JackChat September 2019

Innovation: At the January CREFC conference in Miami, I asked Industry Leader Panelists their thinking about “Technology”. Maybe it was a mistake to frame the question in this context as I received basically no interest in the conversation; at the June CREFC conference in NYC, I asked Industry Leader Panelists their thinking about “Innovation”.  This time, the “Innovation” context got a conversation going about “Technology”.

Over the last six months, I have been talking broadly across the industry to folks about a myriad of topics; it just feels like the industry is starting to take notice and play catch up. I don’t know if it’s the FinTech/PropTech ‘hype’ or a genuine fear of missing out; more and more folks are cluing into the world of start-ups and technology as it relates to our CRE World.

Innovation, is a topic that has always fascinated me as a strategic topic and proactively as a business management tool. My view about Innovation is that it is more than just about Technology. Innovation is a process. It doesn’t start with Technology; rather, it starts in companies run by proactive and strategic leaders who are trying to deliver customer outcomes better, faster, and cheaper. Innovation may or may not be tech related; holistically, Innovation is a catalyst for industries, companies, and professionals to evolve.

Rick Jones in a past issue of ‘Crunched Credit’ posted a passionate plea to the CMBS World to gather and ‘rebuild’ (my word). He continues to challenge the CMBS world to Innovate beyond where the Industry tool (securitization) seems to remain stuck. I want to point out, there was a time, a decade or so ago, when CMBS produced more transactional volume than the Agencies and the LifeCos combined. This year CMBS will produce less volume than either the Agencies or the LifeCos as a separate sector of the capital markets! Without some serious innovation, I wonder out loud if its too late for CMBS to regain market share in the CRE World.

I challenge everyone to focus on the pain points in their professional lives, and their businesses, that they wish could be eradicated by the new technological advances and products that are now possibly newly or soon to be developed. With the introspective part of the process executed first, secondly, explore what is out there in this brave new world. There are wonderful ideas coming to our industry from outside our industry; as part of a proactive innovation process, we owe it to ourselves and our businesses to listen, to consider, and to use these ideas as a catalyst to possibly evolve.

Centers of Recon: I don’t know if your innovation will be about ‘expansion joints’, or ‘digitization’, or ‘tech enabled services’, in your businesses. What I do know is that when disruption (others executing on innovating ideas before you) arrives, you will need to have had a view as to what form it will take and how it will affect you and your organization. This is way more than technology; products and services are being ‘hospitality-ized’ as our industry is thinking more and more about our customers, the outcomes they seek, and our inducing engagement with these customers and our businesses.

If all businesses, people, and industries progress from having no data, to having data, to converting that data to information, to converting that information to knowledge, and then to applying that knowledge into our products and services; then, everyone needs in their business a center of reconnaissance in order to be in a position to get exposed. Think of it as R&D.

As exposure begets research, and research turns into development and invention, only then can productization and diffusion into our customer base occur. Learn to plan for more than the incremental; plan for what could be seismic change. Make it happen for you rather than to you.

What am I thinking about (besides innovation) and worried about:

• Is it possible that Pension Funds will one day need government intervention as the banks did a decade ago? Consider pensioners might need their money back so they call on their pension. The Pension has invested with a money manager who put them into say a transitional bridge deal. The markets shift, the business plan of the transitional ‘value add’ deal no longer works, the asset is marked to 50% of investment, AND the pension fund cannot get its money out or distribute to the pensioner. Rinse and repeat enough times and is the government forced to step in and support the pension community?
• Uncertainty levels are elevated – no one is sure right now about where things might be going. Combined with subdued global inflation and the erosion of the middle class, as well as middle-class employment, all of this drives our economy. Consumer confidence? Investor confidence? Business confidence? It all feeds into allocations of investment capital, savings rates, and disposable income.
• WeWork aside, I love the flex space concept of Space as a Service. The idea that landlords can offer to a customer base products, services and flexibility at unprecedented levels, excites me. While everyone opines about WeWork and its possible negative effect on the shared office concept; I wonder if the investment community and their capital providers have focused on the effect this will have on lease duration this will have across the industry. We used to finance buildings based on long term durable lease income streams, favoring low basis or limiting tenant roll-over. How will investors react when tenant duration desires shorten and a need for greater flexibility in lease terms are made the rallying cry for CRE?
• The debt market and liquidity drive value of CRE assets. See the prior bullet.

CRE is about hanging on.  All real estate makes money, the only question is who owns the asset at the time.  As such, we all need to recognize that to hang on we need to lower leverage levels, begin with the end in mind, and always do the right thing.  Let us define right and wrong by a standard of excellence that we aspire to rather than what we can get away with.  IF we don’t, others just might out innovate us and our businesses.

I hope everyone has a solid Q4.