What Does the Future Hold?
The real estate business is likely to look very different by the end of the decade we just entered. The details may be debated, but fund managers and investors have a more pressing concern: How to prepare their organizations and portfolios to absorb the inevitable shocks while simultaneously positioning themselves to profit over the long term.
The decisions facing real estate investors are already more complex, even before factoring in the reality that changing modes of work, life and entertainment mean properties are being conceived and developed in novel ways. Now, they find themselves asking questions like:
- Will shared mobility fundamentally reformat how communities are (or should be) designed?
- Will co-living take root beyond its current niches?
- Are intergenerational living arrangements among strangers realistic?
- What binds communities when all products and services can be delivered?
- When will going to work become a quaint notion, and what happens to office space?
- Given the considerable carbon footprint of new construction, will renovations get a boost?
- Will climate concerns shift the focus from operating efficiency to lifecycle carbon footprints?
- Do green roofs go from experimental to de rigueur?
- How does the rapidly declining cost of renewable energy sources change real estate economics?
- When will we move from isolated examples of smart buildings to integrated smart cities?
It is not unreasonable to think that the real estate market might change in ways that we cannot even imagine right now. Innovative technology has a way of disrupting industries in unexpected ways and, according to the Deloitte Center for Financial Services, most investors expect technology to have the greatest impact on their legacy properties within the next three years.18 There are also likely to be unintended consequences stemming from new regulations.
Changes will not be limited to how things are planned or built. The entire asset class is likely to be transformed as investment vehicles morph. Imperfect as they are, REITs have long provided retail investors with broad liquid exposure to real estate as an asset class. Now crowdfunding, direct lending, and secondary trading platforms will further open the doors for retail investors to add or remove targeted exposure to real estate as conveniently as they can with other types of assets.
This is more than idle speculation, as real estate would be following in the footsteps of other alternative investments that pioneered this particular migration. A representative at one of the world’s top 10 sovereign wealth funds commented, “I think you’ll see one of the biggest order of magnitude changes in the real estate sector if certain players in the markets are successful in moving real estate closer towards the ‘liquid’ end of the investment spectrum. This would require a fundamental shift and institutional buy-in, as well as comfort in the tech stacks providing this form of service. Fundamentally, institutional investors would need to decide that the change would be beneficial for their interests. As things work now, institutional investors are able to take advantage of inefficiencies in illiquid markets. Whether or not there’s enough positive upside for institutions in more liquid markets to compensate for the benefits they currently receive from their monopolies of scale and longer time horizons, it’s not quite clear yet. If it does though, it will be extremely transformative to the real estate sector.”
Customization is another profound trend that can be observed among institutional investors and their fund managers. A 2019 report by EisnerAmper and supported by Preqin data describes the shift: “As investors have become more sophisticated, so too have their portfolios, as they seek custom solutions to complement their fund holdings. As the demand for custom vehicles grows, many fund managers are seeking to expand their offerings. Nearly half of all managers surveyed by Preqin planned to offer more co-investment and separate account solutions in a bid to attract investor capital and build relationships in a fiercely competitive market.”19
Change is certain. The COVID-19 pandemic will almost certainly influence these trends, but it is unlikely to reverse them. Prices may fall in some markets, but basic supply and demand imbalances remain. People may become more reluctant to share space with others, but our collective–and so far apparently successful–experiment with working from home may result in the need to accommodate more flexible work arrangements. Firsthand experience with a silent killer may spawn more thoughtful responses to other existential threats such as climate change.
With even more uncertainty introduced into an already evolving real estate market, planning and positioning are paramount. It is critical to focus on the emerging trends, formulate well-informed responses and nurture deep working relationships with partners who possess expertise in business strategy, investments, technology and operations.download the full paper
18 Deloitte Center for Financial Services, Commercial Real Estate Outlook, 2019.
19 2019 EisnerAmper Private Equity Real Estate Market Outlook.
This information is provided for education purposes only and is not intended to provide legal or investment advice. SEI does not claim responsibility for the accuracy or reliability of the data provided. Information provided by SEI Global Services, Inc.