Is your portfolio prepared for drive-thru grocery stores?

The retail grocery industry — a crucial commercial tenant — is facing a new disruptive force: Amazon.

The e-commerce giant has plans for a drive-thru grocery store in Sunnyvale, California, according to a report in the Silicon Valley Business Journal. If expanded, the concept could bring new turmoil to a retail grocery business already in upheaval from consolidation and changing consumer habits.

The Silicon Valley Business Journal reports a real estate developer there has submitted plans for a new 11,600-square-foot building and grocery pickup area. Amazon isn’t specifically named in building documents. However, the Silicon Valley Business Journal cites real estate sources who say Amazon is behind the project and plans a rollout of the concept that could eventually encompass multiple sites in Silicon Valley.

For several years, many companies, including Amazon’s AmazonFresh, have attempted to deliver groceries on a same-day or next-day schedule, to varying degrees of success. A common problem has been delivering fresh food to a doorstep and leaving it in a non-climate-controlled and unsecured environment.

Amazon’s drive-thru concept would be a step beyond its AmazonFresh grocery delivery service. With a drive-thru grocery location, customers could order online and pick-up in-person at a scheduled time. The concept could potentially bridge the convenience of grocery shopping online and the need to pick up food and keep it fresh.

“We are seeing the emergence of the next generation of the food distribution system,” says Bill Bishop, chief architect at Brick Meets Click, a retail and e-commerce consultancy, according to the SVBJ.

The exclusive report cites planning documents that include details of the proposed drive-thru grocery store. They include the following:

  • The concept would include both an online shopping platform and traditional brick-and-mortar retail.
  • Customers will pre-order grocery and other items, then choose a 15-minute to two-hour pickup window.
  • The building would be constructed as a warehouse and include loading stalls for eight cars.
  • Shoppers could also arrive on foot or via bicycle and shop inside the store.

Grocery stalwarts such as Wal-Mart and Safeway, among others, have been piloting and expanding curbside pickup for groceries ordered online. However, Amazon’s expertise in e-commerce and automated order-filling could seriously challenge those offerings.

If an Amazon drive-thru service proved successful and the company decides to embark on a major expansion, it could create numerous opportunities for commercial real estate developers and investors.  Of course, a successful neighborhood Amazon grocery drive-thru could also dent the profitability of traditional supermarkets and give their landlords and investors heartburn.

“It would put more competition on (traditional grocers) because now we have a new format,” Kirthi Kalyanam, director of the Retail Management Institute at Santa Clara University’s Leavey School of Business, told the Silicon Valley Business Journal. “Where the rubber is going to hit the road is: Can these new locations be more convenient to customers than a Safeway? If the answer is yes, There will be some restructuring in the grocery industry.”


Adam O'DanielBy Adam O’Daniel | Editor | QuietStream Financial Insights

 

4 Intriguing Ways Drones Will Remodel Commercial Real Estate

Aerial drones are replacing boots on the ground with technology in the air. Will commercial real estate see the same transformation?

The trend of accomplishing more and more with unmanned aerial vehicles presents both challenges and opportunities for owners and investors in commercial real estate.

While military applications have led the way so far, the drone explosion has prompted both large corporations and startups to venture into the private drone business. The use of drones for commercial purposes is expected to expand at a 19 percent compounded annual growth rate between now and 2020. Meanwhile, the Federal Aviation Administration is sorting through a host of issues sure to arise.

A drone flies near an office property.

A drone flies near an office property.

Already, drones have begun to change how commercial real estate owners and investors make decisions. Whether you’re an early adopter or fast follower, now is the time to understand what’s taking off. Here are four areas to watch:

Marketing: Interactive photo galleries and 360-degree virtual tours are old hat. The next trend in marketing properties is to hire a commercial drone to showcase from above. The idea is already catching on in Southern California, where high-end residential Realtors have used drone video to market estates. Expect striking commercial properties to be marketed in similar fashion.

Due Diligence: Inspecting a piece of property curbside gives investors one perspective. Viewing an asset from 100 feet in the sky is another. An investor conducting due diligence on a property hundreds of miles away can now hire a drone to survey the area. Could drone-conducted due diligence someday replace traditional site tours?

“Look at what Google Maps did to help people understand the location of a property. Drones present another clever new tool for analyzing real estate,” QuietStream Financial Chief Executive Robert Finlay says. “However, nothing replaces boots on the ground for due diligence. I’d much rather walk the property than see a drone video.”

Security: Drone surveillance? Not in my backyard. As drones proliferate, security will become a greater issue for commercial real estate operators — on both sides of the issue. Many large office properties use private security officers and video surveillance to monitor a property on the ground. In the future, it may prove cost effective to also secure an asset with an aerial presence. Likewise, property owners are sure to invest in systems designed to keep outsiders from peeping. If property lines are vertical, some owners will do their best to enforce those lines into the air.

Logistics: Amazon founder Jeff Bezos raised eyebrows when he claimed plans to one day deliver packages with drones. Today, the idea is nearing reality as small providers are already experimenting with drone deliveries. Commercial property developers and operators will need to consider how to accommodate commercial drones arriving with packages. Could we one day soon see commercial properties with reserved space for drone landings and drop-offs?

Are you paying a ‘Liquidity Premium’?

Two investments with the same credit risk profile, potential for upside performance, tax treatment and expected investment period should have the same expected return.

Right?

Not in the real world. We know two very similar investment profiles can be priced very different. Why is that? For many deals, it boils down to liquidity.

Pricing differences in two seemingly similar investment options are often due to the investor’s ability to easily buy and sell the investment — the measure of how “liquid” it is.

Liquidity has been a hot topic lately.  Investors typically pay a significant premium to be in liquid investments such as blue chip stocks and U.S. Treasurys. Is it worth it?

Sure, investors can easily sell a liquid investment. However, on days when the market plummets, many investors lack the stomach to sell. Others sell in fear, regretting their quick exit later. On those days, the premium paid for a liquid investment may not feel like it paid off.

A recent article pointed out that sovereign wealth funds and other large institutional pools focused on long-term wealth creation have seen their allocations to illiquid alternative assets perform better over the long-term investment horizon, compared to more liquid holdings, according to research by Patrick Thomson, global head of Sovereigns at JPMorgan Asset Management.

Thompson says investing with a long-term view of alternative assets can help investors exploit tactical opportunities created by short-term investors forced to liquidate holdings, benefit from mispricing and valuation errors, and take advantage of their capacity to absorb additional risk.

“These advantages have rarely mattered more than now in a capital market environment of low yields, mounting volatility, unexciting global economic growth and subpar investment returns — nor have they contrasted more sharply with the prevailing transaction-oriented mentality,” Thompson writes in FTSE Global Markets.

“Yet today, as much as ever, long-term investors can (and should) access the full range of long-term non-public assets — value-added real estate, infrastructure, private equity and private debt — to diversify their holdings, mute the volatility of the public markets and earn steady and favorable risk-adjusted returns.”

The emergence of real estate investment offerings via online investment platforms makes this method of investing more accessible than ever. The average accredited investor can now follow similar strategies as those sovereign wealth funds.

On days when the public markets are fluctuating (or halting altogether), that a feels like good place to be.


Nikki Baldonieri

By Nikki Vasco | Chief Investment Officer | FullCapitalStack

Interest rates: How many increases are on the way?

Yes, investors, interest rates will go up this year.

Here’s the question we really want answered: Will two rate hikes happen before Christmas?

Historically, multiple successive rate hikes have followed a period of prolonged low interest rates. This was the case at the conclusion of the low-rate periods of the early 1990s and mid 2000’s.

“When rates go up, they usually keep going up,” says Nikki Vasco, chief investment officer at FullCapitalStack. “There’s a good chance that the Fed could raise rates this fall, and then again before the end of the year.”


source: tradingeconomics.com

Of course, this most recent period of low interest rates has set new historical standards. With federal funds rates at or near zero since 2009, the Fed is preparing to increase rates from unprecedented territory. Raising interest rates from this point forward will be new frontier.

In a speech in Chicago on Friday, Federal Reserve Chairwoman Janet Yellen remained steadfast in her expectation that the central bank’s Federal Open Market Committee will enact the initial rate increase before the end of the year.

“Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy,” Yellen told the audience at the Chicago City Club. “But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step.”

Yellen’s comments were closely followed by U.S. investors, who thought her outlook might change in response to the turmoil in Greece. She mentioned Greece just once in her speech, saying, “Although the economic recovery in the euro area appears to have gained a firmer footing, the situation in Greece remains unresolved.”

The Fed chair said she expects the U.S. employment market to keep improving, with inflation moving closer to its 2 percent target rate. Those expectations are coloring her plans to increase interest rates. She also indicated the Federal Reserve will move slowly and gradually, shaping decisions based on economic realities.

“I currently anticipate that the appropriate pace of normalization will be gradual, and that monetary policy will need to be highly supportive of economic activity for quite some time,” she said. “But, again, both the course of the economy and inflation are uncertain. If progress toward our employment and inflation goals is more rapid than expected, it may be appropriate to remove monetary policy accommodation more quickly. However, if progress toward our goals is slower than anticipated, then the Committee may move more slowly in normalizing policy.”

Reading tealeaves, the fate of rate hikes — and whether or not they’ll happen consistently, or in fits and starts — appears to depend Yellen’s view of economic growth. If U.S. economic growth is believed to be choppy, the rate increase schedule could reflect that. And if growth is steady? There’s a strong chance interest rates will follow suit.

Massive tech disruption aims at commercial real estate

There can be no more excuses for falling behind the curve in adopting technology in commercial real estate. Ready or not, a major disruption is unfolding in our industry.

It’s no secret CRE professionals have been lukewarm to new technologies. Meanwhile, the rest of the world is accelerating adoption quickly, which is why CRE is now playing catch-up.

Tenants expect high-tech workspaces. Clients and prospects operate in a mobile-connected business environment. Even commercial real estate investors are being drawn to online investment portals and the insights provided by big data and analytics.

Now, new technology is enhancing how agents showcase yet-to-be-completed construction projects. A recent Wall Street Journal article explains how leasing agents for a Madison Avenue property are using virtual reality to showcase the end results of a $60 million renovation still underway.

“Agents for the 40-story office tower take visitors on a tour beneath custom-built canopies, where they can take in the lush greenery of trees and ornamental grasses and check out the outdoor conference area and wet bar. They can even peer over the glass-and-metal railing and catch a dizzying glimpse of the street below and a view of St. Patrick’s Cathedral across the way,” the article describes.

“Actually, the $6 million ‘Sky Lounge’ won’t be finished until next year, but Sage Realty Corp. isn’t letting construction hinder renting space in the 850,000-square-foot building. The leasing agents are simply giving virtual-reality tours: Each visitor sits in the marketing office, outfitted with headgear that is coupled with interactive 3-D modeling software.”

It’s one more example of customer desires to be ahead of the technology curve influencing a migration to new tools by real estate pros. It’s also opening the door wider for vendors to help solve the commercial real estate industry’s challenges. The technology referenced by the newspaper is offered by Floored Inc., a virtual-reality software and 3-D modeling firm.

“I think the truth is people recognize the speed of technological advancement is increasing,” David Eisenberg, chief executive and co-founder of Floored Inc., told the Journal. “A few years ago, if you only had 10 to 15 years left in your [real-estate] career you could ignore some of that stuff. Now people realize they are going to have to be practitioners of the technology.”

Disruption is already happening in several areas. Social media is changing how CRE firms market themselves. Cloud computing has helped numerous firms scale faster and become more efficient. Advanced analytics are making data more accessible and instructing professionals how to leverage it for growth.

“Inevitably, technology is going to change how we all do business,” QuietStream Financial CEO Robert Finlay says. “Virtual technology is just one more example of the disruption coming to commercial real estate.”

A 2015 study from Deloitte lists technology and automation among the most influential forces in the industry. Mobility, smart building technology, data and analytics and related technologies are all forcing major shifts.

Deloitte’s 2015 Commercial Real Estate Outlook polled 1,100 commercial real estate professionals and found 69 percent believe technology will transform their business this year or next.

“Adopting more advanced technology is rapidly becoming an imperative in CRE,” says the Deloitte study. “Ultimately, CRE companies need to be progressively aware of new advancements in technology, and anticipate and step up adoption on a regular basis.”

Will peer-to-peer lending predict what happens next with real estate crowdfunding?

Peer-to-peer lending is about to get real — and commercial real estate crowdfunding won’t be far behind.

This week, we learned details of how Goldman Sachs will begin offering consumer loans via online platform. With plans to launch in 2016, there is little doubt the innovators who devised P2P lending will feel the heat.

As commercial real estate investment professionals, we need to pay close attention or risk being left in the dust. Technology is creating new opportunities for institutional investors and owners who are willing to adapt.

Innovators such as LendingClub and Prosper used financial technology (FinTech) to capitalize on a gap in the consumer and small-business lending markets after the Great Recession’s credit crunch. Seeing traditional banks and related lenders withdrawing, these platforms created a market for individuals to borrow small amounts from pools of cash supposedly invested by other individuals looking for new investment opportunities. The result has been billions of dollars in credit extended for debt consolidation, home improvements and other projects.

The concept is based on the idea that individual investors can now buy fractions of their peers’ debts — “peer-to-peer lending.” However, who really is the “peer” on the backside of this $15 billion to $30 billion market? It’s not savvy individuals making smart decisions for direct investing. Banks, institutional funds, and money managers looking for yield have powered the growth rate, funded the loans and have started to package the debt into securities. They are at times assisted by “first look” offers from the originators, and proprietary risk models to analyze the loans.

Most of the “peers” who own these loans are actually institutions, such as hedge funds and other investment pools. The borrower’s true peers likely end up only owning a piece of these loans through shares in a fund placed in their 401k, packaged and sourced by sophisticated institutions.

The standardization of consumer risk scores and credit profiling has propelled this new asset class into the securitization market, which has attracted new and additional capital. In turn, this will likely convert into more products at better rates for consumers.

What is the lesson here for commercial real estate investors? Our industry is on course to create the same type of standardization needed for institutional capital and lending efficiencies. These three factors are shaping the trend:

  • Crowdfunding has given real estate owners the ability to market their performance. Soon investors will be able to compare sponsor performance in standardized models.
  • FinTech is giving real estate owners the ability easily manage their investor base and post new, accessible offerings.
  • Real estate owners can now spend less time sourcing investors and more time managing their portfolios.

Although crowdfunding for real estate is in its infancy, there is already buzz about institutions and banks partnering with platforms to source product. Just like P2P lending, investors will soon find the ability to hold shares of a REIT in their 401Ks that primarily owns “crowdfunded” participations of equity in real estate.


Nikki BaldonieriBy Nikki Vasco | Chief Investment Officer | FullCapitalStack

Did Forbes swing and miss on investing like the uber-rich?

I have always been fascinated by how the world’s wealthiest individuals invest and what we can learn from them.

Recently, I flipped through some articles I’ve had filed away on the investing choices of the uber-wealthy. I found a Forbes story about how the richest people in the world have shifted their allocations. I read the piece again today. All I can say is this: Forbes missed one.

The advent of crowdfunding gives individual accredited investors access to deals once limited to the world's financial elite.

The advent of crowdfunding gives individual accredited investors access to deals once limited to the world’s financial elite.

It’s not a bad piece, or even inaccurate. It’s just missing a key piece of information about how we can invest like the wealthy.

It’s no secret the world’s elite invest differently than up-and-comers still working to get there. For starters (and I talk about this a lot), they invest much less in stocks and much more in hard assets like real estate and private equity. Forbes suggests that any investor looking to emulate the wealthy can shift more dollars to private equity, via stock in the largest PE firms, purchasing shares in a PE fund itself or working with an advisor who specializes in private investments.

Those three methods carry their own sets of challenges. For example, allocating more dollars to publicly traded private-equity stock doesn’t eliminate the volatility many wish to avoid in the market. As for investing directly in funds or with specialized advisors, those routes come with minimum investments that can price many investors out of the opportunity.

So what’s an accredited investor to do?

Here’s what Forbes missed: These changing allocations towards more exposure to private equity represent the wealthy making direct investments with partners they trust. The only secret sauce is that private equity offers exclusive, high-growth opportunities that are typically correlated with the success and failure of a business (ownership), and less dependent on the greater market performance.

Here’s why I get excited: Ten years ago those options available to the wealthy weren’t available to the rest of us. Even two or three years ago, most accredited investors didn’t have ready access to investments in hard assets through a relationship with a proven sponsor. Now they are accessible.

Crowdfunding and online solicitation changed the game. The investing world is becoming flat. Now, it’s possible for the average accredited investor to put their money into pools that support proven, trustworthy partners in real estate and operating companies. Allocations don’t have to be limited to a big publicly traded REIT or PE firm. Today, seasoned pros are putting technology to work and creating platforms that open trusted investing partnerships to a much wider segment.

Here’s where Forbes and I agree. The wealthiest investors in the world don’t allocate much to “buy, hope and pray mutual funds.” Instead, they pick investments with trusted partners that won’t be subject to stock market ups and down. For the first time in history, that advantage is now available to the rest of us.


Nikki VascoBy Nikki Vasco | Chief Investment Officer | FullCapitalStack

GE sale highlights changing CRE finance sector

General Electric recently garnered attention with its decision to sell over $23 billion in commercial real estate assets and wind down its commercial finance arm.

The deal illustrates major forces reshaping how U.S. companies finance and invest in commercial real estate. Prolonged low interest rates have buyers lining up to acquire commercial real estate portfolios for their attractive yields. Meanwhile, rising real estate prices have whet seller appetites, giving giant regulated conglomerates such as GE the opportunity to profitably exit. A Green Street Advisors index of commercial property shows prices 15% higher than the peak of the last cycle in 2007.

“You really have a perfect market to be selling financial service assets, so you’ve got slow growth, low interest rates, lots of liquidity, people searching for yield,” GE Chief Executive Jeffrey Immelt told CNBC on Friday. “So you’ve got a bunch of stuff in the portfolio that people are going to look at and say, ‘In a slow growth, low interest rate, low-yield world, you know, anything that gives you yield is extremely valuable.’ And these are safe and secure, well-run assets.”

Companies who sought out large sector purchases did well through the 1990s and mid-2000s, but the 2008 financial crisis limited access to short-term borrowing.  Companies such as GE found themselves squeezed in the middle, London’s Financial Times noted. Big traditional banks, such as Wells Fargo, can lend money using cheap deposits, and smaller firms can offer products and services to commercial real estate owners and investors in a more agile, less regulated environment. GE could do neither.

Many U.S. companies are looking for simpler, more straightforward ways to offer products and services. It’s another verdict on the future of complicated conglomerates. Commercial real estate finance is moving into the hands of specialized providers that can serve borrowers with a more nimble and entrepreneurial approach, from direct lending to crowdfunding. And with a major player like GE Capital heading for the exits, the window opens even wider for disruption.

“It’s the end of an era,” Columbia Business School professor Bruce Greenwald told the New York Times about what GE’s move means for the industry. “Specialization matters. You have to be focused.”