View from the Top: CRE’s Transformative Time Has More Runway

by Dennis Kaiser

Connect Los Angeles’ Industry Leaders: A View from the Top panel was moderated by Kidder Mathews’ Robert G. Thornburgh. It featured a group of industry leaders – both advisory and principals – who talked about the state of the market, economic forces, technology and where the Los Angeles and Global markets are headed.

The standing-room-only crowd of more than 500 at this year’s Connect LA conference in DTLA heard a wide-ranging and frequently thought-provoking conversation among commercial real estate’s leaders. Thornburgh started the discussion by noting that leaders in CRE in today’s transformative environment must push innovation. He says that means pushing antiquated real estate and design, while pushing professionals in ways they’ve not been pushed before.

Green Street Advisors’ Dirk Aulabaugh, notes that while technology will be a welcome shove to that transformation, when he looks at the market fundamentals, they aren’t adding up to the cycle being in the first inning. They look at supply and demand and see job growth has been there. Overall, he believes demand is decent, retail sales are strong, GDP growth has been steady, and inflation is in check, holding at around 2%. On the supply side, they see most sectors are relatively in check, though above historical levels. He points out the rent growth models of performance they’ve done ultimately produce a finding that predicts “inflation-like growth, and for real estate that ain’t bad,” says Aulabaugh.

Marcus & Millichap’s Hessam Nadji, notes he is frequently asked what inning he thinks the industry is in, and when does he expect the next recession. He opines if it really matters. “In my viewpoint, it really doesn’t matter,” he says. When he takes stock of the most successful clients the real estate investment brokerage firm has worked with over the decades, the common denominator was most investors were not genius market-timers but their success was because “they bought the right asset for the right reason, and they had a business plan and a concept around what they wanted to do with that investment. And they didn’t over leverage it, so whatever the market brought in terms of a recession or downturn, they were able to withstand.”

He says it is “far more important to be thinking about that asset level strategy to position it to withstand that next downturn” than trying to time the market. Though, he points out “the fundamentals tell us there’s still runway in both the economy and real estate cycle.”

Convene’s Ryan Simonetti, who partners with landlords and developers to bring a distinctive experience to office workplaces, says they are thinking about where the market is in terms of a transformation of an entire industry and asset class. He thinks it is still the first at-bat in the first inning of disruption. He notes at the macro level, the real estate asset class is for the first time being disrupted by two things. One being new business model innovation like Convene is bringing. It is a different way to deliver an experience in an office building as well as to monetize, package and sell it. Secondly, disruption is coming from new emerging technology, which is impacting not just a single vertical, but all at once.

Simonetti says, those two things are transforming the way workplaces are designed and built, the way space is sold and marketed, as well as how it is serviced and operated. And, it is still early in the game with those in the industry now not having even “stretched their legs yet,” he notes.

Nadji points out there’s plenty of capital on the sidelines waiting for a downturn, though. The difference now is that the market is not overbuilt, or overleveraged, even eight years into the cycle. The market hasn’t gone over the redline because of discipline, regulatory pressures stemming from the global financial crisis and the fact that 21.5 million jobs have been created with inflation under 2%. “That’s never happened before,” Nadji says, who notes that’s likely as a result of globalization, technology, and efficiencies. He says the lack of overheating has created more runway in an expansion. The net result is investors should be feeling more confident about real estate prospects.

Cushman & Wakefield’s Shawn Mobley says the firm is tied to the business cycle, and they see the U.S. expansion with a good amount of runway in front of it. “We feel good about the underlying drivers of business,” and it is a “great time to be in real estate” from a tech standpoint, says Mobley. He believes the market is in the early innings of transformation of real estate from the occupier side.

He notes that in the past CRE primarily played a supporting role for companies in an economic expansion environment. That translated to firms finding space and putting deals together for them. What is different now is underlying that growth is a technological transformation. That means helping occupiers create workplaces that “win the war for talent,” which works to achieve the objectives of investors too, who seek high-occupancy assets. That also means having a keen understanding of what value you are creating for occupiers and investors, and eschewing the order-taker mentality, Mobley notes.

For comments, questions or concerns, please contact Dennis Kaiser