My Thoughts on 2020
By Chris Rising
Where We Are in the Cycle
2020 is shaping up to be a pivotal year in the context of real estate investment. From the window of January, there are many identifiable issues that will define the overall market strength for 2020 but very few solid examples on which to make decisions. Currently, the economy is strong. In looking at Q4 2019, U.S GDP grew at an annualized rate of 2.1%, which likely reflects solid consumer spending and confidence (NRF). However, we are now in a presidential election year, which historically drives more market uncertainty as consumers and businesses try to read the polls through the political swings of presidential campaigns and debates. The process often shakes the confidence for where future economic and tax policies are headed and leads to a lack of investment decisions. To further complicate the economic scene for 2020, while the United States has signed phase one of a trade agreement with China (CNN), there are many questions left unanswered around how the deal will play out and how it will be implemented.
If one looked just to the continued strong economic commentary, they could easily take the view that 2020 will be another strong year, ripe for investment and taking on risk. In fact, according to a headline, perhaps taking Goldman Sachs a little out of context, “the economy is nearly recession-proof” (CNBC). In and of itself, this is a risky statement in my book. I don’t believe any economy, no matter how strong its performance, is completely recession-resistant. As the German proverb says, “trees just don’t grow to the sky.”
Exponential growth still has limitations and market declines are a fact of life. We’ve been in the real estate business a long time and always defer to the fundamentals, especially at a time when the economic outlook remains ambiguous.
Record stock market highs are not indicative of continued performance and such evidence is merely anecdotal. A Deutsche Bank’s analysis reported that corporate share buyback programs are driving the record bull market run, while real investor inflow appears to be on the decline (CCN). In my experience, markets always correct themselves, whether a downturn is one that leaves lasting impacts or a passing storm. With scant precedent supporting these highs, change can come rapidly and no one can be sure how long this economic expansion will continue.
I tend to be of the view that the stock market is not an indicator of the strength of the real estate market. I believe that real estate is a supply and demand business which therefore depends firmly on job growth and general economic growth in a particular local/regional market. In looking at the full United States real estate market, I believe there is economic uncertainty looming on the horizon. However, I believe certain regional markets have strong fundamentals of continued job growth and positive GDP growth. Ultimately, we are focused on delivering the best commercial real estate product in the markets we are in. We figuratively fight “hand to hand combat” to win lease transactions in these markets and depend on our impact strategies to create great places.
Our strategic approach involves addressing the needs of modern day tenants - not only for today but future needs as well. We believe that what a millennial or Generation Z worker expects from their office experience is radically different than a baby boomer. Thus, innovation and differentiation is how we establish value and appeal. So ultimately, we need to invest in new deals that offer the opportunity to reposition an asset. In furtherance of Alpha Generation, we believe that location matters when buying an asset and we need to buy at the right basis. It is then all about execution and we have to control our costs.
Given these fundamentals to our real estate strategy, we do believe there are opportunities to buy in the nine markets that we focus our efforts towards on a day-to-day basis. We believe that 2020 will present four to six deals in those nine markets and we expect to make those investments.
We understand that economic declines are inevitable. We also believe that after a ten year up cycle in real estate, the risk of a buy at this time is high. But our DNA as real estate investors is that a careful investment into an asset that meets our scorecard requirements will continue to generate alpha when a market inevitably cycles with a drop in overall values.
Where we are going
With the roll-out of 5G digital networks, wearable technology and self-driving vehicles, a future almost out of the Tom Cruise movie “Minority Report” continues to come into focus. In the real estate world, “proptech” is swiftly modernizing our industry. Artificial intelligence, voice commands and facial recognition software are just a few examples of innovations transforming the workplace. Data goes hand-in-hand with proptech. Going forward, the big question will be: how do we utilize the abundance of information at our fingertips to improve the tenant experience? Big data will undoubtedly play a growing role in driving future investment decisions. Our team is laser focused on how we use data and how we make property level tech investments to create alpha in our investments. We believe that innovation in HVAC and building management systems will lower our operating expenses as we improve a project. We believe that the tenant experience software via phones and wearable devices will also be implemented at the properties we own and invest in this year. We think that several years of research and trials around such products will come to reality in certain aspects of our current investments and that will create more value.
Most importantly, we have been very pleased to see major US and global investors accept the reality of climate change and how it will impact global investment decisions. Larry Fink, the CEO of Blackrock, and the largest asset manager in the world, recently wrote: “Climate change has become a defining factor in companies’ long-term prospects…[o]ur investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors. And with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward.”
It is to our strategic advantage as other commercial real estate developers and investors to view climate change and its risks as an important aspect of investing in real estate. We are out front in this regard and believe that as market leaders, we will be viewed credibly. This is why we believe so strongly in the investment thesis of Rising Impact and why we are reducing our carbon footprint and water waste, creating recycling programs, and investing in the highest attainable LEED certifications, wellness certifications, and EnergyStar ratings for each of our properties. Equally important, transparency and open reporting are key factors for our investors. Thus, we believe our strategic use of Howard W. Buffett’s “Impact Rate of Return” (Social Value Investing) is unique among real estate platforms. An investor shouldn’t just understand their financial returns, but also their impact on climate change, health & wellness and society. Howard’s formula gives us the ability to compare impact on an “apples to apples” basis to our competitors efforts.
Conclusion
2020 is a pivotal year, not only for our company but for the real estate sector.
We believe it has more uncertainty than the Goldman Sachs view of a potentially recession proof economy.
We believe we will make strong, strategic investments this year.
We believe we will make some important investments at the properties we currently own and will acquire and that these investments will create identifiable alpha.
We will report the impact these investments have on carbon reduction, health & wellness and communities where our assets are situated in.
Finally, we looked at hundreds of opportunities over the last couple of years and made very strategic and calculated buys and will continue to be patient and prepared.