By John Egan, National Real Estate Investor

The investment signals Buffett’s confidence not only in Store, but also in net lease properties.

When billionaire investor Warren Buffett makes a deal, people take notice.

Such is the case with the recent purchase by Buffett’s conglomerate, Berkshire Hathaway, of a 9.8 percent stake in Scottsdale, Ariz.-based Store Capital Corp., a net lease REIT. The investment—in the form of 18.6 million privately-placed shares of common stock valued at $20.25 apiece—totals $377 million. Berkshire Hathaway is now Store’s third largest shareholder.

The investment signals Buffett’s confidence not only in Store, but also in net lease properties, says Ralph Cram, president and manager of Envoy Net Lease Partners LLC, a real estate finance company specializing in single-tenant, net leased assets. The cash infusion underscores the fact that the triple-net sector has hit bottom and is climbing back, Cram adds.

“We have seen buying activity of individual properties pick up significantly over the past 45 days,” he notes. “I believe that long-term rates falling recently has helped the triple-net market as well. So the worst has passed for now.”

The Buffett deal brings “favorable attention” to the net lease market, according to Michael Knott, managing director with Newport Beach, Calif.-based research firm Green Street Advisors. At Green Street, he tracks Store and competing net lease REITs Realty Income Corp. and National Retail Properties.

Looking solely at Store, Knott says it’s “a value investor haven” for Berkshire Hathaway. Why? He cites three reasons:

  • Buffett’s company bought its stake in Store at just 11x earnings.
  • Store represents “a safe earnings stream” backed by a diversified portfolio of properties operated by a diverse group of tenants.
  • Store’s management team enjoys a lengthy track record of success. This is the team’s third REIT, with the previous two REITs having been sold.

“The deal suggests there is value in Store’s unique platform in a fragmented net lease industry, and in management’s demonstrated history of generating favorable results for shareholders,” Knott says.

According to Knott, Store carefully evaluates and monitors its investments, and produces solid returns by taking “intelligent risks” with its underlying real estate.

On the day Buffett’s investment was announced, a number of publicly-held shopping center and mall REITs benefited from a bounce in their stock prices. So will the Buffett deal have a more sustained ripple effect on those REITs?

Read more…

By Brian Ward, Trimont Real Estate Advisors

ATLANTA—It’s easy to feel uncertain about what this year will hold for the commercial real estate industry. After all, the industry is facing challenges from meta-trends like Airbnb (where do we begin?), e-commerce, even self-driving cars (and Uber’s legal showdown in California). Then there’s the broader, mature CRE market cycle, global liquidity and the continuing search for yield, and major uncertainties with the changing global political landscape. Will the CRE industry prosper or stall? Time will tell, but let these key trends for 2017 be the starting point.

1. Higher Capital Costs

We may see an increase in liquidity and leverage. If the incoming Trump administration is able to repeal or dilute regulations imposed by Dodd-Frank, Basel III and the like, the floodgates for capital will further expand beyond what we witnessed in 2016. While Wall Street and banks will benefit,  the US central bank will be caught squarely in the middle and may have a tough task of balancing monetary policy, stable growth and a globally competitive US dollar.

These challenges will have broader ramifications beyond commercial real estate. We will see inflationary pressure, but it remains to be seen whether sustainable GDP and wage growth can be achieved to the level suggested by the incoming administration. If not, we are exposed to stagflation risk. Either way, we are likely to have higher capital costs for commercial real estate. In the near term, we doubt higher capital costs will translate into higher cap rates as the weight of liquidity and lack of investment alternatives will keep the pressure on. That could change in 2018.

2. Brexit Effect

Although we’ve had a continuing decline in the sterling post-Brexit vote, we have not yet seen a corresponding increase in UK investment activity. We believe this is due to continued uncertainty around the broader implications of Brexit—though it is too soon to draw definitive conclusions from this slowdown. It could be merely a pause in the market, with activity resuming in 2017 once further clarity on Brexit is communicated. The Brexit event is notable in terms of how quickly the uncertainties of politics and policy can erode investor confidence, or can at least be translated into a material pause in investment activity.

London will remain a global financial leader, although we wouldn’t be surprised if metros such as Frankfurt and Amsterdam see an increase in investment activity over the next few years, particularly as a result of their airports, favorable business climates and multi-lingual accommodations. Assuming Brexit happens, companies will diversify their UK positions into leading EU markets. There is concern that the average U.K. consumer could be hurt as a result of Brexit due to the rapidly increasing cost of consumer goods and declining sterling. A drop in UK consumer spending will most certainly hamper their GDP growth. We see the potential for parallels between the UK and the US when it comes to foreign investment, as well as potential adverse impacts for the average consumer.

Currently, foreign investment into US commercial real estate is at an all-time high. We don’t think that will change much during the first half of the year, but thereafter it becomes less clear. We are hearing words of caution from foreign capital on investment into the US. However, these cautionary comments are offset by the general belief that today, the US remains the best risk-adjusted market for commercial real estate investment in the world. That could change if, similar to the UK, uncertainties persist and risk-adjusted alternatives crop up.

3. Disrupt or Die

Technology advances are significantly changing the way we work and live, shifting how the industry imagines investment strategies. However, we are seeing a slow-reacting asset class. On retail, the loss from e-commerce has resulted in distribution gains. Malls will continue to become distribution spaces and the experiential consumer will encourage further blending of entertainment with apparel.

Transformation of the hospitality industry via Airbnb and VRBO will continue to face local regulations that may inhibit the threat they pose to commercial real estate. But the sharing economy is here to stay. With regard to transportation, driverless cars will present far-reaching social implications when you consider 17 million jobs are tied to individuals driving vehicles. The design of parking spaces is another area of investment that is shifting. There will be an increasing demand for these projects to be built as flat spaces, as it will be easier and more cost-effective to repurpose than the traditional ramp parking garage. We see these designs common in urban areas, but over the next few years, we may see more of these commercial projects pop up in suburban areas.

In the next decade, these technology advances will totally alter the thought process around real estate, how investment occurs, and how we buy and manage projects. If the industry doesn’t keep up, it’ll be decimated by the transformation.

Brian Ward is CEO of Trimont Real Estate Advisors. The views expressed here are the author’s own.

*This content is brought to you by Sable International, specialists in securing secondary residency and citizenship for South Africans. Sable can help relocate yourself and your family, along with your business to the UK.

By Andrew Rissik*

The new year is a perfect time for South Africans to start planning how they will make use of their discretionary allowances to transfer large sums of money overseas without a tax clearance certificate. If you’re married, or have children over 18, you can move much more than R1 million without a tax clearance certificate in a calendar year.

Understanding your annual discretionary allowance

The single discretionary allowance (SDA) allows a South African (18 years or older) to send R1 million out of South Africa annually. Since various SDA subcategories were eliminated in April 2015 you can now use your allowance for any legal purpose abroad.

This is what SDA allows you to do:

  • Invest or advance R1 million to foreigners and South Africans living abroad, without obtaining a tax clearance certificate
  • Spend some of the R1 million per person on overseas travel, provided that the aggregate spend does not exceed R1 million per year

But how do you transfer R2 million over this period?

It’s quite simple really.

All you need to keep in mind is that every year you are given a discretionary allowance of R1 million. Your partner, if they are a South African citizen, receives the same amount. This means that over 2017 you can together send R2 million. You can choose to send this in one lump sum, or you can choose to stagger the payments over the year.

Not having to obtain a tax clearance certificate means you can transfer these funds with very little admin. The large amount that is permissible under current regulations makes it easier for you to make a serious offshore investment, rather than having to do it in dribs and drabs. But that’s a decision that you can make depending on your circumstances.

Send more than R2 million each year

Parents with children who are over 18 years old can move R1 million offshore under each child’s name without needing to get tax clearance. All you need to do is make sure your child applies, and receives, a South African tax number.

We can do their tax number application to SARS for a nominal fee of R380. Exercising this option can make a huge difference to the amount of money you can send offshore without tax clearance in a calendar year.

You can also apply for further investment allowances that require tax clearance certificates. For more information on these, and other ways of getting your money where you want it to be, pop us an email and we’ll walk you through the various allowances available to you.

Use these allowances while they’re still available

Many analysts are predicting some severe cash outflows from emerging markets following Donald Trump’s victory in the US election earlier this year.

Trump has outlined stimulus packages that could send bond yields higher in the United States. In these cases, volatile emerging currencies, like the Rand, are most at risk.

Add to this the fact that South Africa has had a history of exchange controls and a reversal in our currently liberal offshore allowances could be on the cards.

It’s only in the last decade that these rules were significantly relaxed. Should the government decide that too much money is flowing out of South Africa, it may decide to bring capital controls back into effect.

If you’re thinking about getting money offshore, it’s best to do so while you still can with ease.

We can help you make use of all your discretionary allowances. Give us a call on +27 (0) 21 657 2153 or send us an email saforex@sableinternational.com.

About Zebra REIT

Introducing a new “Asset Class” being Passive Property Investing and Opportunity to Invest in Institutional Quality Commercial Real Estate Backed By Fortune 500 Corporations, Government and other National tenants in the USA.

Our goal for Zebra REIT is to become the global conduit for low risk, quality property investments across international borders for mid-sized institutions, wealth managers, private clients and family offices.

Technology will ultimately drive distribution in real estate (making it more efficient for local and foreign investors to invest globally) and with our proprietary owned technology, we are well positioned in the rapidly growing Real Estate and FinTech investment market space to become one of the first e-REIT funds.

For more information email Bryan Smith invest@ZebraREIT.com

By David Sobelman Jan 04, 2017

While net lease remains one of the most stable asset classes, volatility and uncertainty in the market will present challenges for the sector.

We can all breathe a sigh of relief that the worry and stress of 2016 are over and we can now focus on the year ahead. Politics, interest rates and even sports have made us all wonder what could transpire and should we even try to fathom what the coming year entails.

Every interview from our nation’s leading experts, in their respective fields, begins with an explanation on our nation’s micro and macro economies with the words, “I think.” We’ve all heard it before but give it little attention when it’s spoken. For instance, a moderator asks, “Where are cap rights going in the next twelve months?” and the expert answers, “‘I think they will (insert answer here.)” Or the moderator asks, “What will happen to commercial real estate values in 2017?” and the expert answers, “I think values will (insert answer here.)” You get the picture.

But my colleagues and I, who are asked to opine on the state of the overall commercial real estate market and how tangential and outside influences may either impede or bolster the coming real estate cycle, are wondering ourselves how to navigate our and, in some cases, our clients’ decisions in the coming year.

With the vast differences in answers to the questions we’re receiving, its clear that pinpointing a specific response is 2017’s greatest challenge. Even Hessam Nadji, president & CEO of Marcus & Millichap (M&M), who is a regular face on national television and a historical proponent of bringing into account the strength of the markets, chose to publicly sell 37,296 shares of M&M stock in the final months of 2016 at a value of roughly $2.5 million. “I think” that sale may speak volumes to what his real thoughts may be on the coming market cycle.

But what we should all consider is that net lease investments have become an industry in and of themselves. The asset class is seen as one of the most stable types of commercial real estate investment, with as little as 250 basis points of variance from the trough of the recession to the peak of the market.

Compared to other asset types, that spread is very manageable for most investors. Additionally, the International Council of Shopping Centers has begun to embrace the product type as it has instituted the N3 conference series around the country: panel discussions that highlight various regional topics focused on net lease assets.

ICSC has also established the first education and information session for continuing education (CE) credits at its annual RECon conference in Las Vegas in May. These developments could be a strong indicator that the world’s largest real estate association has now embraced the building type as it has been clearly shown that the issues surrounding that market appeal to the masses. This is drastically different than just 10 years ago when a single-tenant investment was rarely mentioned outside its core practitioners.

2017 will prove to many, in and out of the net lease industry, that even in the most drastic of economic circumstances, a single-tenant property and the growing industry that surrounds the asset type will continue to resonate as the safe haven for landlords and investors.

Few investment vehicles, real estate or otherwise, provide the risk-adjusted returns of triple-net lease properties. Add in the opportunity for an appreciating real estate asset and annual returns could far outpace anything in its peer group. But despite its stability, the sector will face its challenges.

History has shown that the hurdles of the net lease sector are not solely in the ups and downs of the market, but in attempting to precisely time the market—that is this year’s biggest challenge.

David Sobelman is the founder & CEO of Generation Income Properties (a public net lease REIT) and the executive vice president of net lease brokerage firm Calkain Cos.

About Zebra REIT

Introducing a new “Asset Class” being Passive Property Investing and Opportunity to Invest in Institutional Quality Commercial Real Estate Backed By Fortune 500 Corporations, Government and other National tenants in the USA.

Our goal for Zebra REIT is to become the global conduit for low risk, quality property investments across international borders for mid-sized institutions, wealth managers, private clients and family offices.

Technology will ultimately drive distribution in real estate (making it more efficient for local and foreign investors to invest globally) and with our proprietary owned technology, we are well positioned in the rapidly growing Real Estate and FinTech investment market space to become one of the first e-REIT funds.

For more information email Bryan Smith invest@ZebraREIT.com

By James Nelson

NEW YORK CITY—For the December 2016 of the Full Nelson, I had the pleasure of sitting down with Victor Calanog, Chief Economist & Senior Vice President at Reis, to discuss the impact of the Presidential election on the New York City real estate market.

JAMES:  What do you have to say about the Presidential election results?

VICTOR: The downside seems to be out of the way.  When it looked like Trump was going to win the election, the DOW was down 800 to 900 points, and low and behold the market was up the next seven to eight trading days.  The markets appear to be taking a bet on greater economic activity resulting from things like infrastructure investments that tend to stimulate more economic activity, which is why the stock of companies like construction services rose anywhere from seven to 20 percent right when Trump was elected.  Then the questions is whether or not inflation will come at its heels, which is why the 10- year Treasuries have been rising quite a bit as well.

JAMES:  What impact does the election have on the real estate market? 

VICTOR: I was saying that Brexit would be a nonevent for commercial property fundamentals, as well as pricing in the US.  The US is perceived to be a safe haven on a risk adjusted basis, and superstar cities with real estate like New York and San Francisco are reaping a lot of those benefits given that they are real assets that are generating income.  That is the overall context as to why a lot of the geopolitical upheavals that are having an effect on other countries are largely leaving us unaffected.  The question has been raised, will a President that has a background in commercial real estate be good for commercial real estate?  I think it seems to be leading that way in terms of where investors are placing bets.  If there are deals to be had out there, people are waiting for more preferential tax treatments, if tax policies change.  We don’t believe we will see the end of 1031 exchanges, so that will benefit a lot real estate investments.  This is not going to lift all boats, but places like New York and San Francisco will likely benefit disproportionately.

JAMES:  Do you think that foreign interest in New York will continue?

VICTOR:  In relative terms, I suspect that if there are benefits to be had, if the economy keeps growing, if treasury rates don’t spike where the risk free rate is more attractive than riskier options, I suspect that any kind of foreign policy change and or boiling of the waters when it comes to how the US relates to the EU and other trading partners, a lot of that will probably be to New York’s benefit as opposed to its disadvantage.  For example, if there is any kind of effect on Brexit on the property markets it is that it probably rendered London as a safe haven for foreign investment as less of an option.  Where else will that kind money go?  New York.

JAMES:  We are witnessing a slowdown in sales in New York City.  And we would think that this decline was a result of a lot of uncertainty.  Now that we are post-election, how do you see sales activity for 2017?

VICTOR: Before the November elections we were not sure whether a Clinton or Trump administration would benefit or harm investments, real estate, or the climate in general. Now that we know Trump will be in office, what people are waiting for will be what changes to rules, regulations, need to be considered before making a commitment.  I think many are waiting on the sidelines until they are familiar with said rules.  Come January, all of these administrative changes will be rolled out in a more definitive way.  I suspect you will see a burst of economic activity at the start of next year, and let’s see how 2017 pans out.

JAMES:  If the 10-year treasury is up, what impact will that have on pricing?

VICTOR: If the 10-year Treasury rate rises past a certain level then you will see greater upward pressure on cap rates, and therefore possibly lower valuations.  But, spreads are still relatively healthy.  A 4 or 5 percent cap rate sounds low until you consider the fact that we were coming from a 1.8 to 1.9 percent 10- year Treasury.  Therefore, a 77-80 bps rise in 10-year Treasuries does not worry me as much.  On the other hand, if 10-year Treasuries climb to the 4 or 5 percent levels then you are looking at an investment comparison where you have got a 4-5 percent sure thing versus riskier alternatives like equities or commercial real estate.  I am not worried right now, but November 9th really pushed 10-year Treasuries in a way that the Federal Reserve could not do for two years.  It ended QE 3, it raised borrowing rates overnight in December 2014, it threatened to raise it again in December 2015, and still no real blip in interested rates until November 9th.  So here we are.

JAMES:  The overall development market is down substantially, and we believe it is a result of not having construction financing available. Do you think that Trump’s election might ease some of the restrictions and regulations on the larger banks? 

VICTOR: It does look like the Trump administration is leaning towards less of a regulatory burden not just for real estate companies, but for banks in general.  It is yet to be seen what kind of impact January will have on changes to regulatory burdens like HVCRE and a lot of the topics that construction financing folks are worried about.  The buzz word is will the Trump administration provide us with a definitive roadmap on which we can hang our hats; whether it means we are writing checks to finance new development or banking on not just short term interest rate movements, but shovels in the ground two years from now on a one million square foot office building that won’t see the light of day until 2019.  If we have that definitive road map, we will feel a little bit more confident about writing that check, and if not then we will probably hold back.

By Reuben Gregg Brewer

In a recent news updateVEREIT (NYSE:VER) was flagged as having been downgraded by a Bank of America Merrill Lynch analyst along with Realty Income (NYSE:O), National Retail Properties (NYSE:NNN), and Spirit Realty (NYSE:SRC). The logic being that there’s limited upside because of the long-term lease nature of the triple net lease business. I won’t argue that, but there’s something important to note about VEREIT compared to this trio–diversification.

The retail group

As a shareholder of VEREIT, what caught my eye about this particular news release was that it lumped the real estate investment trust, or REIT, in with the retail sector. Retail accounts for essentially all of National Retail’s portfolio, nearly 90% of Spirit Realty’s portfolio, and roughly 80% of Realty Income’s portfolio. Spirit and Realty Income both have some exposure to office and industrial, but retail is the clear driving force at each of these REITs.

VEREIT’s portfolio, on the other hand, is far more diversified. Retail makes up around 60% of the portfolio, split largely between retail stores (35%) and restaurants (24%), with office at 23% and industrial at 16%. A near term goal is to reduce the exposure to restaurants, but even without that it’s pretty clear that retail is important to VEREIT, but it has materially more sector diversification than the other three REITs with which it was lumped.

The diversification doesn’t stop there. That’s because the numbers above are for the company’s owned portfolio. VEREIT also has an asset management business that sells and manages non-traded REITs. It’s Cole division has been struggling of late, but largely because of its association with the VEREIT… or more specifically American Realty Capital Properties, what VEREIT was known as before a name change and strategic repositioning. The problem is that the repositioning came along with an accounting scandal that resulted in Cole losing key brokerage relationships even though Cole wasn’t implicated in the troubles in any way.

Although Cole isn’t much of a contributor to the bottom line today, at one point it was a more notable business. And if VEREIT can continue the improving trends at Cole, it has the potential to regain at least some of its former glory. Either way, the Cole business is yet another diversification away from retail since Cole, and thus VEREIT, earns money for managing the portfolios of Cole’s products–regardless of what’s inside.

A different beast

Clearly, VEREIT is not simply a retail triple net lease REIT. It’s much more than that and this is an important distinction that investors should be aware of. Moreover, looked at as a whole, there’s really only one REIT to which you can compare VEREIT… and that’s WP Carey (NYSE:WPC).

That said, Carey is slightly different from VEREIT because it invests internationally and VEREIT is focused on North America. So they are the closest comparisons, but if you really want diversification in the triple net lease space Carey, with roughly 37% of its portfolio outside the United States, is probably your best option. It’s also less exposed to retail. Carey’s portfolio breakdown is industrial 28%, office 25%, warehouse 18%, retail 16%, and self storage 5% (“other” rounds that to 100%). Carey’s asset management arm, meanwhile, makes up about 8% of its adjusted funds from operations. Carey is truly a different animal in the triple net lease space.

I’m not suggesting that VEREIT or Carey are better or worse than Realty Income, National Retail, or Spirit. Nor am I suggesting that any of them are more or less prepared for a rising interest rate environment. What I am trying to stress is that neither VEREIT nor Carey are your run of the mill retail focused triple net lease REIT. They are broadly diversified by property type and both have an asset management arm. That materially changes how you have to look at them, with the international exposure at Carey adding even more differentiation to the mix.

Essentially, this goes back to a key investment priority: Make sure you understand what you own.

Read more…

medical

By Randy Blankstein, President of Net Lease Advisory firm The Boulder Group.

Through the first three quarters of 2016, transactions in the single tenant medical sector* were up approximately 8% when compared to the first three quarters of 2015. In the same time period, the number of transactions in the overall net lease market was down 2.6%.

Cap rates in the single tenant net lease medical sector remained unchanged in the third quarter of 2016 with a median asking cap rate of 6.50%. More specifically, the dialysis sector, which includes tenants Fresenius and DaVita, experienced compression of 22 basis points.

The growing net lease medical sector continues to attract investor interest due to the increasing aging population of the country and the sector’s resistance to e-commerce. In addition to the positive outlook of the healthcare sector, most medical related leases feature rental escalations. These attributes are highly sought after characteristics amongst net lease investors.

While the overall net lease market experienced cap rate compression of 36 basis points from the third quarter of 2015 to the third quarter of 2016, cap rates for the net lease medical sector remained unchanged. This can be attributed to the influx of non-investment grade medical properties like urgent care and general doctor properties.

In the third quarter of 2016, there was a 26% increase in the supply of non-investment grade medical properties which typically trade at a discount to investment grade properties. Furthermore, non-investment grade medical properties made up 65% of the net lease medical sector.

Dialysis clinics continue to be at the forefront of investor demand due to their strong corporate guarantees and familiarity with investors. In the third quarter, dialysis clinics made up 57% of the overall net lease medical sector and represented lower cap rates than urgent care and general doctor properties.

The lower price points associated with net lease dialysis properties have garnered interest from 1031 buyers who traditionally purchase net lease retail assets. The median price for net lease dialysis properties in the third quarter of 2016 was approximately $2.4 million while the overall price point of the net lease medical sector is approximately $3.4 million.

The single tenant net lease medical sector will remain active as investors remain attracted to the long term outlook for healthcare as the aging demographic grows. Investors across all profile types will continue to acquire net lease medical properties as cap rates remain attractive when compared to the overall net lease sector.

*For the purpose of this report, the single tenant net lease medical sector is defined as net lease medical assets priced below $10 million.

Read more…

161110-how-trump-won-feature

Post Trump election changes will undoubtedly emerge, however economic momentum and positive demographics should sustain healthy and positive real estate fundamentals.

These prospects are bolstered by the coming reduction of gridlock on Capitol Hill as both houses of Congress and the White House come under a single party. This will support the establishment of fiscal policy, including a new budget and an increase of the debt ceiling when needed.

In addition, the potential of reduced taxes, increased infrastructure spending and deregulation could give the economy a boost over the short term. While more rapid economic growth could spark inflationary pressure and push interest rates higher, the acceleration could also generate more jobs and stronger wage growth, both positives for the commercial real estate sector. Stable 5% unemployment and 5.5 million unfilled job openings point to a tight labor market and prospects of 2.0 – 2.5 million new jobs over the next year.

Barring a significant unanticipated event, these positive drivers will be sustained into the coming year, supporting commercial real estate demand, tight vacancies and sturdy rent growth.

For copy of full report e.mail

paper-buildings

September 15 Wharton – University of Pennsylvania

The commercial real estate industry is one of the slowest to adapt to the digital age. But it has to change its mental and business models or risk getting disrupted by tech innovators. In this article, authors Michael BermanBarry LibertMegan Beck and Jerry (Yoram) Wind  outline a five-step process called PIVOT to help companies change. This article is part of a series on thriving in the digital era.

Berman is a fellow at the Penn Institute for Urban Research as well as the Harvard Joint Center for Housing Studies. Libert is the CEO of OpenMatters, a firm specializing in business model science, and Beck is the chief insights officer. Wind is a Wharton marketing professor. Libert, Beck and Wind also wrote the book, The Network Imperative: How to Survive and Grow in the Age of Digital Business Models. They would like to thank LiquidHub for sponsoring the research that informs this series.

“The way we lived, the way we consumed, this whole ownership economy much of it emerged out of driving our cars. We built a big house in the suburbs, we moved there, we acquired stuff. The direction of change here is probably different, but it’s comparable in how profound it was and the societal implications.”

— Arun Sundararajan, New York University professor on the development of the ownership mindset and how it’s all changing in the sharing economy

The commercial real estate market continues to simmer even as summer comes to a close. Prices are rising while cap rates are dropping. However, a strong prevailing wind is emerging. The first phase of digital development is finally arising in this location and asset-based industry where technology has long played a minimal role. And for good reason — this is the real asset industry by all measures.

Today’s technologies — social, mobile, cloud, Big Data and the Internet of Things — are being used on the residential side of the industry, with the likes of Zillow, HomeAway and Nextdoor having already made their mark. And these early winners are now blazing a path for the technology industry to change the way real estate is managed, owned and financed.

For those in the technology world with some background in real estate, the opportunity may seem obvious: Participants in the real estate industry can use technology to make faster and better decisions. But as noted, the real estate sector is one of the few remaining sectors of our economy that has created immense wealth with little or no technology know-how and interest.

Assets are losing ground to access, whether the assets are hotels, homes or apartments.

This industry has always believed that location, location, location rules. But in the mobile world, where ‘location’ is mainly virtual — many things can be done through smartphones — assets are losing ground to access, whether the assets are hotels, homes or apartments.

CRE: A Big Market Opportunity

The reason why technology is hungry to play in this historically analog world is clear — commercial real estate (CRE) is a huge market. Broadly speaking, real estate is the largest single asset class in the United States, worth an estimated $50 trillion, according to the Federal Reserve.

More specifically, residential housing is the single largest “tangible” U.S. real estate asset class, worth roughly $26 trillion, and commercial real estate accounts for another $24 trillion. To put these numbers in perspective, as an asset class, real estate is meaningfully larger than other heavyweight asset classes like fixed income (bonds) and equity (stocks).

That’s why Airbnb is merely the first of many technology startups to capitalize on this greenfield opportunity by changing the very definition of real estate and the value of owning it. Indeed, many high-flying sharing economy companies prove that individuals increasingly prefer the value of access versus asset ownership — and the numbers show it.

According to a 2015 PwC report, Americans see many benefits to the sharing economy: 86% believe it makes life more affordable, 83% say it adds convenience and efficiency while 63% see it as more fun than engaging with traditional companies. Further, the practice of sharing assets is making Americans rethink the value of ownership — 81% agree it is less expensive to share goods than owning them while 43% say owning feels burdensome.

And here’s the kicker: 57% see access as the new ownership.

The commercial real estate industry, which includes multifamily complexes, and the related CRE finance, are grounded in concepts dating back to 19th and early 20th centuries. Since real estate consists of hard assets, location still largely defines the role of everyone in the industry. For example, office buildings, shopping centers, hotels, industrial properties and apartment buildings have long underpinned the business and mental models of this massive industry — as well as define its source of value.

The premise of the tech disruptors is simple: Let the CRE companies own the assets and we will own the platforms.

That’s rapidly changing. The technology industry and players like Airbnb, Zillow, WeWork and RealtyMogul are transforming long cherished beliefs of the industry and the interaction of its players — tenants, owners, financiers, and agents. The premise of the tech disruptors is simple: Let the CRE companies own the assets and we will own the platforms that enable residents and tenants to access what they need, when they need it, whenever they need it, using today’s real time, Big Data and cloud technologies.

So the key question is this: Should the CRE industry embrace the digital world or take the risk of letting tech startups disrupt it from the outside? (That’s what Facebook did to the corporate world — capturing 1.6 billion customers and then renting them back to Corporate America.) Our answer: Incumbents need to pivot their strategy and leadership today or lose value to nimbler, technology-first firms that understand it is better to represent the customer (business or consumer) than the supplier (CRE assets).

CRE and Digital Disruption

According to research by McKinsey, just about every industry is going through some form of digital disruption. But many industries have been slow to adapt — and CRE is among the slowest. Nonetheless, it finally may be waking up to the opportunity at hand: In today’s digital economy, every person carries their ‘location’ with them every day. People use their laptops, tablets or smartphones anywhere they want (homes, cafes, hotel lobbies and airports). Given this reality, if real estate wants to create value and not lose it as virtual technologies like AR and VR create even more alternatives to the fixed asset industry, CRE leaders must begin to take action:

— While continuing its transition to a more corporate model, where corporate discipline, capital formation, core competencies, and branding are recognized and embraced, it is time to catch up to other industries in adapting and embracing the digital age. Why does the CRE industry lag others? At the core of the CRE business proposition is the assumption that growing the business means acquiring hard assets one at a time. Scale lets them increase profitability.

Conversations with senior CRE executives on embracing disruptive business models in the same fashion as Airbnb or Uber inevitably brings up this question: “How is it possible for my particular business to monetize assets that we do not own and control?” But such thinking is myopic, stuck in an analog world. Instead, look at it from a different dimension: Focus on the needs of customers and the intrinsic value of their data and connectivity — information and access. Consider this: What is the incremental cost of adding a hard real estate asset compared to Airbnb adding a new site?

— Rethink the CRE industry’s hard asset bias, which has been reinforced by GAAP accounting assumptions that consider property as assets and people as expenses. CRE veterans have been wired to put value on the hard assets they own and control. Indeed, the financial statements of most firms do not even count data and networking as assets. As such, people up and down the organization don’t see them as they truly are: valuable 21st century assets.

— Examine the possibility of changing the value of your enterprise by accessing and monetizing assets you have but largely ignore. Recently, when the CEO of a major multifamily and CRE company was asked how much he knew about his tenants, he said, “We know quite a lot — for our apartment tenants, we know income, age, sex, education, occupation; and for our commercial tenants, we know a fair amount about their businesses.” And then when asked how that level of information compared to what Facebook or MasterCard knew about those same tenants, he simply shrugged. “We’re just not that focused on our customers or the data we have about them.” The network effects are not even on the radar screen.

Many industries have been slow to adapt — and CRE is among the slowest.

The bottom line: The CRE industry’s ability to scale its ‘hard assets’ will shrink, while a new type of leverage will emerge based on the industry’s intangible assets — tenants’ wants and needs, access to Big Data and virtual networks — provided they build digital platforms that have the capabilities required to benefit from the monetization of these new assets. To get there, a new, non-linear, approach is necessary where the CRE industry leaders need to shift both their mental models of value (non-things vs. things) and business models (technology vs. non-technology) and put digital at the center of everything they do. But how does the CRE industry refocus on digital? The answer lies in our extensive work with CRE leaders in the U.S.

5 Steps to Put Digital at the Center

We created a simple, five-step process called PIVOT to help CRE participants cross the digital divide –

Pinpoint: Know your starting business and mental models, which includes your industry’s business model. For example, do you make and sell things? Hire and provide services? Develop and sell data and software? Or build and manage virtual networks, whether business or social?

Identify: Take a complete inventory of all your assets — hard and intangible assets such as your customers, partners, employees and any data relating to them (interactions, sentiment, friends and family.) Think of these assets as you would think of your real (or tangible) assets. Our research shows that they are just as valuable.

Value: Envision a digital platform and virtual network (like a Facebook or LinkedIn for real estate participants) where you partner and co-create with tenants, suppliers and employees in a new business model — allowing them to participate and share in the value that your network brings. Start small, by either developing or buying a digital platform that connects what you make with what you service and sell, and then co-create. A technology platform is critical to digital success.

Operate: Begin shifting small amounts of your capital (including time, talent, and money) to your digital business model away from your real estate assets. If you don’t spend money and time on it, nothing will change — you will be leaving a huge opportunity on the table for tech disruptors, which can take your most valuable assets of data and customers. So, create a digital pilot to prove your concept for how you can play in the digital world. There is still plenty of room for disruption. Just look for these opportunities like you did when you started and built your physical business.

Track: Implement new key performance indicators (KPIs) and report them regularly and transparently to your board, investors and other stakeholders. Remember, if you don’t measure these new KPIs, you won’t manage or invest in it. To do that, add KPIs to your standard financial measures. These indicators include tenant interactions (sales or other activity), extent of tenant participation (for example, the size of the network), employee and partner engagement and sentiment, new products or services created by your tenants and the amount of value and revenues shared with them (Apple does this with its developer network).

Too often, companies and their leaders believe that their industries are somehow ‘different’ and ‘separate’ from the digital revolution that is engulfing everyone else. However, as most industries are learning — including retail (Walmart vs. Amazon), entertainment (Netflix vs. the broadcast networks) and now hotels (Airbnb vs. the major chains) — no one is immune from the fast-growing and well-capitalized technology industry.

It is time for the CRE industry to PIVOT if they want to participate in the digital age and leverage the intangible assets that all of us have created and will continue to generate. It is time for CRE leaders to adopt and build a 21st century business model that parallels the best that’s coming out of Silicon Valley — or become prey for these 21st century predators.

It’s time to act. The future will not wait.

Skyscraper buildings made from one hundred dollar money banknotes on cloudy background.

By Allen Kenney REIT.com

In the the latest episode of The REIT Report: NAREIT’s Weekly Podcast, Mike Grupe, NAREIT executive vice president for research and investor outreach, offered his perspective on the implications of real estate being elevated to a new headline sector under the Global Industry Classification Standard (GICS).

Equity REITs were moved from the financial sector to the new real estate sector at the close of trading on Aug. 31. They were joined by a number of real estate management and development companies. Overall, Equity REITs account for more than 95 percent of the equity market capitalization of the new real estate sector.

Grupe speculated that the greatest effect of the move on REIT investment would be to provide a greater level of visibility for real estate’s role in the economy and for publicly traded real estate companies.

“That visibility is important,” he said. “Up until now, REITs were embedded in the financial sector, but the financial sector also includes commercial banks, insurance companies, finance companies and other types of diversified financial companies. This change brings [REITs] to the forefront and establishes them among one of the highest 11 headline sectors of GICS.”

As a result, Grupe said, real estate will become “a much more prominent part of the conversation” for investment decision makers as they design portfolio strategies and set asset allocations. Grupe also noted that separating real estate away from the financial sector should mean that REIT stocks are more likely to trade based on underlying real estate fundamentals, as opposed to the economic factors that tend to drive financial stocks.

“I think that will create a situation in which real estate companies will be free of those other factors,” he said. “We’ll see that the valuations of the stocks and the trading activity will reflect more directly the actual developments in the real estate sector.”

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