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IMN: Disruptive Technology Creates Challenges, Opportunities for RE Investors

Real estate experts agree: The only thing that’s certain is change.

The disruption of technological advances on the real estate  market has created a buzz among market practitioners. Understanding how technological trends may present challenges and opportunities within the real estate investment market served as a popular discussion topic at IMN’s annual US Real Estate Opportunity and Private Fund Investing Forum held this week in Newport, Rhode Island.

“Technology tends to provide benefits to a society, and in the RE industry we are thinking about all the positives that technology brings, but there are in fact disruptive forces that technology brings,” Michael Cohen, director of advisory services at Costar Portfolio Strategy, told CIO

For example, increased automation within manufacturing may impact jobs, which could then negatively affect demand for certain sectors within the residential real estate market. “If you are relying on manufacturing workers driving demand for class B apartments,” Cohen added, “to the extent that line of work is disrupted, that source of demand for workforce housing could potentially go away.”

Similarly, the retail real estate market has been challenged with the growing popularity of ecommerce.  “Brick and mortar retailers are struggling. Retail sales are not going down, they’re just shifting toward ecommerce,” said Kevin Morgenroth, senior vice president at PIMCO, on a panel discussion. “We see a real opportunity to capitalize on the growing trend of ecommerce and specifically on next-day and same-day delivery models,” he said.  

The shift towards ecommerce gives way to opportunities within the industrial sector; in particular, the demand for distribution space and warehouse real estate assets. “Ecommerce retailers need about three times as much warehouse space as brick and mortar retailers,” added Morgenroth. “We have too many malls and not enough warehousing.”

Michael Mandel, co-founder and CEO of Compstak, agreed that the real estate retail market has been disrupted by the likes of Amazon. Amazon’s market capitalization was about $356 billion as of the end of 2016, compared to the combined market cap of Walmart, Target, Sears, Nordstrom, JCPenney, Best Buy and Kohl’s, which was $298 billion as of the year-end, according to Mandel.  Further, over the past decade, the market cap has trended lower for the traditional retail outlets relative to their online counterparts.

“Across the [real estate] sector, there are huge changes and disruption taking place on the account of technology,” said Sujan Patel, co-head of Colony Northstar’s US investment management arm, on a panel discussion. “RE has been the asset class that’s been the slowest to adapt to technology. This cycle, we’ve seen a lot more innovation, and it’s only just beginning.” Currently, Colony is targeting a capital raise around a venture strategy focused on investing in early-stage technology companies. 

Healthcare represents the firm’s biggest asset class, reflecting nearly $7 billion of assets. “With technology people are living longer,” Patel said. “We are big believers in healthcare overall. With the aging demographics, there has been a significant shift, [however], of people staying in their homes longer and not needing to move into these facilities.” Such facilities include senior housing and assisted living RE.

Other real estate sectors potentially impacted by changes in technology include:

  • The student housing sector, as online education gains popularity
  • Parking garages in a negative way and suburban housing market more positively, given the onset of driverless cars and transportation services such as Uber
  • Less demand for commercial real estate, such as office space, as innovation enables the ability to work remotely

“The negative effect [of disruptive technology] on office is probably very well documented,” said Andrew Holm a managing director at Ares Management, on a panel discussion. “Less observed is the positive impact on hotels where people gather to meet together. People get really focused on AIR BNB disrupting urban hospitality. If anything, technology has been a boon for the large group meeting space, as people spend less time face-to-face in offices they tend to get together for conferences more frequently.” 

Going forward, market participants seem to keep a watchful eye on the risks and the opportunities presented by innovation. “As a firm, we are trying to get our arms around [technological changes],” said Randy Giraldo, managing director at TH Real Estate, “to capitalize on it and get ahead of the curve as opposed to being reactionary.”

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