Real Estate Investors Adapt to a Changing Environment

Finding investment opportunities in the late stages of the cycle, the rise of the shared economy and technology’s impact on real estate were all significant topics of conversation at the recent NYU Schack Institute of Real Estate’s 52nd Annual Capital Markets Conference in Manhattan. Real estate investors discussed their strategies for adapting to these changes and the challenges ahead.

“The rate of change going forward compared to what it was in the rearview mirror is just night and day,” said panelist Cia Buckley Marakovits of Dune Real Estate Partners. “The only thing we can be certain about is things are not going to stay the same.”

Late-Stage Cycle Investment Opportunities

While it’s anyone’s guess as to when the next market correction will occur, panelists acknowledged that cautionary signs are apparent. Property values are inflated in many asset classes and markets. Finding good investments that deliver high yields is getting more challenging, but there are still opportunities out there.

“You really have to look submarket by submarket, and I think there are still value opportunities in the U.S. from an investment standpoint,” noted panelist Jeffrey Fine of Goldman Sachs, speaking on the “Drivers of Real Estate Equity” panel.

He added that his firm is investing in a lot of the “growth” markets like Nashville, Denver and Austin, where jobs and young people are moving, and housing is more affordable. Certain places in Texas are also on their radar due to the state’s favorable tax rates. On the other hand, Fine said they aren’t big investors in New York or Washington, D.C., where job growth has been a little slower and the supply/demand dynamics are making it difficult to achieve the company’s target returns.

What’s most important, however, is to make sure your portfolio is diversified so your risk is spread out, Fine noted.

Markovits added that her firm is still bullish on coastal markets because these cities have deep liquidity and will remain attractive to investors, even if there is a market slowdown.

In terms of asset type, Marakovits noted that her firm is focusing on property sectors with lower operating costs. That way, the company is not as impacted if revenues do slow down. She added that she’s cautious about investing in office and retail because the dynamics have shifted more risk onto owners.

“Because tenants have so many options, they’re pushing so many more costs upfront,” she said. “We look at those asset classes differently today because of that capital need.”

Panelist Paul Galiano of Tishman Speyer added that another trend in recent years is a “flight to new and quality,” making new construction projects some of the strongest assets for risk-adjusted returns.

The Shared Economy and the ‘WeWork Effect’

How people live, work, play and stay has transformed during this cycle due to the rise of the shared economy, Scott Rechler of RXR Realty noted in his one-on-one conversation with NYU Schack Institute Dean Sam Chandan.

WeWork was a hot topic during several panels due to the effect and disruption it’s had on how real estate owners and managers operate their assets. While landlords used to count on their income streams coming from long-term leases with credit tenants, that’s getting harder to do. Instead, they have to get more comfortable with short-term stays. Tenants are also expecting amenities and conference space in their offices, putting more pressure on landlords to address these preferences to remain competitive.

“It’s no longer acceptable just to run and manage a great building, people want an experience,” Galiano affirmed. “It’s coming at the cost of the landlord to create that experience.”

If real estate players don’t innovate, they run the risk of becoming “competitively obsolete,” Rechler argued. He added that the speed of properties becoming obsolete has accelerated. This is particularly evident in sectors like retail, which has experienced rapid closings of certain store formats and outdated malls.

Technology Adoption Necessary to Stay Ahead

To better understand tenant preferences and how they’re using space, real estate players are seeing the need to adopt new technologies or partner with tech firms to collect useful data on their customers.

Real estate is only in the early stages of technology adoption, Rechler noted. While some companies are at the forefront of recognizing the need for data and analytics, the industry is still grappling with how to use the data to create a better customer experience and optimize building performance, he said.

Some startups have entered the marketplace to help real estate owners with this issue. Several discussed their businesses at the NYU event. One was Hello Alfred, a company that partners with owners to power their buildings with a mobile app and backend technology, as well as in-house service, to assist residents with errands like apartment cleaning, groceries and laundry.

“The resident is the new asset, and we are empowering a different lifestyle for our residents,” declared Marcela Sapone of Hello Alfred, speaking on the “Shared Economy” panel.

She added that large real estate firms without the hospitality or technology background could partner with these smaller startups to ultimately offer a high-quality product and service, which will lead to a more profitable asset.

“The intersection has to be around how can we build an amazing resident or commercial experience that ultimately is going to get you greater returns in the short term and in the long term.”

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