Data centers – affectionately called Internet hotels when they first arrived on the real estate scene – are essentially office spaces where tenants, usually financial businesses, agree to pay higher amounts in exchange for guaranteed electricity to power their servers. In the beginning, it was relatively simple. As more businesses rely on lightning fast Internet speeds and up-to-the-second updates on stocks and financial portfolios – a half-second literally meaning the difference between millions of dollars made or lost – data centers are popping up more and more often. And with computing power increasing, so too does the need for more electricity.

The information age
Bradley Dick, chief information officer at Resurgens Orthopaedics, said he uses nine racks of servers at Quality Technology Services's data center that process and store hospital information such as digital images and patient billing records. The clinic's 1,600 telephones are routed through the same servers.

"That is our business," Mr. Dick said. "If those systems are down, it's going to be a bad day."

The landlords of these properties are seeing their roles shift as the actual quality of the space becomes less of a priority and the amount and the consistency of electricity gains a prominent clause in the lease agreement. Data centers can often consume as much electricity as a medium-sized town. Landlords, then, are becoming pseudo energy brokers, reselling electricity at a tremendous profit.

These properties benefit from much of the real estate laws but are not regulated the same way utility companies are, especially considering the restrictions placed on energy profits. Some of the largest data centers are pursuing to reorganize themselves as real estate investment trusts to avoid most corporate taxes.

Since most data center tenants contract more power than they need, data centers charge tenants for "available power," not necessarily power used – allowing data centers to charge double what they are paying.

This comes on the heels of a recent announcement by the U.S. General Services Administration's report on how commercial buildings can save energy and reduce utility costs – photovoltaic cells being cited as a way commercial-scale systems can generate around 8 percent of their energy needs on site. The was tested at the Bean Federal Center in Indianapolis, Ind. Solar power among them, the GSA also experimented with the use of 22 other technologies as part of the program. For data centers, this is just another way to guarantee energy availability to clients.

 As a result of the report's findings, the GSA had begun installing advanced power strips and wireless cost-saving sensors for the data centers in its own facilities.

According the National Real Estate Investor, the U.S. economy will lose $85 billion in federal budget cuts for 2013 – cuts that won't necessarily be felt evenly. Economists are predicting that such cuts will reduce growth in the gross domestic product by 0.5 to 0.6 percent. Many of the cuts will directly impact the office sector as government contractors constrict their staff size and budgets.

"It will slow us down a little bit," Jon Southard, managing director of the Econometric Advisors at CBRE in Boston. "But it won't be fatal in any sense of the word."

Geographic regions most affected
Washington D.C., Maryland and Virginia all report 19.8 percent of their economic activity relates directly to federal spending, as a high concentration of government agencies and contractors call this region home. 

According to the NREI, 40 percent of the office market in northern Virginia is propped up by government contractors. In 2012, the metro D.C. office market saw 3 million-square-feet of negative absorption as contractors consolidated their operations and the government froze its property acquisitions.

Scott Homa, a vice president of research for the Mid-Atlantic region at Jones Lang LaSalle in Washington, D.C.

"So, this is an office market that is highly exposed to any fluctuations in government spending," Scott Homa, vice president of research for the Mid-Atlantic region at Jones Lang LaSalle, told NREI. "Any lack of clarity associated with fiscal policy and long-term budget priorities really impedes growth in the market."

Optimism to boot
Even though the office sector dragged as a result of the government spending cuts, the long-term outlook is positive. Commercial real estate investors are seeing improvements in business spending, job growth, a housing recovery and boosts in consumer confidence indicating good things to come.

In a recent statement, Bentley Forbes, a real estate investment and development company, expressed their confidence in the market. They noted that it is easy to point to a few storm clouds but people are getting back to work and interest in retail and office space in increasing. And that's not mentioning, the firm notes, the continued success of the multi-family sector, emphasizing that the future looks promising for commercial real estate.

"It is clear that there is an increased level of optimism in this industry," said Bentley Forbes. "Which is good news for all of us,"

National vacancies still remain 450 basis points above the recession low in 2007. Despite continued job growth, with 85,000 per month in 2010, to over 182,000 per month in 2012, there are just enough jobs to maintain current office demand. Construction companies have experienced difficulty securing financing, especially for office developments, as high vacancy and existing office space absorbs current demand.

A meager 1.697 million-square-feet of new office became available during the first quarter – the lowest figure since 1999, according to the Real Estate Information Service.

The effect of the recession can still be felt when assessing rent levels, as rent levels are still tethered to 2007 benchmarks. Both asking and effective rents grew by 0.7 percent during the first quarter – down from 0.8 percent but still above the quarterly average. This growth is mostly the result of high-performing metropolitan areas with robust tech and energy companies, while most other areas have seen declines. Effective rent rates would be cut in half if the top performing markets were left out of the national average, indicating distorted levels of performance.

While job growth is still considered the most significant contributing factor to the recovery of the office segment within commercial real estate – April seeing 165,000 additional jobs – job growth is adversely affected by government legislation – in particular austerity measures.

The Washington D.C. area in particular will experience high vacancy rates as companies propped up on government contracts begin sequester-related lay-offs. In fact, the effect is already being felt – Washington's vacancy rate has already risen by 20 basis points during the first quarter.

New York Policy
According to the New York Real Estate Journal, the Capital Region office market is doing well with a 14.2 percent vacancy rate – at least when comparing it to with the national vacancy rate. Eric Simonds, of CBRE in Albany, notes that, since 2010, the New York region office vacancy rate has been increasing, and the cause is inter-related with government decisions.

Recently, New York made a policy decision requiring the state to migrate all its employees from leased, private properties to state-owned buildings. The shift caused $21.5 million in losses for property owners' lease revenue and increased vacancy rates in the central business districts and suburban markets, as well as in the already struggling downtown Albany office market, illustrating that more than just job growth can affect the micro office market.

With the growth of urban areas – which account for 50 percent of the global population – the future success of any real estate company, commercial or otherwise, is linked to creating sustainable places for families to live and work and that align with energy benchmarks and natural resources.

The Energy Star debate
Many industry insiders say that energy benchmarks are just the beginning of any sustainability program. For example, the Energy Star certification program, developed by the federal government, uses Portfolio Manager, a computer program designed to compile a building's data points. 

"If you put good, accurate data into Portfolio Manager, you get good results," Tony Liou, president of Partner Energy, told the NREI. "But garbage in, garbage out."

Many buildings, Liou says, game the system by distorting the numbers. Some buildings do it intentionally, while others simply enter data in error. More importantly, there is a huge block of commercial real estate that is currently exempt from Energy Star ratings – the multifamily property and retail malls. While others call the system in question altogether because it compares buildings to a poor efficiency standard, pulling from a pool of data that originated during a technological time when buildings were inefficient.

And according to the NREI, compliance and reporting rating results publicly, even when required by law, is few and far between.

"Absent a really steep fine, I don't think a lot of these cities have a good way to convert everyone over," Dustin Gellman, owner of Green Per Square Foot, told the source. "While some companies were honestly ignorant about the law, he notes, others didn't want to know what they'd find. "It takes the health of your building and makes it public. A lot of owners don't want that."

Sebastopol, California
According to The Press Democrat, the small town of Sebastopol adopted legislation requiring all new residential and commercial developments to be equipped with solar power installations. The ordinance would require two watts of solar power per square foot of insulated building surface or offset 75 percent of the building's annual electric load. 

The Mayor, Michael Kyes, said that the ordinance will not only save money, but that it is the responsible thing to do.

"What we hope to use technology for is that we can provide better services for our clients," Mike Kram, president of Cassidy Turley, told NREI. "Not just for the purpose of deploying technology." Kramm notes that his firm is currently implementing a customer relationship management solution called eClient that will allow brokers to see with whom other brokers in the firm are working. "That is going to be a major improvement in our productivity, and also allow us to provide better client services in a more coordinated fashion."

Aside from CREs, small- and mid-sized firms see technology as a way to level the playing field and better equip themselves to compete with larger brokerages. Scott Burns, president of Wilson Commercial Real Estate, is employing technology that allows him to give clients 360 degree virtual tours of the 75 shopping centers in Wilson's portfolio. Burns notes that his firm is often overwhelmed by phone calls from people interested in seeing the space, and while prospective buyers are valued, he says access to a virtual tour eliminates less serious buyers and saves the time for his firm to court serious buyers, according the NREI.

Other increasingly popular technologies embraced by brokers are property information apps, allowing brokers to track down owners, identify investment sales or leasing opportunities, and provide easier access to reports and property listings.

Don't forget about property managers
Many software firms are paying attention to the needs of brokers and property managers, developing apps that streamline their operations.

One such firm, Inspect & Cloud, has produced property management inspection software and a mobile app enabling field inspectors to conduct property inspections using their smartphone employing touch check boxes, auto text comments, and photos to create an organized professional report. This report can then be accessed anywhere online as needed, to view, print, or email the report directly to the property owner on the spot. Brokers and owners can manage their inspectors instantly by viewing what inspections have been completed on a map, at what time the inspector completed the report and long the inspection took to complete.

"The beauty of this feature is that the information is automatically emailed to the property manager on a weekly basis," Gilbert Quinones, RE/MAX broker and property manager, told the source. "This really makes it easy for the property manager, and the price is actually very competitive. It costs you more not to have it."

"The market is shifting to favor landlords," Louis Tomaselli, senior managing director of Jones Lang LaSalle, told National Real Estate Investor. "Tenants are starting to scramble for opportunities, and the ones who are slow in making decisions are being forced into space they didn't want. Space is so tight that when we show tenants an inventory summary, they look at it and ask, 'Where's the rest?'"

Net absorption of industrial real estate in the 54 largest U.S. markets totaled 25 million square feet in the first quarter, according to Rene Circ, director of research for PPR. That figure is about three times larger than the first quarter of 2012's total.

As demand surges, new supply continues to remain low, Circ noted to the NREI. About 13 million square feet of new industrial facilities were delivered in the U.S. during the first quarter, and roughly 38 million square feet of facilities were under construction at the end of March. Both figures fall below historical averages.

"Construction basically stopped for two to three years," says Kim Snyder, president of the southwest region for Prologis. "It's ramped up over the past several months, but replacing stock takes a long time, especially with the regulations that govern development here [in California]."

With success comes rate hikes
With the industrial sector experiencing a vacancy rate of 8.2 percent, a full 20 basis points lower than the preceding quarter, the average rent for an industrial tenant climbed 2.5 percent year-over-year.

Understandably, investors have taken an interest in new industrial developments as many tenants are absorbing rent hikes. Confidence is high that some speculative construction has already taken place.

Many industrial tenants have seen their businesses expand and have maximized their space as much as possible, adding racking and seeking more intelligent layouts. But the supply is so low that many don't have any choice but to wait for new space to open up that will accommodate their growing business.

Jim Brice, a partner with Holt Lunsford Commercial, told NREI that while the industrial sector doesn't get the big spikes in value or rent like other opportunities, its appeal among investors is its consistency. It's a steady, solid play – yielding consistently positive results – a sector everyone wants in on, Brice noted.

According to the Counselors of Real Estate, the best sought solutions are born out of creativity.

The CRE cited an example of an abandoned, unfinished hotel development in New York City that was repurposed as a rental high-rise.

"Younger workers who want to live close to where they work could not find suitable housing," said Kenneth Browne, partner at Urban Development Partners. "It was literally a hole in the ground with a foundation poured when it was abandoned but we envisioned something new, something different. Now the building is helping to reinvigorate the neighborhood."

In cities like Pittsburgh that inherited large, aging industrial infrastructures, creative partnerships have helped transform vacant buildings and storefronts into community centers, community arts collaboratives or theaters in urban centers as well as suburban strip malls.

Christopher Gerlach, director of public policy research at the International Council of Shopping Centers, said property owners and leasing agents should consider the character of the community, as well as the adverse effect of empty storefronts – and for the benefit of all, find a creative solution to fill the space, rather than leave it empty for an extended period of time, hoping for a more lucrative tenant. Examples include local arms of educational institutions, entertainment venues, fitness centers medical or dental offices, even churches and resale shops – anything so long as it's occupied. If occupancy is maintained, the probability of property damage, theft, or vandalism go down significantly.

Detroit's angle
For the city of Detroit, the scope and intentionality of its creativity is slightly different. Many commercial real estate companies are seeking both creative solutions and creative businesses with plans to sign long-term leases.

"We are excited about opening up a studio space downtown where we can be closer to our clients and the incredible revitalization taking place," Joel Smith, partner at Neumann/Smith Architecture, told the D Business Journal. "The new Detroit office will provide an opportunity for more face-to-face meetings, foster a closer client experience, and increase our involvement in the community."

The problem in Detroit is two-fold. The city has a high vacancy rate, coupled with low traffic. So the draw is to attract large to mid-size creative firms and all of their employees with attractive rent packages. Retailers can return once people traffic and consumer demand is restored.

While large apartment REITs have seen strong growth, a slowdown is expected as rents rise and more first-time homebuyers seek to finance single-family homes taking advantage of near record low rates for 15 and 30 year mortgages.

"We are moving into a new phase of the multifamily housing cycle, a more typical phase, characterized by higher levels of apartment supply and incrementally greater competition from for-sale housing," David Stockert, chief executive of Post Properties, told The Wall Street Journal. He noted that additional competition will result in "a more sensitive trade-off between pushing rents and sustaining high occupancy."

In a recent National Real Estate Investor article, landlords can enjoy the tight supply for another two quarters – with effective rents climbing 0.5 percent – until almost 100,000 units enter the market and become available during the second half of the year. The multifamily sector absorbed 36,000 units in the first quarter, a figure considered healthy. 

The national vacancy rate fell by 20 basis points, stooping to 4.3 percent in the first quarter. Vacancy rates have dipped by 70 basis points in the last four quarters, the fastest declining vacancy rate than any other commercial real estate sector.

Malls and storage units outperform
As office and apartment landlords experienced slower growth, Malls and storage unit buildings experienced the strongest gains.

"The top-quality malls have continued to do very well despite the fear that everyone is going to be shopping online," Alexander Goldfard, an analyst at Sandler O'Neill, told The Wall Street Journal. "People like to be able to try [clothes] on and see how it looks and most importantly how it fits. It's immediate gratification. People feel great with arms full of bags walking out of the store."

Goldfarb also noted that 40 percent of online purchases are returned and that, for many, malls still offer a social, hands-on experience.

Simon Property Group, the nation's largest REIT, said last month that its cash flow from properties rose to $2.05 a share in the first quarter from $1.82 a share a year ago. Those results toppled analyst expectations of $2.01. Simon, which is comprised of 327 malls, also reported that occupancy rates increased to 94.7 percent (from 93.6 percent), and the base minimum rent was up 3 percent from a year earlier.

As cited by John Orehek of the Puget Sound Business Journal, owners and operators were able to attract commercial real estate management companies, investors and capital for new multifamily developments when the rental rates justified a healthy return on total development costs. For the past few years, rental yields on apartment projects have exceeded the yields on existing asset purchases, yields that typically hover around 5 percent.

This push by investors for multifamily units has created a solid expansion that has, for the first time in 10 years, overtaken the office segment. However, according to Peter Muoio of Multifamily Executive, the growth varies geographically, indicating shifts in demand and vacancy rates that may affect investor decisions.

Still, the multifamily sector has experienced 15 consecutive positive quarters of seasonally adjusted absorption. But with homeownership back on the rise, Muoio notes that high unemployment among the millennial population will continue to drive strong absorption and low vacancy rates.

Echo Boomers
High unemployment rates are not just the only thing contributing to high multifamily absorption, according to Orehek. He notes that the demographic trends favor longer-term demand for rental-housing in urban locations, particularly, because young people between the ages of 20 and 34 – the prime rental age group – are seeking economic opportunities and generally prefer city living.

Born between 1982 and 1995, there were nearly 80 million 'echo boomers'. And according to David Lynn at the NREI, these young people are changing the real estate landscape. They favor urban lifestyles with diverse activities, cultural amenities, and restaurants. They are a highly mobile generation, preferring walking, bicycling, and centers of mass transit and tend to be renters.

Echo boomers generally are not interested in, or are financially capable of, purchasing a home as many witnessed parents or grandparents lose properties and pensions to foreclosure. 

Technology on Office Space
As this young generation flocks to the city, the suburbs face decreased revenues and retailers struggle to survive. This has left retailers to make more sophisticated use of smaller spaces, focusing on flexibility and collaborative workspace models that seek the benefits of technology. This may be one reason why the multifamily sector has overtaken the office segment.

With rising home prices, high cost of homeownership barriers, and a skeptical, mobile generation of renters, the apartment rental segment isn't going anywhere.

"Each jurisdiction is unique in how they value properties and administer property taxes even within state lines," Amish Gupta, chief operating officer at Real Estate Tax Consultants, said in a recent statement. "The more dynamic a property is, the more volatility there will be in taxes. These factors can leave owners with a tax bill that does not reflect the true value of their property resulting in overpayment."

For owners, property taxes are usually the biggest line item expense they experience and can affect cash flow and a building's sale price. If a property sees a jump in its net operating income, owners can expect an increase in property taxes. However, by managing property taxes effectively, owners can benefit from the increased income while boosting the value of the property as well as their debt ratios.

When to Appeal?
According to a recent Dallas News interview, Rick Kurz, founding principal and president of Kurz Group, says there are a few key things to keep in mind when considering appealing the tax appraisal of your commercial real estate property, especially if you want to build a strong case for a lower assessment.

First, take the time to go over the details of  your assessment. If there is any discrepancy, or if you disagree in with the district's appraisal value, you must file your written appeal before the protest deadline. There is typically a 30 day window to file an appeal.

Second, visit the appraisal district website and locate your property. Confirm that the information they have regarding your property is accurate.

If the property generates an income, be sure your financial records are organized and accessible. Information like rent roll and the profit-loss statement is required in the case of an appeal.

Next, assess the surrounding properties in your district and compare their sales and financial numbers with yours. You may need this information when making your appeal to the district. If managing your business leaves too little time left over for investigating surrounding properties, but it is essential to make an appeal, hire a consultant. Consultants usually work on a performance scale, or tax-saving commission. No savings, no fee.

You may want to hire your own appraiser. Keep in mind that, according to the Chicago Tribune, a bank is not obligated to use your appraisal and will not help you lower your appraisal.