It always pays to hear questions from the audience after a conference panel. During last month’s annual EXPO Real conference in Munich, delegates were reminded how much easier it is to raise institutional money for real estate investments than to deploy it wisely. The travails of a real estate investment management fraternity – under pressure in a low-yield environment – are becoming ever more palpable.
Reconciling with yields compressing beyond pre-global financial crisis levels – regardless of whether the margin with fixed income alternatives remains at historically acceptable levels – is today’s headache. But a question at the end of the session shined a spotlight on a bigger issue to come, one that could seriously hinder the liability-matching the folks on stage are charged with achieving.
The panel was asked how managers are engaging with new-age practices such as shared working space and flexible working programs. Both have momentum and will impact future office requirements in volume and nature – an issue not lost on the EXPO panel. The problem is, such practices are nigh on impossible to underwrite. As one of the panellists indicated, a landlord might be comfortable offering a master lease on institutionally-friendly terms. But the underlying short-term leases typically awarded to the businesses that use such space represent a quandary for long-dated capital. One of the panellists walked away from a platform-level investment recently because of that.
Nevertheless, managers will need to find a solution to progressive occupational trends if they don’t want to be left behind. Days after EXPO, WeWork, the $16 billion pioneer in shared working accommodation, announced at the Cornell Real Estate conference in New York it would create its own investment vehicle, funded by external capital. In so doing, it threatened to turn from occupier to competitor for the folks on EXPO’s stage.
Such movement in today’s office market dynamic is also evident in other property types, notably retail, an asset class already reconciling with the e-commerce revolution. Uber, another ‘disrupter,’ trialled its first driverless cars in Pittsburgh in September. The firm forecasted a 20 percent reduction in car parking requirements once self-driving cars are the norm. As one of the EXPO panellists indicated, when that happens, shopping mall owners could need to redefine their parking provisions, and that’s a lot of space to convert.
Arguably these were the session’s most thought-provoking takeaways; anyone not staying to the end would have missed them.