On this episode of Deconstructed: The Future of CRE podcast, host Vivek Kartha is joined by David Ferrero, EVP of Capital Markets at The Laramar Group to talk about the state of the CRE industry today and what he feels CRE professionals should look for moving into the future. 

Who is David Ferrero

David Ferrero directs Laramar’s strategic fundraising and joint venture activity while overseeing the expansion of its investment portfolio. He has a deep understanding and extensive experience in property technology (PropTech), which informs his role in focusing on linking technology innovations with real estate operations at Nine Four Ventures.

Prior to his time at Laramar, David was Senior Advisor and Head of Real Estate and Business Development at Mosaic Building Group. There he guided development of an early-stage construction technology platform, successfully aiding a $10 million Series A capital raise to secure growth for the platform into the future. 

The Covid Shock

When David looks at the Covid shock, or upending to the real estate industry, he considers some of the previous industry upheavals that have happened during his working life for comparison. There are similarities with all of them, but what jumps out to him is that this particular shock comes with many differences and many material reasons why those differences are occurring this time around. 

One difference between the current situation and past disruptions is that gateway cities are suffering with population loss, but smaller cities are growing. “San Jose is losing people, San Francisco is losing people, and Boise is picking them up,” he says. “CBDs are losing people. But the suburbs are picking people up.” 

This new paradigm means that much of your investment success depends on location. For example, an investor in Midtown Manhattan might be hurting while someone in Austin may be thriving. 

Not A Typical Economic Recession

All the recent dislocation of the population has not been driven by economic or financial factors. The massive recent changes have been driven by public health factors. And the government policy changes to the public health crisis have been different than they would have been in a typical economic crisis. 

Instead of the market resetting asset pricing at a lower level so that the market can clear and start over, we’ve seen multiple rounds of financial stimulus from multiple government sources and agencies. There have been limits on evictions and foreclosures. All of this has allowed people in distressed situations to carry on, eliminating or postponing the traditional distress you would see in down markets. 

Close to a Bubble 

Does all this volatility and unprecedented activity in the market mean that we are in a bubble? David doesn’t think so, but he thinks we are approaching one. 

“I think we are probably dangerously close to a bubble of some form,” he says. “At least in some markets or in some particular property types.”

He gives an example of the Sunbelt market, where apartment properties that are going to market are seeing active, sophisticated investors bidding at mind-boggling prices. Frequently, he says, we’re seeing bidding coming in at 10–25 percent higher than the seller’s target pricing. Another rare tactic being used is bidders are putting up non-refundable deposits before even visiting the property in order to block out the competition. He says this behavior is concerning to market veterans right now. 

The Evolution of PropTech

The real estate industry has been slow to evolve into using new technologies in the way other major industries have, but David says that the CRE market has gone through a collective maturation over the last 20–30 years, and adoption of PropTech has gained a lot of momentum in the last five years.

Many years ago, during the Resolution Trust Corporation (RTC) days, there were a handful of private equity firms or investment banks that would buy non-performing assets with great success. When the risks were properly understood, the margins were wide and deep. 

These days, the market has matured and there are many more players involved. “There are so many people now with multi-cycle experience that the margins have been compressed,” he says. “And if you have a good idea, it’s not yours for long. The level of interest rates has gone down, and the sophistication and maturity of the business has gone up. The ability to generate really good returns consistently over and over again at scale has gotten harder and harder to do.”

The result of this maturity is that there is an increased emphasis on the details of each transaction, with owners and managers working together to add the proverbial nickel and dime to the return on the investment by adding efficiencies that were previously overlooked.

As technologies have emerged that help in finding these efficiencies through analysis of various data points, it is only natural that new SaaS products continue to come online to help investors create efficiencies to help generate bigger margins, improve value, reduce expenses, and grow revenues. 

So, while the growth of technology in the real estate industry has been slow, the seed has been planted for that growth to occur for a very long time. 

The Downside of Early Adoption

Since the adoption of PropTech is relatively recent, many in the industry have gone through the pain of adopting a system before it was ready or fully tested, and being burned by software that over-promises and under-delivers. As a result, many of those people in the construction and real estate industry are understandably gun shy about trying a new platform. 

If a homebuilder adopts a new platform, he is using that platform to make decisions that could adversely affect his reputation which he has spent years or decades building, causing him to lose business in the future. So these software programs differ from new social software programs which, if they fail, don’t have material impact. In construction, these systems have real tangible consequences for the business owners and many others who count on them for work.

Keys to PropTech Success

To avoid these pitfalls, developers of PropTech systems need to ask themselves some basic questions: Can they deliver? Do they have a roadmap for how they are going to grow and expand? Can they deliver a meaningful product without creating unnecessary risks for early adopters?

If a software developer can honestly answer these questions positively, then they are probably set up for success. Many in all areas of the real estate space are looking for help from technology, and if a product can deliver, that product will be successful. As David says, “I think there’s an incredible opportunity to help real estate participants. As managers become more powerful and thoughtful, help them to organize their data, link and understand it, and interact with it better. That to me is a really interesting, practical, and game changing step for the data space, once that information is brought together in a coherent fashion.” 

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