Archives for February 2020

Thanks to all of the brokers, sponsors, and guests who attended the February 2020 CCIM NM Deal Making Session and to those who shared their properties.

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Last Year Commercial Real Estate Tech Investment Hit New Records, Setting The Stage For A New Type of Business Model.

As one of Atlanta’s most affluent submarkets, Roswell can be a good choice for apartment investors. Atlanta itself is the 10th largest metro economy in the US and Roswell boasts a steady population growth, a lower unemployment rate and higher median income per capita when compared to the US average.
But such fundamentals were not enough for one investor as it weighed whether to buy a 396-unit, garden style apartment complex there. So this Atlanta-based company partnered with Skyline AI to make use of its ensemble of machine learning models to dive deeper into the question.
Ultimately it decided to move forward with the $57 million value-add investment but how it got there is worth a story on its own. Skyline AI further vetted the asset by processing scraped data from review sites with natural language processing. Online reviews of the asset were flagged by the system as indicating an opportunity for optimization.
“Sometimes the best commercial investment opportunities can be revealed in surprising places,” said Iri Amirav, CRO and co-founder of Skyline AI, at the time.
While commercial real estate can no longer be accused of being a tech laggard, the sector’s adoption of tech has arguably been uneven and in some spheres progress has remained slow. Even Skyline AI, a leader in the space, has only closed one other AI-based real estate deal despite being on the scene for a few years now.
Now it appears that is set to change, perhaps as soon as this year.
 

BANNER TECH INVESTMENT

In 2019, commercial real estate tech investment doubled over the previous year, and 2020 is set for another 12 months of record-breaking tech investment spending.
By the third quarter of 2019, there had been $25 billion invested in the sector, says Ashkán Zandieh, chief intelligence officer at CREtech.com, adding that the year will likely close with $30 billion to $35 billion invested in built world technology. As for real estate tech specifically, the company is expecting $25 billion to $26 billion invested, he says.
But 2019 did not just see robust spending—to many it also seemed to be a turning point. “From 2015 to 2018, we went from $9 billion invested in the category to $15 billion invested in the category. In 2019 that number nearly doubled—almost as though the industry began ramping up tech investment and adoption en mass.
 

FROM NOI TO ROI

There are reasons for this shift. One is that commercial real estate companies are starting to look at technology differently than they did in the past. “Today, the industry has the potential to benefit tremendously from technology, and is being pragmatic about it,” says Zandieh. CRE technology, as well, has become more pragmatic, offering very specific use cases and financials. “For users of innovation in tech, everything has to come down to NOI or ROI, so the technology has to have some kind of financial benefit to it,” Zandieh remarks.
Consider what is happening with property management: new companies are working to streamline operations and create better efficiencies, which promise to have a major impact on ROI and property value. Seattle-based Remarkably is an emerging leader in the space. The software platform unifies data to help owners make better decisions that will ultimately boost multifamily portfolio performance and leasing activity. ”The benefits are multifaceted, and include items such as accelerating stabilization of an existing property or new lease-up,” says Erina Malarkey, CEO of Remarkably, who founded the company with Anna-Lea Dieringer. It also works to minimize occupancy volatility across a portfolio, drives cash flow, optimizes performance and increases NOI, Malarkey adds.
Furthermore, these new feats are being delivered via user-friendly, intuitive interfaces that give non-tech users easy access to the underlying data.
IIRR Management Services, one of the largest crowdfunded real estate investment management firms, houses the toolset on the Google cloud. We “can bring up a Google maps dashboard of the entire country overlaid with every single asset,” CEO Jeff Holzmann says. “The asset management team can bring up all the data about any investment by simply clicking on the map. Links take you directly to the investor list, financial documents and bank accounts. It really is state-of-the-art technology.”
Indeed, IMS’s very business model would not be possible without user-friendly technology. “CRE crowdfunding enables investors to take part in offerings that were previously blocked off to only the richest, most well-connected people in the country,” Holzmann says.
The catalyst to the growth of fintech and crowdfunding technologies was the JOBS Act, which opened the door for these companies to target a wider range of investors. “For the first time in history, an average accredited investor can participate in a CRE investment under the same terms as the moguls. It is the combination of legislation and technology that made this a realistic possibility for the American public,” says Holzmann.
At IRM, the technology allows users secure access to information and transactions online. “The technology involved is very similar to what you would expect to see from a bank or an investment firm,” says Holzmann. “A basic interface allows you to securely log in, see your account, and transact larger multifamily complexes.”
At Remarkably, Malarkey continues to build out its technology to better develop its features. “Currently we are focused on data aggregation, visualization, insight generation, recommended actions, and measured results,” she says. “This is for multiple facets including tactical, campaign, building, and portfolio analysis. Additionally we are moving towards predictive analytics.”
 

INSTITUTIONAL INVESTORS DRIVE CHANGE

These savings and efficiencies haven’t been lost on institutional investors and it is they that are in large part driving the adoption of tech in commercial real estate, according to Zandieh.
“If you can compress fees and expenses on the real estate finance category by only 1% across an entire portfolio, that can be a significant cost savings. Owners have no control over the supply and demand side to generate returns. What they do have control over is their expenses.”
These companies are investing in onboarding technology and piloting within a few buildings, and they are also investing in funds to help facilitate change, he notes.
Most of these funds are targeting a handful of specific categories in real estate. Fintech companies are seeing the most venture capital investment by far, according to Zandieh. Property management and flex space are also seeing a flood of venture capital dollars. In 2020, Zandieh expects construction technology to also take a spot at the top of the list. “The biggest gain that we are going to see from 2019 to 2020 is most likely going to be in construction,” he says. “Funds are now closing out construction and services within the construction industry. We expect construction to be one of the biggest winners this year, but it won’t be the biggest winner. The biggest winner next year, we still believe, will be the financial services category. There is so much capital deployed in that vertical.”
Demand is also fierce from property owners as well, many of whom have increased budgets for technology this year. As the market gets more competitive, Malarkey expects to see even more interest across owner profiles. “Real estate, which has had such a strong recent cycle, knows that if and when things soften, which all economists agree to varying degrees is impending, they will have to be more savvy, sophisticated, and efficient in their marketing and asset management of properties,” she explains.
On the other hand, mom-and-pop or small operators are the slowest adopters of these new technologies. They have less incentive to make major changes in operations, and often those changes can be more cumbersome for smaller owners. Such firms have one or two or three buildings, no investors to report to and no debt on their assets, says Zandieh. “They make up a majority of real estate owner nationally.”
Ultimately, though, both big and small owners will be forced to adopt some level of technology to remain competitive. “Owners will feel pressure in terms of occupancy. When the time comes and those owners have not outfitted their properties to meet the current tenant demand, the occupancy level is going to drop dramatically. So, it is innovate or die,” says Zandieh. “You may not feel it now, but eventually that meteor is going to hit, and you will feel it financially.”
That change is coming quickly, and owners are already feeling the difference. “I am seeing a fundamental change coming to the industry. Real estate had still been stuck in the previous century, as compared to communications, advertising and aviation for example. New tools are coming and are being adopted across the entire value chain,” says Holzmann, who lists companies like real estate brokerage and data firm Compass, real estate back office firm Lonewolf, resident experience companies like Carson, and automated underwriting companies like Skyline AI as examples.
These and other start-up real estate technology companies are eager to meet property owners more than halfway in their search for ROI and are committed to creating services that drive meaningful value and directly impacts an investor’s or operator’s bottom line. “We believe that technology will fundamentally change value creation for real estate, the largest asset class in the world. It will bring dated, fragmented and manual data sets and processes online, streamlining, optimizing, and moving into an entirely exception-based and predictive-management methodology,” says Malarkey.
 

WHAT’S NEXT?

There are still untapped areas that technology can help to improve. Zandieh says that alternative lending platforms, tenant experience and co-living platforms are the biggest opportunities in CRE technology. Alternative lending platforms in particular have the opportunity to tackle home buying, particularly among millennials.
Rent-to-own companies, for example, can make headway in providing a pathway to homeownership. “The reality is that the millennial generation is not buying real estate,” says Zandieh. “They believe in an asset-light model, which we do not feel is the right approach because no one has ever gotten rich by being asset light. The reality is that they don’t have the financial means of acquiring debt because they have student loans, which greatly impacts their ability to get financing. We believe that rent-to-own platforms will greatly increase homeownership.”
I-buying is another model that can help increase homeownership by supporting single-family development. “When product comes online, I-buying helps to absorb the real estate in a streamlined and efficient manner,” adds Zandieh. “There will be purposefully built single-family homes that I-buyers can acquire, allowing developers to cash out quickly so that they can build on scale. We see that being a huge trend in the residential market.”
Holzmann agrees that there are endless opportunities, but thinks that technology adoption is still focused on the consumer side of the real estate market rather than the business-to-business side. “The consumer is always more likely to be an early adopter—the younger generation expects everything to be accomplished online and immediately,” says Holzmann. “The business world and the B2B segment will catch up some years later because of the capital advantage, competitive landscape and the new generation’s mentality taking more of a presence in the executive suites.”
Zandieh also sees strong opportunities for tech companies to disrupt the tenant experience, which has become crucial to survival in competitive urban core markets like New York, San Francisco and Los Angeles. “The tenant experience is absolutely vital to tenant retention,” says Zandieh. “The largest expense a landlord will face is vacancy. A one-month vacancy will wipe out your profit for that unit for that year. Having a tenant renew is great, and they way that you do that is through tenant experience.”
All in all, technology creating a whole new real estate market—and this is just the start. “The entire industry is changing, digitizing, and improving,” says Holzmann. “Because there is so much capital involved and because everyone needs real estate to live in, work in and invest in, there is an endless opportunity to change, upgrade, improve and redesign so many aspects of this industry that I’m sure trillions of dollars in value is waiting for the right entrepreneur to act on.”
By: Kelsi Maree Borland (GlobeSt)
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A recession is unlikely to hit this year, but experts say that this is the perfect time to reevaluate your portfolio to prepare for when it does.

 
 
 
 
 
 
 
 
 
 
A recession is unlikely to hit this year, but that doesn’t mean that you shouldn’t start preparing. Experts say that this is the perfect time for investors to reevaluate portfolio performance to prepare for the next downturn—when it does come.
“Real estate is cyclical and it is impossible to predict exactly when a downturn will happen. Most experts agree that the current economic expansion began in June 2009, and, last summer made it 10 years old, the longest in U.S. history,” Ed Hanley, president of Hanley Investment Group, tells GlobeSt.com. “An economic downturn doesn’t impact every market and every investment the same. So, as the current election year unfolds and whether a downturn is around the corner or not, this is the perfect time to evaluate the current performance of your portfolio and how to best position it for the future.”
A portfolio evaluation can include repairs, preventative maintenance and upgrades, all of which can be essential to tenant retention during a correction. “Properly evaluating making capital expenditures now to retain tenants and stable occupancy levels may put you in a better position for the next downturn or market correction,” says Hanley. “Some mall and regional open-air shopping center owners used the last downturn to make large improvements to reposition their properties to be ready for better economic times and the strategy was very effective.”
Of course, the fundamentals are much different this cycle than at the end of the last cycle, but some of the lessons learned during the last downturn are still important. “In the last cycle, one of the biggest mistakes investors made was being over-leveraged or not having sufficient reserves to weather an economic downturn. Although interest rates remain broadly at historic lows, it is prudent to review current loan terms now to prevent any potential inability to refinance an existing loan in the future,” Bill Asher, EVP at Hanley Investment Group, tells GlobeSt.com. “It’s important to know your break-even point and make sound financial decisions to protect your bottom line and your cash reserves. Some investors were prepared for the last downturn and purchased properties at a deep discount due to having ample equity on the sidelines that remained patient during the previous peak of the last cycle.”
In the world of retail, shopping center owners have a lot of options to take care of current market demand. “As demand and pricing for non-core, grocery-anchored shopping centers slowly wane, a break-up sales plan can help provide an owner with better overall proceeds,” says Asher. “By selling a shopping center in pieces, a seller can realize an improved value compared to selling the entire center as a whole. Furthermore, the pricing of separate, smaller offerings, typically appeals to a much larger buyer pool, which has continued to have the most depth in today’s market.”
The bottom line in surviving a downturn is to prepare for one. “Although we anticipate 2020 will look similar to 2019 in regard to retail investment demand, transaction volume and velocity, by failing to prepare, you are preparing to fail,” says Hanley. “No better time than the present to prepare for what history shows inevitably will come.”
By: Kelsi Maree Borland (GlobeSt)
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C&W expects the North American industrial market to remain one of the leading product types to watch.