Western Real Estate Business

SEP 2018

Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.

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www.REBusinessOnline.com Western Real Estate Business • September 2018 • 57 T he United States, like Eu- rope, is under- going disruption within its economy that is rivaled only by the post-World War II period. At that time, the United States was wran- gling with trans- forming a war-time economy to a peace-time economy. The challenge was how to convert fac- tories making weaponry to consumer goods ranging from autos to textiles, and how to put returning GIs to work. Programs like the GI-education bill aided with retraining returning veter- ans, and the new demand for housing, cars, modern appliances, etc., gave factories and manufacturers a new productive focus. This disruption re- sulted in the creation of the suburbs, shopping malls and a housing boom. That was then, however. Disruption today is equally as transformative in terms of its impact on commercial real estate. Just look at the following graphic on GDP to understand how disruptive the 1950s were versus the post-2010 financial crisis era. For a frame of reference, the GDP growth rate in the United States averaged 3.22 percent from 1947 until mid-2018, reaching an all-time high of 16.7 per- cent (not a typo) in the first quarter of 1950 and a record low of -10 percent in the first quarter of 1958. From the depths of the financial crisis a decade ago to 18 months into the Trump pres- idency, GDP has recovered from a -8 percent range in 2009 to +4.1 percent in the latest reading for the second quarter of 2018. Just what, then, are these disrup- tive forces impacting U.S. real estate? They are technology, the remaking of the supply chain, artificial intel- ligence (AI), Millennials entering the workforce and altering how work gets done and Blockchain. Changes to U.S. real estate are collectively fueled by technological innovation in every in- dustry from banking to manufactur- ing and services. Consequently, that means how companies use real estate is changing. Office space is migrat- ing to malls to back-fill empty retail. Warehouses are also moving into malls. More and more corporations are turning to co-working and a We- Work model for office space needs. All this is fueling the adaptive reuse trend. Supply-Chain The U.S., like the rest of the world, has become more intertwined in terms of supply chain. The Amazons of the world are reinventing commerce and supply chain management. Con- sumers no longer want to go shop at stores; they want goods delivered to them. As a result, consumers no lon- ger need to live near stores and are free to move back into the city from the suburbs. This trend is fueling a re- newed interest in urban housing — a lesson Europe could have taught us decades ago. Physical stores are now virtual websites and apps on phones are connected to warehouses. Transportation networks have be- come more port- and rail-centric than trucking as reliability and speed have become crucial for today's immediate delivery promises. Blockchain Speaking of speed, Blockchain is enabling all this economic and real estate activity to happen in a transpar- ent, digital leger environment. Maersk shipping has combined with IBM to develop the Blockchain technology to accelerate import and export activity. FedEx is developing the Blockchain coding to accelerate package delivery. Finally, central banks in the U.S. and Europe are studying how Blockchain can be deployed in financial transac- tions to make the transaction process quicker, more transparent and effi- cient. Intermediaries, such as banks, title companies, brokers and any en- tity that is involved today in validat- ing a segment of the real estate trans- action, may now have the potential to be eliminated. All this disruption is occurring at an increasingly faster pace. Just look at the top-right graphic depicting the time it took to adopt new technologies from air travel to credit card usage to the ATM machine. Disruption is here to stay — and it is not just occurring in the U.S. It is global in scope and happening at a faster pace than any other period in the past century. So what could go wrong? Things like tariffs and an un- winding of the global supply chain or e-terrorism that can hack into ev- ery system being built to drive com- merce. Current events are what can go wrong. K. C. Conway, Director of Research & Corporate Engagement, Culverhouse College of Commerce - Alabama Center for Real Estate, University of Alabama investments. In part, and in turn, higher rates usually go hand in hand with declining stock market valuations and offer new oppor- tunities for investors to re-allocate funds. As interest rates take a more cen- tral role, overvaluation is starting to be sensed in various segments of the industry, especially in locations that are overbuilt. Each property type varies and market data lags, not usually showing up until the following month or quarter. Never- theless, there is evidence of upcom- ing change. The economy and most property segments are still in positive territo- ry today, with available market evi- dence indicating stability for most property classes with opportunities still emerging in some classes, such as industrial. While 2018 is projected to remain solidly in growth territory for the economy at the national and region- al levels and in California, change is on the horizon. The opportunity now exists for investors, lenders and other industry players to make strategic adjustments and plans as the year progresses to best position themselves for what's next. Elliot M. Shirwo, Founder and Principal, BridgeCore Capital in Beverly Hills, Calif. DISRUPTIVE FORCES Disruptive forces cause CRE players to embrace change or become irrelevant. By K. C. Conway U.S. GDP Growth Rate Source: Trading Economics.com Source: Trepp by Anne Marie DiCola Conway continued from previous page

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