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As technology expands, need for space shrinks Trend will alter skylines and change real estate industry

Technological advances are shrinking the demand for commercial real estate, a trend that will alter city skylines, darken offices and forever change the landscape of the $3.3 trillion industry.

Before long, a growing number of industry analysts and academics predict, the technological revolution will affect every sector of the real estate industry, from downtown skyscrapers to distribution centers to manufacturing plants and strip shopping centers.

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The trend will profoundly change the way future properties are developed, designed, leased, financed and analyzed for investment, the experts believe.

"Real estate to date has had a supply-side bias," said Jay Gouline, a professor at the Johns Hopkins University's Allan L. Berman Real Estate Institute and a local representative of TA Associates Realty, a Boston pension fund adviser. "The mentality has been, build it and they will come. Those days are behind us. The adage location, location, location today is myopic."

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Technology's role and its implications become more important, analysts say, as companies are forced to become increasingly competitive, increasing the pressure to slash fixed costs such as rent.

Computers, fax machines, cellular phones all contribute, providing freedom for employees and reducing the amount of space that business has traditionally required.

"Real estate in the past was the only place people could do their work or shop, so we built a huge infrastructure to support that," said Barry D. Libert, managing director of Arthur Andersen's real estate transformation group, in Boston. "That's not true anymore."

Already, companies such as AT&T; Corp. in Hunt Valley are pioneering space-reducing techniques such as telecommuting, where employees work either at home or from the road, and "hoteling," where workers book office time on an as-needed basis.

Such techniques are playing havoc with formulas used to forecast the need for new real estate development. In the past, 1.87 million square feet of new office space would be required to accommodate 7,500 new office workers. The figure is being reduced dramatically.

However, the emergence of technology could add years to the recovery of Baltimore's central business district, already stung by a 23.2 percent office vacancy rate.

That figure was the third-worst on a list of least-improved office markets as compared with a year ago, according to a new Morgan Stanley & Co. Inc. report.

The prognosis for the city's older office buildings is especially poor, since those buildings are the least able to adapt to technological improvements by installing high-tech fiber-optic wires or upgrading their power supply to accommodate sophisticated computers. The result, analysts say, will mean that several of Baltimore's old office towers will be functionally obsolescent.

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"The consequences for older properties downtown are especially disturbing," said Jeffrey B. Samet, a vice president of Colliers Pinkard, a Baltimore-based commercial real estate services firm. the utility of those buildings with smaller floors continues to .. diminish, decisions will have to be made. Whether that results in the razing of some structures is years away, I think."

In some cases, the impact is being felt now. Piper & Marbury, one of the city's largest law firms and office occupants, has transferred much of its law library from books to computer at its offices in the 25-story Charles Center South.

"It's reduced the need for satellite libraries on each floor, because now that material is on CD-ROM," said Jack Machen, a partner in the firm and chairman of its technology committee. Tom Fleming, Piper & Marbury's library director, said the electronic shift has allowed the firm to maintain its current 7,000 square feet of library space, despite significant additions of books.

Mr. Gouline calculates that a single CD-ROM disk can take the place of 9 cubic feet of file space.

"Between space utilization, technological advances and corporate downsizing, it really makes it hard to justify any new office construction downtown in the near term," said Ira J. Miller, a principal with Miller Corporate Real Estate Inc.

Office building development isn't the only real estate area likely to feel the influence of technology, however. Distribution space is also being hit, thanks to taller warehouses, automated conveyor and racking systems, computer software and manufacturers' moves to more concentrated products.

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"The aggregate need for new distribution space will be only a small fraction of that required during the past three decades," said William C. Wheaton, director of the Massachusetts Institute of Technology's Center for Real Estate, in a recent trade publication article.

By adopting bar codes and other so-called "just-in-time" shipping methods to track inventory, distributors can double their sales but increase space requirements by only 41 percent, Mr. Gouline said. Furthermore, higher warehouse ceiling heights allow distributors to boost sales without increasing floor space.

Locally, Alcon Laboratories Inc. proved that improved technology allows distributors to make more with less, when in 1994 it moved to 102,000 square feet of new warehouse space in the 138-acre Meadowridge Business Park in Jessup, shaving 23,000 square feet off the pharmaceutical company's previous requirement.

Shopping mall owners and merchants won't be immune, either, as catalogs and electronic shopping mediums being developed by mall owner the Hahn Co., MCI Communications Corp. and others eliminate stores and salespeople. Many analysts contend that the emergence of alternative shopping is the primary reason that mall owners such as the Rouse Co. and the Simon Property Group are searching for ways to convert their projects to more entertainment or community-oriented places.

"I may never buy shoes or a coat virtually, but even if I buy 20 percent of my goods electronically that I used to shop for at a mall, it will devastate the malls," Mr. Libert said.

Not everyone in the industry agrees, however.

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"The vast majority of real estate in this market isn't being affected by technological advancement and won't be for a long, long time," said R. Lawrence Koch Jr., managing director of Columbia National Real Estate Finance Inc., a mortgage company which arranges financing with such real estate lenders as Cigna and Teachers Insurance & Annuity Association Inc. "The lenders we're financing with aren't worried about the impact of technology replacing people. It's not a focus."

J. M. Schapiro, an associate with the Towson development and investment firm Continental Realty Corp., said that, while he agrees that technology will generate changes for real estate firms, it won't happen all too quickly. He noted that the "paperless" office predicted years ago has failed to materialize, because "people still like paper. Going electronic isn't as easy as people think."

And Colliers Pinkard's Mr. Samet points out that technological gains often result in added demand, as new industries form to supply, service and profit from improved electronics, changes in work style and customer demand.

"One needs to look only as far as the deregulation of the telecommunications industry to see how new jobs can be created," Mr. Samet said. "And those businesses occupy office space. While we may continue to have a split that favors the suburban markets, we have to be careful at arriving at conclusions."

Still others say many managers chaffe at the idea of telecommuting and won't adopt it because of fear of losing control of employees. Of course, even those who predict that real estate will become less necessary do not suggest that it will be rendered completely meaningless.

The so-called Class A properties -- defined by age, quality, amenities and ability to react to changing work styles and technology -- will continue to perform well, despite overall declines in demand, Mr. Libert said.

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"I'm not suggesting that the central business districts of most cities will become obsolete, all I'm saying is that there's a transformation taking place now that has significant implications associated with it," Mr. Gouline said.


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