Contributed
The lightbulb replaced candlelight. Video killed the radio star. And the internet is gradually usurping commercial real estate., It’s time for equity and debt investors, alike, to come to terms with the fact that retail and office properties may not be the enticing assets they once were. In 2019, businesses large and small are continuing their migration away from concrete and onto the cloud. Products and services are increasingly digitalized. Everything from banking, grocery shopping, taxiing, and ordering food can be done by tapping our fingers against the screens of our smartphones., In fact, since it’s raining today, I might not step foot outside of my house. I’ll take my three scheduled conference calls from the comfort of my couch. I’m funding a mortgage loan later this afternoon, so I’ll email my banker the wire instructions for my lawyer’s trust account. I have to get through 20 or so messages that I’ve “starred” for follow-up in my Gmail. I have to sign a new retainer agreement, but I’ll just do it with my electronic signature that’s saved on my laptop. And before the day is over, I want to read the due diligence on a real estate deal that I’m contemplating – all of which is saved in my email. Heck, I don’t know if I’ll even put on pants today., This is the reality of business in the 21st century. Companies are grateful to rely less on people and physical products, and more on the internet. Sure, electronics are not perfect. They can freeze and run out of. But they work 24/7, they don’t take sick days, they never complain and you can fit them inside your pocket. The same cannot be said about most humans., Side note: can somebody please invent an app that takes pictures of our feet and measures their size? Then, it should recommend shoes that match our style and price preferences. Finally, allow us to purchase the shoe from within the app. I despise shoe shopping!, The digitization of people, products and services will continue to place downward pressure on commercial real estate. As businesses require less physical work space, the demand for those assets will depress. All of this is bad news for investors in that category., To be sure, the foregoing is already happening. The collapse of big box stores like Toys “R” Us and Sears have demonstrated people’s desires to avoid lineups and instead make purchases online., But this is just the beginning. The world will only become more digital. In 2010, the internet giant Amazon’s revenue was around $34 billion. In 2017, it was over $165 billion. By 2022, it is expected to grow to $356 billion. The expansion of online shopping should concern investors in malls and offices. However, it will be a boon for those who participate in warehouse facilities and data storage centers. After all, companies need to keep their troves of data somewhere., As a rule of thumb, real estate is there to serve the needs of humans and our businesses. When we change, so will the types of properties we use. That’s why almost nobody invests in stables for horses. Today, we use cars, so investors finance parking lots and garages. Offices and retail properties are on their way to becoming akin to the horse and cart: they still exist, but they don’t have the same value as once before., The prospects of any investment come down to the individual details. Obviously, not all office projects are doomed to failure. There is still plenty of money to be made within that asset class. But the broader fundamentals that support these investments are slipping. Equity participants and creditors have to be exceedingly careful. They must ensure that a conducive market not only exists today, but that will in the coming years., Alexis Assadi is the Chief Executive Officer of Pacific Income Capital Corporation. He finances real estate and business ventures across North America.
