Jack G. Kern is the director of research and publications for Yardi Systems, Inc., and is responsible for the data analytics team at Yardi Matrix and the information publishing group in New York City comprised of Commercial Property Executive and Multi-housing News. Before joining the firm, Kern served as the managing director of consultancy Kern Investment Research, a national research practice with clients across the U.S. and Europe.
What have been the biggest regulatory and legal changes impacting the commercial real estate industry and how have these changes impacted the industry?
The biggest changes impacting the real estate industry are Increased exemptions under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), which will increase foreign investments in CRE. Macroeconomic and regulatory developments also continue to impact profitability. The question becomes, how do companies gain a competitive advantage and drive top-line and bottom-line growth from regulatory changes?
How do you see regulation, data, and technology (in the commercial real estate industry) intersecting?
Technological advancements, demographic shifts, and regulatory developments could bring disruption to the commercial real estate (CRE) industry this year. 2017 research efforts found that CRE transaction activity might be tempered by modest economic improvements and higher interest rates, while new accounting standards on lease accounting and revenue recognition will likely increase compliance and administration costs for real estate investment trusts and engineering and construction companies.
Risk retention rules will likely lower commercial mortgage-backed securities (CMBS) issuance and reduce capital availability in secondary and tertiary markets. New accounting standards on lease accounting and revenue recognition will likely increase the compliance and administration costs for real estate investment trusts (REITs) and engineering and construction (E&C) companies. Corporate tax reforms will reduce flexibility for corporations to spin off real estate assets into REIT structures.
What have been the advantages or challenges of this intersection?
The Protecting Americans from Tax Hikes (PATH) Act of 2015 will ease REIT tax provisions and research and development (R&D) tax credits for E&C companies. PATH will also increase the flexibility to invest in startups for R&D experimentation. Online retailing, on-demand manufacturing, and innovations in speed and mode of delivery (such as same-day delivery and e-lockers) are disrupting the retail and industrial markets. Demand for large retail and industrial spaces will contract, and there will be a blurring of lines between these two property types.
How have technology innovations and data intelligence transformed the industry to date?
Apartment developers are looking at an Airbnb-style strategy to monetize vacant apartment units during the lease-up and stabilization phase of new developments. For example, Vornado recently launched Y Hotel and Pop-Up Hotel. Startups based on the sharing of collaborative economy, like Airbnb or WeWork, are disrupting the way organizations lease and use CRE. Companies face challenges from new competitors that are providing dynamically configurable spaces and flexible leases. Owners need to rethink their approach toward space design, lease administration, and lease duration.
Transaction activity will continue to decline, and upward momentum in pricing is likely to slow down due to modest economic growth and ongoing political uncertainty. Investors are mostly focusing on primary markets and high-growth secondary markets in the United States.
How will technology and data intelligence transform the industry in the future?
The emergence of “pay-per-use” is beginning to challenge the model of personally owned vehicles. Along with this, the advent of self-driving vehicles will potentially transform the entire mobility ecosystem. Mobility changes have the potential to change demand-supply dynamics, free up large parking spaces in prime areas that can be put to different uses, and shift tenant demography. Companies will need to be more strategic in analyzing the impact of mobility patterns and options on their long-term revenue and profitability, exploring design changes to existing spaces, and revisiting tenant strategies.
Technological advancements are making CRE data more ubiquitous and transparent. These changes are enabling online leasing in a cost-effective, real-time manner and threatening the traditional brokerage model. Traditional brokers should consider diversifying their core business focus to include consultative opportunities, invest in data and technology, and collaborate with startups to get ahead in the game. Investors must develop unique capabilities to distinguish themselves. They will also have to be very creative about where they seek value opportunities—secondary/tertiary markets or niche asset classes, such as student housing, healthcare, and single-family homes, could all be explored.