Where do you see CRE in 15-20 years?
Nevermind the current down market, I'm curious to hear where you folks see CRE in 15-20 years, especially development. Do you think it'll be more institutionalized/centralized, or still generally fragmented? Do you see firm headcounts increasing or the opposite? Do you think competition will be more intense among smaller firms?
Interested to hear your thoughts!
Down market? We got a massive rate cut today!
Seriously though I think it gets more and more institutionalized. The difference in this industry from when I started to today is night and day, and if you ask my former boss's generation, it's not even recognizable.
That doesn't even get into technology either. The dudes out there who are in their late 50's/early 60's who are now either running the industry or getting ready to retire were doing deals without Excel when they started. "Back of the napkin" wasn't just a phrase. With the introduction of AI and all of the real estate data companies, along with how fast technology has been progressing in our lifetime, the changes are going to be dramatic.
Good news is, the existence of land and property won't be. Real estate will always be there, in one way or another. It's always going to be tangible, even if it is a sentient robot that is out there touching it.
Edit: Also, huge missed opportunity here for my standard dad joke response when someone asks about "CRE." I'm off my game.
I used to look at old guys doing back of the napkin deals as unsophisticated but after modeling a few thousands of these deals, I stand strongly behind if it doesn’t work on the back of a napkin, it’s not going to work with the world’s most sophisticated/dynamic model.
Models are useful as a sanity check, sensitivity analysis, figuring out a specific purchase price for a target IRR but I don’t typically take the time to do all that stuff if it doesn’t make sense on the back of a napkin first.
I don't see a meaningful difference. Technology has helped around the margins in the past and will continue to improve around the margins in the future. Information asymmetries are narrowing in some places. But all of this is tangential to the actual business of almost all real estate, which is managing people's expectations and getting them to pay you. That fundamental aspect hasn't changed, and won't change. Many of the tools that have been introduced in the last 40 years are meant to help project, not to execute. This is also, probably no coincidentally, something the WSO community doesn't truly understand about the industry.
The people who succeed over the long run will still be the people who know how to manage real property, who have some competitive advantage that others don't, who value reputation over profit. And since a lot of real estate is interpersonal, a lot of it cannot be automated away. Yes, some of the more infamously backwards parts of the industry are being yanked into the 21st century, and it's no longer easy to make money the way people did 40 years ago, but new opportunities open.
Agree with Ozy that I don't see much difference. Hopefully technology will bring down construction costs and perhaps allow us to build in areas where it was previously not possible, but as for the development process, i don't see AI, data, or technology making much of a difference. As an area gentrifies and wealthier people move in, they also bring with them the power and money to be a NIMBY. When you hear about gentrification, it's always in low income neighborhoods where the residents lack the resources and knowledge to push back on developers. But in an area like Beverly Hills, good luck even getting approval to build a new single family home. Real estate development is very political, so this entitlement process of working with the community, neighbors, and city will never go away in the same way that politicians campaigning for supporters will never go away. I've always said that development is a local business - a developer who builds in New York City where zoning regulation is a lot more lax is going to have a very tough time in San Francisco because of how different the attitude toward development and density is in SF. As such, I think that development will continue to be fragmented or at the very least you will have more institutional companies like Tishman or Related but each of their satellite offices is essentially it's own local development business.
I do love that you chose NYC as an example of "lax" zoning. It's probably the second most difficult municipality to build in, after San Francisco!
I agree with the above. It'll be more institutionalized, but I do think the industry will contract. Not saying this as a permabear, but most of us have recency bias. You mention the next 15 years and its very important to note that the last 15 years was a one-off. Last 15 years was literally from the bottom of the GFC and interest rates that were near zero and QE policies that were there to ensure a quick recovery. The Fed did a 50 bps cut because they are being more nimble now than before. Realistically I think the Fed Funds rate will hover in the 3-4% range. Money markets, savings, etc. will be in the similar range. And this matters because this essentially becomes the risk free rate. So as long as the risk free rates stay at these levels, valuations have to fall, theres just no question about it. No more 3 cap deals in Atlanta or Nashville. I think a reason why valuations havent fallen yet is still due to recency bias. Sellers were literally seeing BOVs for double the current value. Mentally, its just hard for them to cut price when they had high offers dangling in front of them just a couple years ago. Buyers are thinking rates will be back to near zero. People have short term memories here.
more institutional is pretty much a given but what does that mean? Idk. Curious what more experienced folks think.
More development personnel working for massive corporations versus smaller shops and those corporations having an increasing majority of dealflow. Development will be less of a start up entrepreneurial activity and more like going to work at a Wall Street bank.
More institutionalized is just the world we live in today, its not just RE its everything.
Back in the day not every one went to college, or high school, there wasn't the internet. Now everyone does and the same train of thought is taught around the country. The way people think is becoming more institutionalized and what is "Right" and with everyone having the same knowledge there isn't a ton of info that is just missed because no one ever checked.
Stay woke
How much have these things changed in the past 50 years? Leases, Loans, PSAs, Building Construction Methods, BOVs, Engagement Letters, Estoppels, Property Insurance, etc etc .... Not much in my estimation.
Yes there are some things that didn't exist from 50 years ago (dog washing stations in MF buildings, data centers, CMBS, docusign). But these are all at the margin IMO.
The tech-enabled, Ivy-educated 20-somethings don't have much advantage over the foreign-born, high school educated guy with an AOL email address and a flip phone.
So put me in the 'not much changes in 15-20 years' category. But reasonable minds can disagree.
One trend that has persisted and will accelerate IMO is the world has shrunk and distances mean less and less when it comes to investment. It's not unusual for a middle east sovereign wealth fund to buy a tertiary market asset. But I think that's a different issue from CRE itself changing in the future.
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