshaping industries, driving down costs, and increasing efficiency. As AI systems automate tasks and boost productivity, they exert downward pressure on prices. Historically, automation and technological advancements have led to deflationary periods by reducing labor costs and improving output. With AI’s ability to enhance automation across various sectors, we could see persistent deflation, particularly in service-based economies.
Deflation presents a paradox for businesses. While lower costs can improve margins, falling prices also reduce revenue growth potential, making profitability a challenge. AI is accelerating this trend by automating tasks that previously required human input. This is already evident in financial services, customer support, and logistics, where AI-driven automation is reducing the need for labor and office space.
For commercial real estate (CRE), these changes will have profound implications. If AI reduces the need for physical workspaces, changes supply chain logistics, and alters consumer behaviors, then office buildings, warehouses, retail spaces, and multifamily housing will need to adapt. Below, we explore how these deflationary pressures will affect key CRE sectors.
Office Real Estate: Facing an AI-Driven Reckoning
The office sector is already struggling due to remote work and shifting workplace habits. AI could further accelerate the decline in office demand by making it easier for businesses to automate white-collar work. Major firms are already experimenting with AI-driven automation, reducing the need for large office footprints. If fewer employees are required to complete the same work, companies may consolidate space, leading to higher vacancies and lower rental income.
Even before AI’s full impact, many enterprises have been reducing their real estate needs. Large corporations are embracing hybrid models, and automation-driven efficiencies will only amplify this trend. AI-powered virtual assistants and collaboration tools further reduce the necessity of in-person office space. The result? Office landlords will need to rethink their leasing strategies, possibly converting underutilized office spaces into residential or mixed-use developments.
Industrial Real Estate: Automation and New Opportunities
Unlike the office sector, industrial real estate could see increased demand. AI-driven automation is transforming manufacturing and logistics, leading to the rise of advanced, highly efficient warehouses and distribution centers. Companies investing in robotics and AI-driven systems can produce and deliver goods faster, leading to increased e-commerce activity and logistics expansion.
Additionally, onshoring and nearshoring efforts are increasing demand for high-tech manufacturing spaces. AI-enabled supply chains allow businesses to localize production while maintaining cost efficiencies, further bolstering the industrial sector. However, this shift requires warehouses and factories to be designed with modern automation capabilities, pushing demand toward new, technologically advanced facilities.
Retail Real Estate: E-Commerce, AI, and Changing Consumer Behavior
Retail real estate is already undergoing a transformation due to e-commerce and AI-driven personalization. AI algorithms help online retailers optimize pricing, predict customer preferences, and automate order fulfillment, leading to lower costs for consumers. Brick-and-mortar stores that cannot compete with AI-driven e-commerce platforms may struggle.
However, experiential and service-based retail locations will likely remain resilient. Shopping centers are pivoting toward entertainment, dining, and healthcare services—sectors that AI cannot easily replace. Grocery-anchored centers and discount retailers will also maintain strong demand, as these businesses provide essential goods that AI cannot fully digitize.
Multifamily Real Estate: AI and Changing Housing Demand
AI’s impact on multifamily real estate will be twofold: it will change how properties are managed and influence where people choose to live. On the management side, AI-driven property management systems can optimize energy usage, predict maintenance needs, and enhance tenant services. Smart leasing tools powered by AI can improve occupancy rates and reduce marketing costs.
On the demand side, AI-enabled remote work could shift housing preferences. If automation leads to job losses in urban centers, we may see a migration toward lower-cost, high-quality-of-life areas. Cities that depend on office workers and service jobs may experience declining demand, while suburban and secondary markets could benefit from population shifts.
How Investors and Brokers Can Adapt
- Embrace AI-Driven Insights: Real estate professionals must leverage AI and data analytics to assess market trends, tenant behavior, and investment risks.
- Focus on Adaptable Spaces: Investors should look for properties that can be easily repurposed, such as converting office buildings into residential units or warehouses.
- Diversify Asset Types: Given AI’s varying impacts across property types, a diversified portfolio with exposure to industrial, retail, and multifamily real estate can provide stability.
- Invest in Smart Buildings: Future-proofing properties with AI-powered infrastructure, such as smart HVAC systems and automated security, will attract tenants and improve long-term value.
- Monitor AI Policy Changes: Governments may introduce policies to regulate AI adoption in various sectors, which could influence real estate trends.
Leveraging Brevitas for AI-Driven Market Insights
Commercial real estate is at a crossroads. AI’s deflationary forces will create both challenges and opportunities, requiring investors and brokers to stay informed and agile. By leveraging data, embracing technological advancements, and adapting investment strategies, Brevitas members can position themselves for success in a rapidly evolving market.
