The Institutional Real Estate Inc Sponsorship brochure, Connected-Investor Focused, We connect people, data and insights, sponsorship, events, IREI Products
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NAREIM DIALOGUES FALL 2016 3 THE FUNDAMENTAL ESSENCE of real estate investing is prediction. What does an investor believe the value of an asset might be in five to ten years? What changes in the economy, what changes in the region, what changes in the tenancy, what changes in capital might influence the final outcome? It's interesting to reflect however that our pro-formas are almost never absolutely correct. Perhaps that's because the future is always changing – and the investor, no matter how diligent, can't possibly see everything that hasn't happened yet. But what if we could do a better job of preparing for change? How might we do that? Perhaps we should discuss what might happen, what could happen, then prepare for the implications ahead of time. Recent discussions at NAREIM have focused on just that effort. What might happen if LP's decide that they will only invest with GP's that are able to provide radical, real time data transparency? No longer would it be good enough to provide strong quarterly reports and respond to data requests. If even one firm provides truly transparent data, LP's would demand granular, real time reporting on every aspect of every asset from every manager – and leverage data collected on the industry and their assets to find better strategies and better predict the future. This is not so far-fetched. Several firms today are raising the bar on what is possible, and more advanced management platforms are adapting new strategies and processes that put data at the center. However, according to Jason Kern of LaSalle Investment Management, "There is a sense of complacency in our industry. If you look at any other industry, such as banking, they already understand that tech disruptors are threatening their business models for lending, credit card processing, even payment settlements." How long before aspects of our industry are replaced by some sort of data driven solution? What if, thanks to breakthroughs in micro fuel cells, solar technology and other renewables, commercial buildings become completely self-powered, automobiles quickly switch to electric, and the demand for oil, gas, and coal only decreases. How would strategies have to adapt? That may sound unlikely or strange, but in March, The National Renewable Energy Laboratory announced that the average cost of solar power from rooftop panels is now 12.2 cents per kilowatt hour in the US, about the same as the average retail electrical rate. Since 2009 the cost of solar power has gone down by 70%, and price decreases are likely to continue over the next 20 years. What happens as the disruptive changes in manufacturing continue to take place? The way goods are manufactured today is changing radically. Because of advances in robotics the cost of labor is dropping across the board. As a result, America is growing manufacturing capacity on shore. Simultaneously, 3D printing can bring manufacturing of other goods to the neighborhood or even into the home. What happens as these trends continue? Discussions at NAREIM quite often center on how disruptive technology, demographic shifts and changes in capital require one to think differently about the real estate investments. How should investment committees think through the impact of a fast changing world? " One thing is certain. The earth is now more cultivated and developed than ever before. We've become a burden to our planet. Resources are becoming scarce, and soon nature will no longer be able to satisfy our needs." The above warning was originally written by theologian Quintus Septimus Florens Tertullianus in 200 AD. Either he was very much ahead of his time or worrying about the future is nothing new for human civilizations. Infrastructure has been crumbling and being re-built for ages. Capital and revenue streams have dried up and sprung to life in other places countless times throughout history. Energy has come from many different sources as they present themselves. Change happens. The trick of course, is to anticipate it so you can take advantage of it. Real estate investors are risk takers, soothsayers, and fortune tellers. They are cautious adventurers, pessimistic assessors, and historians. They are geeks, nerds, and at times, rocket men. In trying to address the unanswerable question, "what do we do about the future?" Matt Henry of Chatham Financial put it best in a discussion about risk last spring, "We know the next problem that tanks the market will not look like the last one. We need not try to divine what it will be, but set ourselves up to weather many scenarios." The flood may come from any direction, but if you are resilient, flexible, and thoughtful, it doesn't matter where change comes from, you will be ready to thrive.