JackChat May, 2018

I just came back from the Spring ULI Council Meeting in Detroit. After Council Dinner I had a conversation with my oldest son about a class he is taking for his MBA. He was talking about “Red Ocean and Blue Ocean” businesses. As I went to sleep my mind was wandering on about how to take a mature industry full of fierce competition behave more like an “open playing field”, free of competition. When I awoke it became clear to me – as marketplaces are defined by product, customer or geography; all one needs to do is to redefine the geography, or refocus on a customer subset, or reposition your products.

What struck me during Council Day is how vested we all are in our existing views of and about our worlds. While it has made many of us more money than we ever thought possible; it possibly is blinding us to new competitive challenges, paralyzing us as we are stuck in old and tried and true ways, keeping us from seeing real opportunity.

What are we facing every single day that we could possible see in a new light?

Wouldn’t it be wonderful to be in the Office Leasing business without the burdens and responsibilities of being “asset heavy” (owning the brick and mortar; responsible for the attending liabilities)? That’s what WeWorks did. An Asset Light Company that once free of the burdens of the long-term asset of the brick and mortar, they offered their tenant short duration lease obligations and the context of Flexibility. The magic in that? They lease space to corporations of all sizes and charge per person rather than per square foot! Imbedded markup they can then use to sell services at a profit!

Interest rates vs cap rates: 10 yr swaps up 104 bp in last 100 days; 10 yr Treasuries are back in the 3’s. I for one am cheering the rise into a more normalized 10 yr Treasury in the 4’s. But, what about cap rates? If everyone believes they are tied to interest rates (I do not), then are they? If everyone seems to fear rising cap rates (I do not), then will they rise? Fact is, with all the debt capital in the marketplace its easier to be an owner, a borrower. Its also great to be a seller. Not so much to be a buyer. Cheaper next year? Are you aware that for a “baseline” of a 4 cap industrial building in LA or NJ, institutions are now forward purchasing spec industrial buildings at 30-75 bp discounts and taking leasing risk! I continue to posit that cap rates are based on perceived scarcity factor rather than the math of where interest rates are or by truly understanding the market for leasing risk. Yet, investors need cash flow and a leverageable yield.

Snippets I picked up from ULI:

• Industrial: The buying influence use to be rent, then labor costs. Now, with robotics, tenants can have plants almost anywhere.
• Office: Seems like a smaller group of people will be willing to pay the highest rents. People will pay for Experiential and where they want to be. That place (location and sublocation) is changing.
• Retail: Mall owners focus on the anchors and their merchandising. How then do you merchandise these anchors? How do you then make the mall unique? Can you add entertainment? How do you increase the destination quality of the mall? If you can’t, maybe it’s time to see the asset differently – no longer as a mall?
• Amazon: Seemingly lost in the benefit of the search for HQ2 is the “playbook” Amazon is leaving behind with each city applicant as to what it will take to remake their city. Will cities listen and take action?
• CapEx: Are you ready for a Super Cap Ex cycle in CRE? With rising interest rates and compressing cash flow, do we have the capital needed?
• The Horror Story we all seek: Consider the possibility it simply isn’t there. There is not a horror story waiting for us as an industry any time soon or hiding around any corner…
• Baseball: How well has your business adapted to “saber metrics” from basic “scouting”? Are you clear about the difference between data, information and knowledge? How about what to do next with the knowledge your data has provided you?
• Technology: We all need to be tech companies who provide a customer centric experience consistent with the core products and services we are in business to deliver. After all, we all need more bodies or more technology. I posit that the tech is cheaper. PropTech and FinTech are removing friction points.
• Remember the last deal: In every past cycle, almost every investor I spoke to bemoan the last deal that they did. Seems that was the deal that was the tipping point that sent them over the edge. Isn’t every deal your last deal? What worked? What would you do differently? What did you learn? Have you confused luck with skill (your own)?
• How much have we been over rewarded by a liquid capital market?
• Bugs Bunny once said: “Sure, I believe in luck; how else do you explain the good fortune of those you despise?”

Remember, if everyone agrees with you, you are too late.

Press coverage

3650 REIT Launch Press Release (pdf)