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tkiwala@firstanalysis.com
welmekki@firstanalysis.com
- We identified two key themes at this year’s CREtech conference: First, increased interest rates have made it more imperative than ever for landlords to minimize their operating expenses. Second, the rate increases have reduced or eliminated room for error in the process of accurately assessing the profit potential of new real estate acquisitions.
- Technology remains at the center of the stage in efforts to address these challenges. Well-capitalized landlords are racing to implement technology-based strategies to lower their operating expenses. We’re also seeing a higher profile for technology companies that use artificial intelligence to locate and evaluate real estate investment opportunities.
- We highlight some technology-based solutions that manage utility costs using connected devices and related tools. We also highlight companies that offer software to automate and enhance the process of evaluating and prioritizing new property acquisition opportunities.
TABLE OF CONTENTS
Includes discussion of 12 private companies
Two key themes evident at CREtech
Increased interest expense, inflation compressing cash flows
Higher profile for technology that helps assess new asset purchases
Real estate tech is key to meeting the challenge of higher interest rates
First Analysis Enterprise Productivity Index: Holding in positive territory
Enterprise productivity M&A: Notable transactions include Certinia and Wrike
Enterprise productivity private placements: Notable transactions include Hyperproof, InnerSpace
Two key themes evident at CREtech
We recently attended the CREtech real estate conference in New York. As at most other industry conferences, key conference themes reflected major macroeconomic trends. We identified two key themes at this year’s conference: First, increased interest rates have made landlords’ imperative to minimize operating expenses more urgent than ever. Second, increased rates have made the challenge of accurately assessing the profit potential of new real estate acquisitions more challenging than ever. Technology remains at the center of the stage in efforts to address these challenges.
Increased interest expense, inflation compressing cash flows
As we’ve highlighted in recent reports, high interest rates and inflation have created an urgent need among landlords to shave operating costs. Many landlords, particularly those in the commercial real estate space, have historically used interest rate hedges to stabilize payments on property loans. Many of these hedges will be expiring in the next few years. With today’s substantially lower property values in the commercial real estate space, many landlords will find themselves absorbing higher interest rates to refinance or paying substantially higher hedging costs if the value of their underlying collateral is not high enough to support a refinancing.
At the same time, wage inflation has caused a spike in operating expenses, and vacancy rates have risen. Corporate lessors are looking to either reduce their real estate footprints significantly or eliminate them entirely in favor of a work-from-home structure. Jones Lang LaSalle recently reported the U.S. office building vacancy rate was 20.1% in the 2023 first quarter, nearly a half-point higher sequentially. Nationwide, the vacancy rate has increased approximately 70% since the start of the pandemic. Sublease vacancies, which are less burdensome to landlords since their tenants continue to pay, nonetheless add 3% to total office inventory.
In the face of these needs, landlords are focused on conservation, sustainability and capital expense management. This is particularly important for residential landlords. Residential landlords typically pay many real estate operating expenses, including maintenance and taxes. Residential tenants typically pay only a portion of utilities – usually those that are metered. By contrast, commercial property tenants typically have triple-net leases, in which the tenant pays all expenses of the leased space, including property taxes, maintenance, insurance and utilities. (Where commercial tenant utilities are not metered, landlords bill tenants periodically for those utilities based on an agreed-upon methodology.)