Jim Berry, US Real Estate & Construction Leader at Deloitte, joined us to discuss how new technology will be disrupting real estate.
Jim leads the US Real Estate & Construction (RE&C) sector for Deloitte. Prior to assuming the US RE&C sector leader role, he served as the head of Deloitte's Audit practice for the RE&C sector. During his more than 30 years of experience, Jim has worked with public and private companies across many segments of the RE&C sector including REITs, construction, and private equity companies. Jim has extensive experience in initial public offerings, private placements, and SEC filings, as well as advising clients in all aspects of mergers, acquisitions, divestitures, and due diligence activities.
Jim is a frequent speaker and instructor on industry and other technical subject matters at the national level with Deloitte. Living in Dallas, Jim has been heavily engaged in several real estate and community organizations including The Real Estate Council and United Way of Metropolitan Dallas.
RealCrowd - All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions, and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.
Adam Hooper - Hey, Tyler.
Tyler Stewart - Hey, Adam, how are you today?
Adam Hooper - I'm great, and welcome, RealCrowd listeners, to another episode of the RealCrowd podcast. Tyler, who's with us today?
Tyler Stewart - Adam, today we have Jim Berry. Jim heads up the US Real Estate and Construction Sector for Deloitte.
Adam Hooper - We had an interesting conversation. We follow the 2018 Real Estate Outlook that Deloitte puts out. We'll put a link to that in the podcast description today, but covered a lot of topics, as we tend to. Talked about the startup space, fintech, automation, artificial intelligence, a whole bunch of different things. Ultimately, tried to tie it together with what does that mean for our listeners and investors.
Tyler Stewart - Absolutely. Deloitte's looking at technology and how it's going to impact commercial real estate in 2018. This report was a great assessment of that.
Adam Hooper - One of the points that we're trying to help with listeners of the podcast is how to start thinking about these things as this future that we talk about becomes today. How can we look at some of these changes and get ready for that with our different investment philosophies and different opportunities we might be looking at? Always good to stay apprised of what might be coming down the line. Jim did a great job of laying that out for us today.
Tyler Stewart - It was fun having him on. If any of our listeners have questions, certainly feel free to reach out to us and let us know.
Adam Hooper - And as always, if you have any questions, comments or topics you'd like us to cover on the show, send us an email to podcast@realcrowd.com. With that, let's get to it.
RealCrowd - This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit realcrowd.com to learn more about how we provide our members with direct access to commercial real estate investments. Don't forget to subscribe to the podcast on iTunes, Google Music, or SoundCloud. RealCrowd, invest smarter.
Adam Hooper - Well, Jim, thanks for joining us today, coming from Dallas. Hope all is well this morning, and excited to have a great chat today.
Jim Berry - Great, thank you. Looking forward to it.
Adam Hooper - Well, Jim, tell us a little bit about your background, how you got in with Deloitte and what you do currently with Deloitte.
Jim Berry - Absolutely. I'm privileged to be the US leader for our Real Estate and Construction practice at Deloitte. My career has really covered quite a few things, but I've had over 30 years' experience growing up in the audit and the test part of our practice, working primarily with public companies, REITs, as well as quite a few private equity and other investors in the real estate and hospitality arena.
Adam Hooper - Today, we're going to be talking about a report you guys recently put out. Why don't you just walk us, high level, through that report? We'll put a link in the podcast description here so everybody can get that, as well, but maybe set some groundwork for a conversation today.
Jim Berry - Absolutely. When we took a step back and started planning out our annual outlook, one of the things we really tried to focus on was not just the fact that there's disruption occurring, but really there's this convergence of disruption that's really occurring within the real estate industry. When you think about that convergence, what is that really going to mean to the industry, not just today, but to tomorrow? What are the opportunities that really exist for companies today to take advantage of those, particularly given the current placement of real estate and its adoption of technology and how that might present additional opportunities.
Adam Hooper - Last week, I was on a panel at a conference. It was a similar topic, technology and disruption. Disruption is a word that we hear thrown around a whole lot. We on the panel, we all agreed to avoid disruption, and talk about more of an evolution. Disruption brings with it an assumption of we're going to wake up tomorrow morning and the world is just going to be a completely different place, certainly in the Silicon Valley sense of disruption. Major technological disruption happens pretty quickly. What do you feel disruption means in the real estate space? Is it more of an evolution, or is this going to be a quicker disruption that we're going to see, do you think?
Jim Berry - Well, it's a fair comment to say it's an evolution, but it's a fairly rapid one. Part of that, also, is where real estate is in the whole adoption phase of technology. Historically, real estate has been a trailer when it comes to adoption of certain technology and the use of that. However, now, with things that have occurred in several different arenas, we focus in our report on robotics and cognitive, as well as fintech and some of the aspects of what's coming in from a fintech perspective, in particular, when you talk about technology, but it's really where we are today. Because of that, and we're at that point where, from a real estate industry perspective, it really becomes a huge opportunity to jump on the bandwagon, if you will, or to be a leader because the result of not doing that, quite honestly, sets you back.
Adam Hooper - That was a similar sentiment at this conference was how fast it's going to happen. It'll probably happen quicker than we think, right? A lot of those conversations we're having, whether it's, we'll talk about today the autonomous cars and automation, AI, blockchain, all this stuff, it's probably not a 10 to 15 year conversation anymore. That's what we're trying to figure out. Is it a 18 to 24 month conversation? Five to 10 year conversation? The pace that real estate is adopting this technology, historically, very much a late industry to get on the technology bandwagon. Like you said, I don't think we have a choice. A lot of this is coming quickly, and will probably happen quicker than most practitioners out there anticipate.
Jim Berry - Right. That's how it even bleeds into some of the talent model discussions that we then bring into our outlook because when ya think about kind of all aspects of where the real estate industry is, and first off, from a capital markets perspective, we're a much more mature industry, which is a very good thing. Just presenting a lot of additional opportunities for us within the industry. However, it also means that more people look at us. The competition for capital is a broader playing field for the real estate industry. You have to recognize that. But then when you look at talent, it's really how attractive are we as an industry to attracting the best and brightest?
Adam Hooper - What are some of these drivers that you're seeing with the acceleration of these option, and also just development of these new technologies? What are some of those pushes that you're seeing or helping with that adoption these days?
Jim Berry - Well, as we focused on, and one thing I'll come back to 'cause I think you made a very good point, which is that how rapid will some of this occur. Probably the foundation of some of this is what's already here. When you talk about robotics, and remembering that robotics are not robots. Robotics is really mechanisms to take, or ability to utilize technology to basically take repetitive tasks, assemble data more quickly and to platform yourself, then, to utilize that data more efficiently, more effectively and in applying analytics. All that technology is there today, and in a lot of cases, can be applied relatively easily.
Adam Hooper - What would be an example of something like that?
Jim Berry - Sure. Within real estate, there's really quite a few different areas where this can be impactful. One of the biggest things when we advise the clients we're working with is you ought to be looking at places where you have very repetitive, high-volume processes. That really should provide a lot of opportunity to take the technology that exists, to simplify and better gather that information. High-impact areas are areas such as leasing and accumulating the information that exists within the leases. In addition, budgeting and projections. A better use of information and pulling together that information in a better way are a couple of areas that certainly present itself today for pretty much every company.
Adam Hooper - Now, when you say robotics, again, not specifically robots in the classical sense, but you have to imagine some of the automation that we're seeing from the tenant side is going to be driving their use of space, too. How are you seeing landlords or how are you guys kind of consulting or advising landlords with a lot of these changes from the use of the space, how that's going to impact their operations going forward?
Jim Berry - Absolutely. Really, that's one of the keys and I'd say one of the real opportunity areas. As a real estate company, you're really in a unique position to bring together several different groups. That is going to become more and more vital to be a real estate company of the future because it's no longer about just providing space. It really is about how's the real estate company, developer, owner, operator going to better partner with the tenant. Then, ultimately, the end user. The great examples that might exist within retail are certainly how do you partner to provide a different kind of experience within, whether or not it's the shopping center, the mall or in some different arena that exists. But it goes all the way. Office buildings are facing the same thing, as well as multi-family assets.
Adam Hooper - I was in the middle of a very interesting conversation last week, again, with a group that we've done a couple of retail deals with, trying to defend where retail is going. On the other side of the table was a very large industrial buyer and developer. Their sole focus now is infill industrial, kind of last mile bit. It was just a really, really interesting conversation to hear both sides have very valid points. Retail is shifting more towards experiential, but goods still have to get there somehow. They still have to get to the people. Then you've got industrial on the other side. With retail, it's not a thing anymore. It's going to be dead, it's all going to be going direct to consumer. It was just a really interesting conversation. At the core of that is this technological change. It's how, as consumers, we can interact with the retailers. With the retailers, it's how they need to interact with the consumers. The ultimate decider or, I guess, person who's going to be impacted is the real estate operator and these investors. It was just a really interesting time that we're in right now.
Jim Berry - Yeah, I agree it is. That is why, when you look at the opportunity that exist and how you better play in that arena. I bet that was a great debate 'cause we certainly hear it ourselves. Multi-channel's here, and it's here to stay. It actually is providing, or certainly adding to that debate, as people continue to rationalize what's the model really going to look like. It is interesting, though, when you look at some of the groups. Certainly, industrial's been a great sector. It certainly has the opportunity to continue that way. Retail, it's interesting because while you certainly look at that part of the REIT index and what's happened to it, it certainly took some hits this past year. However, when you look at baseline fundamentals and real estate valuation. Most of those, they really are still holding. It's an interesting dynamic. Another reason, when we pointed to it in our outlook, that was the fourth area we focused on, which was the value differentiation or separation that's occur when you look at NAV and stock price within REITs.
Adam Hooper - That's obviously been very dynamic. Where are you guys seeing that now or where do you see that going to in the future in terms of the discount between those two?
Jim Berry - A couple things. First off, kind of coming back to the maturity of the real estate industry. That really is something that provides a lot of opportunity. Like I mentioned early on, I've been doing this for over 30 years. I've seen a lot of economic cycles and real estate cycles over that time. One of the things, though, that's really helped as we follow this cycle. You get into that debate, which we love to do in real estate, is what inning are we in? Where's it going to play out? How does this really look? But what's been really interesting about this is that an element that's really helped, from a real estate cycle perspective. is, and just to focus on the real estate cycle perspective, is that element of maturity. The capital maturity, the investing maturity, the willingness to really play on a longer term viewpoint has really helped to stabilize a lot of the operating metrics when you peel away beyond the stock prices or beyond even the transaction prices and you really look at fundamental of leasing, occupancy. It really seems to still be holding together, for the most part. Obviously, there's variances, but for the most part, still seems to be holding together.
Adam Hooper - There was a lot of prognostication at this conference about where, and that exact question, where are we at in the cycle? What inning are we in? A lot of folks were hesitant to even play the inning analogy. Baseball games can go forever, technically. Some people were bringing that up. But it felt like, a couple of years ago, we felt like we were getting pretty toppy, we were getting pretty far along in the cycle, and it felt like it had to be getting close. What was reassuring and was, again, echoed here at this event was that, like you said, the maturity that groups are taking into this part of the cycle is very different than what we saw, and, again, this time it's always different, but it felt like there's a more disciplined approach to loan evaluation. There's a more disciplined approach to underwriting on both side of the equation that gave people a little bit more comfort than there was this time two years ago at this point in the cycle. What are your thoughts on that? Does it seem like we're approach this as an industry a little bit more disciplined than maybe it was in the '06, '07 run-up?
Jim Berry - Yes. Once again, the foundational, the numbers support that when ya dig underneath it. That certainly is a big element of it. Now, clearly, there are other factors that are going to start coming into play, with interest rates moving, with the continued opportunities that exist in the broader market. Those'll be combatants to stock price for the REITs because people are going to look for returns, people are going to, that part of the capital, that part of the capital that's really in play that REITs are competing against, other elements. The market will impact some of the stock prices, maybe, but once again, the foundational elements just feel better. It's just at this long a cycle, they just feel better. They seem to be sustaining. Barring a black swan event, which is always at risk.
Tyler Stewart - Then with the opportunity that the convergence might bring, could this add some extra innings to the baseball game?
Jim Berry - Absolutely. When we look at, once again. Taking advantage of where you stand as a company today, and then taking the moment to look around and say what's going to happen and how are the technologies that are currently occurring and that will occur, how are they going to impact these long-lived assets that we own or we're developing today? What do we need to be doing to enhance that? It becomes a couple of things. One is it becomes incumbent to rethink the use of your assets and how better to reposition those that may already exist, be thinking of how to do that. But also, if you're in current development, what kinds of things should you be currently thinking through. I was having some recent discussions and a long-play development was about to kick off. The conversations are around mobility and how to really bring that into play on something that you're going to be developing over the next 20 years. What does that need to look like? It's not just bringing in helipads so you can get delivery of things. It's really saying, look, what are air rights? How will we handle those kinds of things because we may be dealing with autonomous cars in the near future, but what about autonomous helicopters or what about the use of drones? How's all that going to play into this? How are smart cities and the technology that's been adopted and available to better predict and better analyze those kinds of population patterns and citizen patterns, whether or not it's use of energy or whether or not it's how you transport and move in and out of the cities in major areas, how's that going to change?
Adam Hooper - Smart cities, we definitely want to touch on. Before we get there, though, I was hearing a while ago that WeWork is now tracking within their space their migration patterns or their usage of the space. They know, for each office user, how many times they go in and out of which rooms, how much time they're spending around the coffee maker, when they're in the break room, when they're in their office doing productive work, hopefully. How are you seeing the ability to collect this kind of data now? Sure, we can retrofit spaces and we can try to figure out the use of the space more effectively, but how is it impacting, to kind of segue into smart cities, how is the ability to collect and aggregate and analyze this data affecting how decisions are made going forward?
Jim Berry - It really is touching all aspects of the industry. You gave a good example from a company that's certainly leading edge on some thinking. The use of sensors today and how and what data can be gathered and then assembled in such a way that it can be used almost immediately. I'll give you an example. We were talking about development. Now let's move into active construction. Say you're on a construction site today. Obviously, a big element of that is safety. In the past, it might well have been a fairly manual process of safety inspectors moving around or managers monitoring and reacting as can, as well as the safety programs that were developed. Today, you can put in place drones that are in constant motion around your site. Each of the individuals can be wearing vests that have the sensors on it. You can readily see is the team effectively utilizing their safety equipment? If the answer to that is no, you get an immediate note. Then you can go and immediately deal with the safety issue for that, for the professional, as well as the site in general. But in addition to that, the drone is learning. It's using cognitive to actually learn. It learns that typically at one o'clock, this one section usually has more violations. It'll start honing in even closer and closer to that. Then, from a business perspective, you can take that information. Then as you can better and better apply and improve your safety, that becomes a better tool for you as you negotiate your insurance premiums, for example.
Adam Hooper - The impacts and the pace, again, at which this technology is progressing allows us to have conversations today that I don't think we would have ever even thought possible a few years ago. These new technologies with artificial intelligence and some of the automation stuff that we've talked about, blockchain, what are those conversations that we're going to be having that we can't even foresee right now? Who would have thought that drones would be tracking people's usage of safety equipment on a construction site and being able to be smart enough to zero in and try to figure out how to mitigate that? It's incredible, again, the pace that we're developing these technologies with and the conversations that it's allowing us to have that a few years ago seemed just completely far fetched.
Jim Berry - Exactly. It also points to the need to continue to better team. As real estate owners, operators, how do ya better team and who all do ya need to better team with? We've already talked a little bit about, obviously, your customers, your tenants, looking through that relationship, though, and what are they trying to achieve with the experience of their ultimate customer, how to team there, but there's also cities, municipalities, states. How are you better teaming with those institutions to help look around the corner? How do you advance either regulations or what will that really need to look like and be, and how do we as an industry continue to be a meaningful part of that conversation, as well?
RealCrowd - Thanks again for listening to the RealCrowd podcast. If you like what you're hearing, please visit realcrowd.com to learn more, and subscribe at iTunes, Google Music, and SoundCloud. RealCrowd, invest smarter.
Real Crowd (Jack - Real User) - My name is Jack, and I've been in the financial services industry for over 30 years. I've done six different deals. When I first started doing these deals, I was looking for sort of core real estate, cashflow. Wasn't looking for a lot of upside return. I wanted more immediate yield. I went conservative to start. Then as I've gone through, I've just looked, really, at the quality of the sponsors, first and foremost, and their level of experience. Now I'm trying to mix in different types of properties, different geographies. I wanted some core-plus and a little bit of development. It's still pretty, in my view, a conservative portfolio. It's mostly focused on sponsors, and then looking at the projections, as far as how much of the return would come from current income and yield, and how much of it would be based on appreciation, and thinking through whether or not, how much risk there is and the appreciation being realized. It's really a portfolio approach for me, looking at different sponsors, different geographies, different property types and even different types of properties, as far as core or core plus or development. I'm looking for, I guess I would start with a certain level of return because my investments are primarily in equities. I look at the direct real estate investing through RealCrowd as being a diversification play, but I also want a pretty substantial return. I typically look for properties that have a yield of seven, eight, 9% current income. Then an IRR that's in the mid to upper teens, low 20s, in some cases.
Real Crowd (Jack - Real User) - I start with return, I focused on sponsor. I look for property types that I don't have already invested in the portfolio. Then finally, I look at geography. Well, I think that diversification is important to any portfolio. I looked at a number of different crowdfunding portals. I chose RealCrowd because I like the transparency. I like the fact that the sponsors pay a fee to be on the portal and that they, there's not built-in fees for RealCrowd in the compensation structure of the deal because these deals are fairly complicated to understand, anyway, because you've got to pay a management fee and an incentive fee and things like that. If there are embedded fees from the portal provider, it just makes the complexity so much higher. I think the key for me is the transparency. I just think that direct real estate is a great complement to a lot of other stock and bond portfolios. I think it provides inflation protection, current income and appreciation potential. For me, direct real estate is better than REITs, which are more subject to market fluctuation and price. I just think with the minimums that are out there now and the quality of the sponsors, it's a really good way for a lot of investors to access direct real estate without the hassles of property management on your own. I think it's an important advancement for a lot of investors to diversify their portfolios.
RealCrowd - Thanks again for listening to the RealCrowd podcast. If you like what you're hearing, please visit realcrowd.com to learn more, and subscribe at iTunes, Google Music, and SoundCloud. RealCrowd, invest smarter.
Adam Hooper - Well, let's switch a little bit now. I know one of the areas of focus in the report was the companies that are providing these services, more on the startup side. I would still consider us a startup. Five years now, I guess that's still probably squarely in the startup space. But let's just talk a little bit about how that landscape has changed over the last 10 years. Real estate was a very technology-averse industry, and now we're starting to see some changes there. Let's talk a little bit about what you're seeing in the real estate tech and prop tech side of the world.
Jim Berry - It is, once again, I'd say a maturing area. It has been an interesting evolution. One of the key things that has been occurring is as fintech companies really started coming out and emerging, I think there was a couple things. One was an initial view of this as a threat industry or a threat to the industry. Maybe some initial pushback, or at least what do we do with this, and viewing it more like a new entrant than a threat. Now, what we're seeing more and more of is a recognition of the opportunity that really exists. From that perspective, when we look at fintechs, first off, we break it down in between funding and investing and operating fintechs to kind of keep the model somewhat simple. But if you start now, start more embracing that these are here here to stay and they are going to become an increasing part of the discussion and part of the business, then how do ya better work with these companies? There's several different models, certainly, that work and are evolving. One is obviously a user of the product or the service. Taking advantage of that. The other one is bringing a closer alliance, so building a truer alliance to create a competitive advantage to yourself. Then the last one is direct investing. We're seeing real estate companies really look for opportunities to maybe get in on the ground floor and use this as part of the R and D, part of their business, which hasn't been a historical big investment in the past for real estate, but now needs to be.
Adam Hooper - In the typical startup entry world, corporate venture has always been a thing, where you've got the strategic investments from bigger corporations that use those seed investments and early stage investments almost as a incubator of their own, if you will, to find those technologies that can be impactful. They're involved at the very early stage. They can assimilate that or acquire it or be the key partner for that going forward. We've definitely seen some of that in the real estate space. We got a couple real estate specific VC firms out there. The landscape is changing for sure. We've just noticed in the last five years, going from when we started this company, I don't know that we were really seen as a threat to most real estate operators. Certainly the broker/deal community, they still don't like us because there's very entrenched, very high-fee models that we're trying to, again, disrupt on that side. We've always seen it as a way that we can be to the real estate operators' platforms and we can bring access to investors. I don't think we've had as much of that threat or adversarial side of the business, so that's been good for us. I think the tone is definitely changing. We were this kind of fringe experiment on the side, this crowdfunding thing. What the heck was that? To see the change in sentiment from, yeah, it's not going to ever really be anything great to $4.5 billion of real estate through the platform in the last few years, it's been great to see the adoption and the acceptance of some of these new technologies
Adam Hooper - from historically very, very technologically-averse real estate companies. That's been a good shift overall in our space.
Tyler Stewart - It's been a story change from here's a Kickstarter platform to, oh, this is a real estate investing platform.
Adam Hooper - Yeah, which has been nice. Now, you mentioned you guys look at it as the fintech, which would be funding, investing and then the operating side. What are some of the more interesting things you guys are seeing on the operation side in terms of technology plays?
Jim Berry - There's several different things that are occurring. We touched on a couple, but I'll just kind of maybe talk a little bit about a couple of areas. We touched on leasing a little bit before. I'll actually broaden that out a little bit, and maybe say leasing and transactional type things. Commercial real estate searches, long-term rentals to sales. There's certainly a lot of tools that can be in place that are, for example, would help customers who are buying, selling, renting homes, apartments, to accumulate the data and how better to utilize that. For the companies itself, understanding and utilizing the data and assembling it. Tools that are allowing them to gather the data in a more predictive manner, so it can be used in a more predictive manner. Right now, there's an enormous amount of energy just in data accumulation. When all of that occurs, inherently then, that data is now normally old. It's not as current as it may need to be, particularly in shifting markets. By better aligning with other data sources, real time in the transactions that are occurring, that data can be not only better assembled in a more specific segment or area within the market, but it can also then be kept real time so that as you continue through negotiations as you continue through the transactional cycle, you're really getting more and more and better up-to-date information.
Adam Hooper - Outside of the amazing work that we do here at RealCrowd, what are you guys seeing on the fintech space? Any new, enticing developments that you're seeing there with the startup world?
Jim Berry - Well, once again, and I appreciate your point about where that is. I'd say what we're continuing to see is a broader acceptance of the platforms and really how does this becomes a meaningful part of the strategy for real estate companies. If you looked at other elements, we did see maybe a little slower move from that standpoint, but what we've now seen is if they don't have it immediately in their strategy, it is certainly they're exploring, the major players. How do you better align with this as an important element of our funding cycle and why it can be meaningful. Because the other thing, and tying that back into better connecting with customers, well, the same thing is better connecting with investors. Investors aren't one size fit all. The multiple platform approach to offering investors alternatives, and in certain cases even more specificity into what they might be investing in, it doesn't have to be as broad as maybe the entire company. Maybe there are elements or pseudo JVing kind of opportunities, limited fund kind of investing that these sources really offer more and more opportunity to. I think we would consider it still escalating and maturing. Another interesting thing, though, getting back to kind of maturity cycles, across the broader range, the other thing we're really seeing is while initial capital for most of the fintechs has been provided from venture capital sources, we've seen that broaden out, which is now more PEIs getting interested and debt financing, which, when you look at maturity within companies,
Jim Berry - and as a company moves through that maturity cycle, that's what you would hope to start seeing is that capital and the availability of capital starts changing in the dynamic of what's actually available for fintech companies.
Adam Hooper - We've seen a lot of changes in just acceptance of what we do, as an industry in general. It's always been reassuring to see the biggest institutions out there, while they maybe haven't figured out exactly yet where this fits into their plans, it's on their radar. They're trying to figure out how does this direct to retail strategy work for their capital raising needs and that diversity of the capital base. One of the things we've talked about before on this podcast and with a lot of sponsors is this demographic shift from the boomers to millennials, and that transfer of wealth, which is, by some accounts, tens of trillions of dollars of wealth is going to be transferring from boomers to millennials over the next several decades. Their investing habits are completely different. Very, very different behaviors when it comes to making those investment decisions and how they choose to allocate those funds. That's one thing that we see on the radar and is on the radar of even the biggest institutions out there. They're trying to figure out when that shift starts to happen and continues to change, how are they going to position themselves to be in a better spot to take advantage of that demographic shift and make sure that they have access to that capital base, which is going to be a very, very different picture than what it is today.
Jim Berry - And probably much more fluid capital from that perspective, as well. But the need to better tie in and use data trackers and other thing to better align with investor needs and desires, and, quite honestly, information need. That is a big driver, as well. It's no longer just back office kind of stuff. People want to know what's happening with my investment, what's really occurring, what are the opportunities, how do I move more nimbly through some of this stuff, as well?
Adam Hooper - Now, most of our listeners are on the investor side, but there's a fair number of sponsors and managers out there, too, that listen to the podcast. How should they educate themselves around some of this technology that's out there? Do you have any resources? What does that process look like for a real estate practitioner that's interested in learning more and not getting missed out by this or maybe trying to be on the front end of these changes, what are some resources they can go to to try to do that?
Jim Berry - Well, the good news is there is a lot of data that's out there, a lot of white papers that are being published. There's certainly a lot of good sources. I know, from a Deloitte perspective, we're certainly trying to be leading edge, and just put out a publication, Deloitte Fintech By the Numbers, which is providing some real hard analytics around some of these areas. Certainly, white papers and some of that is a good source, but I would also say broadening your conversation with your tenants, with your clients, with your lenders, with your investors. What are the things that are occurring there? I will say, from a real estate perspective, because of the tight linkage to the financial services, broader financial services markets, banking and others, there's really a high-impact discussion that's occurring because banking, and in particular securities investing, have really been front runners in some of the technologies and advancements that's occurring. That's another element that's going to happen with real estate companies is there's certainly an opportunity to step up the use of some of these technologies, but the truth is, there'll also be a pull that's going to occur from investors and from the banking industry that's to adapt more quickly to some of these technologies.
Adam Hooper - That's all great points, and, again, we'll put a link to your outlook certainly here in the podcast so folks that are interested can have good access to that, too, and get some more ideas. We'd be remiss if we didn't talk about blockchain with all the hubbub that's going on out there in the crypto world and blockchain space. Is that something you guys have been watching fairly closely? What's your thoughts there?
Jim Berry - Deloitte, actually, we have been watching that very, very closely, and actually been involved with quite a bit in that area, in particular within the financial services arena. But blockchain, it's here and it's real. A lot of firms or companies are still trying to figure it out exactly. Blockchain was, at times, too tightly aligned with the cryptocurrency, which, initially, people just thought of it as one in the same, and it's not.
Adam Hooper - That's a huge distinction is trying to separate this cryptocurrency craze right now from the fundamental technology of the blockchain. Those are two very, very different things that, for a long time, were just looped into one. Crypto is the first, adoption of the blockchain technology at scale, but by no means is the end use of that technology.
Jim Berry - No doubt. It will continue to penetrate and then be utilized more and more and more. I really do believe that's going to be one of the places, I actually believe it's a huge opportunity for real estate companies, but I also believe it's going to get a pull because there has been a heavy investment on the part of a lot of financial services institutions in this arena. Because if ya really just break it down, and your point is spot on, and that if ya just break it down, all blockchain really does is it takes a list of records, those blocks, it links them together, and uses cryptology to do it in a open environment. It allows a very clean mechanism to do anything that basically involves blocks of information. Whether or not it's transaction flow or whether or not it's leasing or whether or not it's other things that you need to bring people together to do, there's an opportunity there.
Adam Hooper - That was one of the more elegant descriptions of blockchain that I've heard. It's basically just a big spreadsheet that lives in the cloud, and in order to make a change to that spreadsheet, everybody has to agree to that change. It's really just a way to keep information public, accessible, transparent, and not have those potential for disputes, I think that's a big piece of it. When you look at the applications in our space, whether it's title transfer, I think, is the most obvious low-hanging fruit. There's no reason to go to a title company's office or the county offices and search through paper deeds back to the 1700s. That should just be somewhere that you can verify immediately and electronically, and just know that that's what you're getting. I think that's one thing, lease administration. There's a whole bunch of different applications in our space, aside from the securitization aspect, which is something we're interested in. We've seen some attempts at it, maybe not the greatest attempts at it yet in our space, but the securitization side, I know Deloitte, I know you guys put out a paper on that, as well. Where do you see that going? Is that a real opportunity there, with real estate aside, maybe just securitization in general? Seems like it could be a pretty good fit for this technology, doesn't it?
Jim Berry - Absolutely. Because, once again, if you're basically taking pools of, or you're taking information to make it available on various tranches for investors it's a place that it does provide opportunity. The other part that's really important in this, with this technology, and you were kind of hitting on it, but just to kind of drill down on the point, and that is it's not only transparent, but it's trackable. Every event is logged. You really can tell exactly how and what happened, when it happened and who instigated, who made that "change."
Adam Hooper - With a change as big as that could be to the industry, how do real estate practitioners get comfortable with that? That's a pretty big. We've seen a lot of that in our space, going from a capital raise that's always been private, very opaque, at best, with information, to now raising capital in a public venue. There's a lot more scrutiny on the documents, there's a lot more scrutiny on the numbers. The crowd is smart is a mantra that's been said for many years, and I think it plays out. Once you have that many sets of eyeballs on something, you can't get by with trying to sneak a few things through. This is even more transparent, this is even more concrete. How are real estate companies going to get comfortable with that big of a shift?
Jim Berry - It falls in line with most changes in technology. One is educate yourself and get familiar with it. I would point again that there already are some good certainly structures and models that can be looked at. But I think the hard part, the hardest part about this is kind of who's going to be the trendsetter in some of this? Who's going to be the front runner? What are the risks that have to be taken to manage through that? Because there are certain aspects that still need to be dealt with, from a regulatory perspective, and some different things like that, in particular, but I think that's probably the biggest, might well be one of the biggest challenges to how quickly it's adopted. It's not if it's adopted, but how quickly it's adopted.
Adam Hooper - The saying, you never want to be the first or the last to do anything. Someone has to jump--
Jim Berry - Timing can be everything. But there is a lot of good information and data, and there are a lot of good sources. Whether or not it's your company, RealCrowd or others, there's certainly folks that can be looked at to gain some additional insights.
Tyler Stewart - Then with the blockchain technology, what would that do for the timeline of transactions? Within our space is RealCrowd on the fundraising side, we've taken the process of an investor doing all the necessary paperwork and funding from about a month to now the average is about two days. What would blockchain do for the timeline of some of these deals?
Jim Berry - Well, it's hard to put an exact number on it because it depends on what's being impacted, but I don't think it's unrealistic to say that you're going to take multiples of the time down, so your example of a month to two days. You can certainly see a significant reduction in various aspects of things. Once again, I would say, the opportunity may well be in just a cleaner fashion, as well.
Adam Hooper - One of the points that you mentioned earlier with automation and robotics, the smart contracts are another application on top of this blockchain technology that we've also been paying attention to. When you're talking about trying to reduce timing for these things, so many of the agreements that we work with and real estate companies work with, a lease agreement is just a set of conditions. The smart contract, again, for listeners out there, it's basically just computer code that follows a set of rules that outline an agreement. It executes automatically. If you look at a lease agreement, tenant needs to pay X amount of rent. Landlord maybe, depending on how the lease is structured, they've got to cover expenses, maybe the tenant pays expenses. Break that down in the waterfall for the investor distributions. With a smart contract, you can code all that in there. The tenant pays the rent, and then virtually instantly you could have a waterfall-promoted distribution to limited partners just happen. You can take all of that human error and time out of it. There's just huge efficiencies that we can see with this technology once it becomes adopted that will truly, truly revolutionize how, from an operational standpoint, real estate is even managed. I think that's a very interesting thing that we're trying to keep an eye on, and will watch for sure and see how that plays out.
Jim Berry - Yep, I agree. It's that linkage across the transaction that's another big opportunity.
Adam Hooper - To put a, as much of a pretty bow as we can on this, trying to tie it all back into what is the impact for investors with this technology, with this adoption. Tyler made a comment earlier, can this maybe add a few extra innings into the cycle? How do you see this as impacting, ultimately, the value of real estate, Jim? Is it something that's going to be good, bad, indifferent, or just operationally, is there going to be a value increase to the underlying real estate with these technologies?
Jim Berry - Well, clearly, the opportunity is there to drive additional value. It does come in several different ways. One is from just a pure cost savings perspective. Whether or not it's driving a more effective and efficient process, it should present an opportunity to reduce cost to operate. But the bigger opportunity that we would see is also from the perspective of better aligning with your customers, your tenants and their end-user customer, and how best to do that because the experience counts, the experience matters. What will happen, as happens in any major cycle or any major trend or any major step is that some people are going to step into it, and some people will lag too far, and they will get left behind. It will get harder to catch up. The dynamic a lot of companies are going to have to face is, at a time where there's increased pressure on returns, increased pressure against broader markets to demonstrate those returns, a willingness to invest now for the longer term.
Adam Hooper - That's a great point. One of the things that we've always been focused on is access and trying to change how both sides of the equation can access that through our technology. We always embrace that. Anything else you're seeing on the investor side out there as it comes to education or other technology platforms or interesting things that they should be paying attention to?
Jim Berry - The bigger thing I would say is the need for information of investors and the pace of the need for that information. That's a shortening patience on delivery of information, as well as accuracy of that information. The closer you think of real time, the better. That's the kind of stuff you need. That's investors and that's maybe even your tenants or your customers because they want to know how are the markets changing today, what should we be doing with rents as we negotiate our next lease or some of those different things? How do we better identify customer patterns? It all ties back to better, quicker information.
Adam Hooper - That's a great point. Well, we talked a little bit about the cycle earlier, but we didn't really put you on the spot. So as we round out the conversation, I think we kind of have to ask, what do you see happening this year? Are we getting a little late, long in the tooth? Are we right in the middle? Where do you think it's going to happen here in 2018?
Jim Berry - I may call it, like you said you did on your panel at your event, everybody shied away from actually trying to name the inning. Here's what I would come back to, which is that, from a long-term play perspective, real estate is here and it's here to stay. Everyone's now recognized the maturity of the industry and has really got an investment strategy around it from the institutional players. That's all very, very good. Fundamentals still remain strong underlying those things. There's other elements within the broader economy that are in play that may make for a little bit of some bumpy ride, but focusing on long-term fundamentals, we're still generally optimistic.
Adam Hooper - Good. I think that would be a sentiment echoed throughout. Reliance on fundamentals, that's not such a bad thing. Good. Well, Jim, I think that wraps us up today. Anything else you want to add before we sign off here?
Jim Berry - No, Adam, Tyler, I greatly appreciate it. On behalf of all my Deloitte colleagues, thanks for including us today.
Adam Hooper - Absolutely, thanks for coming on, sharing your thoughts. Listeners out there, thanks for listening to another episode. As always, if you have questions or comments or anything you want to hear us cover, please send us an email to podcast@realcrowd.com. We'll catch on the next one.
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