This article is sponsored by Yardi Systems
The pandemic is creating a seismic shift in asset allocations for investment managers while speeding up the adoption of many existing technologies – from covid-tech, to property operation tools, to enterprise-grade financial systems. Touchless, gesture and facial recognition, robotics and sensors will be required to combat the health risks presented by the pandemic.
An increase in mixed-use developments will demand a connected solution of property operations tools to drive profit in a single site containing multifamily, coworking and retail, and financial engines to calculate debt returns, manage syndication of loans, and entice investor engagement will also be required to meet the challenges of a potentially seismic shift in investment allocation.
Given the moving parts within individual assets and portfolios, technology applications that give asset managers a single dashboard to view and manage investments will be critical as this disruption stays in high gear for the next two to three years.
It’s no secret that bricks-and-mortar retail, which was already struggling to keep up with the shift to online shopping, will face more of the same headwinds as e-commerce takes an even greater market share. But this segment still represents a sizable investment category that cannot be ignored.
Social distancing at stores can be achieved by near-field, contactless payment through phones with connections to a nearby computer terminal; buy online, pickup in-store options; contactless kiosks; and curbside pickup. It is clear that technology will be a key contributor to protect retail asset health.
In the next five years, as much as 20 percent of retail stores could close, according to an estimate by Moody’s. If that trend holds true, investors will often take the mixed-use route, repurposing retail properties for uses ranging from multifamily, coworking and logistics to dining and entertainment.
There is nothing new about repositioning retail assets with mixed-use; we have seen this investment technique yield huge returns for select properties. However, the pandemic has a way of accelerating good ideas – think Zoom or Grubhub – so it is reasonable to expect that retail redevelopment could happen on a large scale in the next three years.
With multiple asset classes under one roof, each revenue stream will require a specific software tool for operations. Because the site will still represent a single owner, investment and set of monthly financial statements, asset managers will seek tech solutions that can cover all asset classes, helping owners to track a property’s operational and financial health on a single dashboard.
The new mix for office
As with the retail sector, we see a transformation of much conventional office space into mixed-use. Surveys suggest that 25-50 percent of the global workforce will work remotely several days a week. Whatever that percentage ultimately turns out to be, the accelerated adoption of new technology has made teleworking not only viable, but mainstream. Options range from video conferencing apps like Zoom to futuristic mobile robots such as Suitable Technologies’ BeamPro, which enables people working remotely to beam their likeness into a conference room.
The office segment will certainly adapt, and stealing a page from retail redevelopment might help generate higher returns than even traditional office investments. Consider an office tower in a 24/7 urban market; it could be repositioned as a hotel on the 20th through 30th floors, a law firm on the top floor, plus co-working, retail and multifamily distributed throughout the building.
On a per-square-foot basis, these alternative classes could feasibly generate more revenue than a large-footprint corporate office tenant. As this metamorphosis unfolds over the next few years, conference rooms leased by the hour might also become more popular as people work remotely much of the time and come into the office primarily for important meetings.
As urban office reinvents itself over the next few years, we might also see a migration to the suburbs; not only will office footprints change to accommodate many uses but satellite offices will become the norm. Turning low-rise suburban offices into coworking space will provide satellite locations to companies that previously occupied large spaces in central business districts.
These satellite offices will also allow workers to avoid potentially dangerous situations, such as commutes on public transportation and elevators that are too small for proper social distancing. At the same time, those suburban locations will offer shorter commutes and potentially improved quality of life for workers. Coworking space, whether it is hoteling or hot-desking, will be offered flexibly and require a reservation app to sign up for desk space.
In either the urban or suburban scenario, one of the biggest issues will be security and health. Building owners and managers will be challenged to maintain access control among a greater number of tenants. Mature technologies like touchless sensing, gesture recognition and temperature monitoring will likely be deployed first – and in some cases tied into access control systems – followed by newer innovations, like products that detect who is not wearing a mask.
Emerging technologies like autonomous robots will be deployed to disinfect conference rooms with UV light between meetings. Meanwhile, manufacturers like Otis Elevators are developing IoT tech solutions like the eCall smartphone app, which allows users to call an elevator and send it to a floor. Smart building apps will also collect traffic data from common areas like elevators, restrooms and lobbies to manage cleaning schedules.
By comparison with the struggling retail and office sectors, the industrial sector is performing robustly. Technologies like social distancing apps that track workers’ locations in real time will not only help companies operate industrial facilities more safely but also assist with tasks like managing equipment.
A recent report by Prologis estimates that online sales are on pace to reach upward of 25 percent of total retail sales by 2024. That would require three times as much space as conventional throughput distribution. The trend will result in the conversion of viable retail space to last-mile logistics space, although the process will be complex and require balancing political, operational and legal
Prologis has identified 60 malls comprising 60 million to 65 million square feet in 25 top markets as potentially suitable for industrial redevelopment. Altogether, the report forecasts that retail-to-logistics conversions will account for 8 million square feet of new supply.
With some 250 million square feet in annual industrial completions projected over the next decade (as much as 20 percent of them last-mile developments), developers and owners will benefit from construction apps that help them leverage data effectively and manage vendors with accurate, real-time data across multiple capital projects.
As these new projects come online, apps that provide guidance on deal approvals, and that generate dynamic documentation and comprehensive reports, will be critical, along with tools for property management, accounting and budgeting. Investors will need to analyze every deal to make certain that net effective rent and cashflow are in line with market rates. In this fluid environment, technology solutions that combine leasing, property management, and asset management will help investors make forecasts with confidence.
With multiple market disruptions taking place, other changes are in the works. Against the backdrop of remote workforces and virtual meetings, investors and their advisors will need to communicate in new ways. We believe investors will expect a new level of transparency and visibility. That calls for improved systems and processes that foster internal collaboration and supply the information that investors need.
Going forward, market dislocations resulting from current market conditions and fluctuations will create ample opportunities for savvy investors. Yet just as the virus is accelerating technological innovation and upending the use of commercial real estate space, how firms fundraise and attract new investors is also undergoing a transformation. Investors are scrutinizing deals particularly closely, and the transaction process must often be managed without the one-on-one interaction so critical to relationship building.
Technology that allows companies to invite new investors will require the ability to easily publish key information like photos and documents while automating subscription agreements and tracking fundraising and key milestones. The ability to plan for conditions that are being altered by covid-19 will be especially important to long-term investors that are looking beyond the current crisis.
Debt investments outpace equity
We are also seeing an increase in clients taking debt positions in real estate and starting or increasing investment in debt funds. Despite a pullback in liquidity at the onset of the virus, the Blackstone Group raised most of its $8.2 billion target for its long-hold private equity fund. In many cases, our clients are augmenting their customary real estate equity portfolios with new debt positions.
As the coronavirus-hampered economy impacts rent collections, investor focus on debt covenants and interactions with lenders are both on the rise. Tracking debt by spreadsheet is inadequate; we believe it will be important to use advanced technology that integrates with real estate collateral to track debt, both for borrowers and for those maximizing their investment by taking a position as a lender.
In a low interest-rate environment, it is becoming increasingly difficult to find a yield that matches the expectation of institutional investors. With uncertainty creeping into commercial real estate values, especially in metro locations, the risk profile of “debt as a receivable” might be the only investment that generates anything close to equity returns over the last 10 years.
As fund managers shift their allocation to lending vehicles, technology will follow the money as well. Debt valuations, loan returns, loan syndication – these are all complicated calculations, and an enterprise-grade software package will likely be required to manage a loan portfolio accurately.