Phase 2 - Real Estate 101 (How to or one big idea)

Podcast - Why Foreign Investors Favor The U.S. Real Estate Market

Marcia Cuenca
June 9, 2022
Podcast - Why Foreign Investors Favor The U.S. Real Estate Market
They're chasing, what everyone should be, demographics. Where are the people going? At the end of the day, it's always around that."

-Gunnar Branson, CEO at AFIRE (Association For International Real Estate)


The U.S. Real Estate Market continues to be resilient despite challenges. On this episode, Gunnar shared his insights on why the U.S. Real Estate Market continues to attract foreign investors. As a bonus Gunnar shares deep insights on global communication.


About AFIRE
AFIRE is the association for international real estate investors focused on commercial property in the United States. Established in 1988, AFIRE is a nonprofit trade association headquartered in Washington, DC, and is an essential forum providing high-value thought leadership for real estate leaders from around the world.

Links

Learn more about AFIRE, click here
To listen to his weekly real estate podcast, the AFIRE Podcast, click here
TEDx speech on Moore's Law and Real Estate, click here

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Transcript

Adam Hooper (00:03) Hello and welcome, I’m RealCrowd CEO Adam Hooper, and this is the Real Estate Investing For Your Future podcast. Here we explore the latest in commercial real estate trends, insights, and investment strategies that passive investors can use to build real estate portfolios that last.

Disclaimer (00:21) All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions and do not reflect the opinion of real crowd. 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 (00:43) Our guest today is Gunnar Branson CEO at AFIRE, which is the association for international real estate investors focused on commercial property here in the United States. Prior to Gunner's time at AFIRE, he was a Director of global communications at GE real estate in today's conversation. Gunner talks about global risk factors and how they impact us real estate.

Adam Hooper (01:04) As a bonus Gunnar, put on his global communications hat and shared his insights on communications. That pretty much blew our minds. Be sure to check the show notes for links to AFIRE latest report on investor sentiment. And we hope you enjoy today's episode with Gunnar Branson. Well, Gunnar thank you so much for taking the time to come on our show today. We're excited to learn more about what you're doing with AFIRE. Learn about some capital flows into the U.S. here and excited to dig into some timely topical conversations around foreign investment into U.S. real estate. So, thank you for coming.

Gunnar Branson (01:36) Thank you so much for having me, Adam, and I'm looking forward to the conversation.

Adam Hooper (01:40) Great, we know you've got a deep experience in the commercial real estate world with stints at some pretty major organizations. So why don't you tell our listeners a little bit about how you got into real estate? What got you into the industry and then what led you to your current position with AFIRE.

Gunnar Branson (01:56) Like a lot of people, that's a pretty circuitous path. I think there's not a lot of people, there are people, but they're not a lot of people that they say when they grow up, they want to go into real estate. But I wasn't a, that was not my original plan, but I I managed at one point in my twenties to land a job at GE capital real estate, who was lending back in the nineties into the commercial real estate market globally and expanding rapidly. And I was there for about eight years and in that time really became headed up communications and marketing for them and got a wonderful view to what was going on. On a global basis and across the business from, asset management and risks to originations. And it was just a fantastic education in so many different ways. And then from there moved on to Heller financial, there was a mid-market lending group, and a lot of what they did was in the real estate space in the Midwest and also global actually it was a publicly traded company and I was the head of marketing for the entire company there which was a wonderful experience until GE came and bought it.

Gunnar Branson (02:48) I had to go looking for work again. And that was that was the beginning of an interesting journey for me, where I ended up becoming a consultant and doing mostly innovative. With all sorts of companies and looking at marketing and how they can understand their markets and do a better job with introducing new products and new processes in order to have an unfair advantage. And I was able to work with a lot of real estate companies and some financial firms as well, including Wells Fargo in CBC and also JLL in the real estate space and a couple of private equity groups. And it was able to keep my hands in it if you will. Until this an opportunity working with an association as their president at a Navy and the national association of real estate investment managers landed in my lap and never thought I'd end up doing that or what I'd want to do, but certainly had some points of view around real estate and how it's changing and how we need to change to meet that.

Gunnar Branson (03:38) So I felt that it was just a great opportunity to learn more, to get to know more people was there for about eight years. And that was an investment man. Organization really focused on investment managers in the U S and in Canada and then a fire about four years ago. And to me, it was just an expansion of what I was doing and able to sit down with just brilliant people from all over the world and get a sense of how they're investing into these markets.

Adam Hooper (04:02) Yeah. So now you mentioned in your time at GE real estate, this was back in the nineties in the early two thousands, I guess I'm director of global communications. So I'm curious how have global communications changed since the nineties? I've being in the industry over, over multiple decades very different world now. I'm just curious, maybe what's w what's changed the most and what do you see? That's maybe some of those foundations that are still the same, and when you look at I guess where I'm going with this, there's a lot of the listeners of the show are real estate managers themselves, and so much of what we do. On the marketplace is, they have to build their brand, they have to be able to sell themselves as managers that would get people interested in investing with them. So I'm just, I'm curious from a marketing and communications perspective what are maybe some of those core truths that have remained from even, several decades ago to what today?

Gunnar Branson (04:50) I'd almost split it up into three categories of change, not change. One being, back in the old days, we would actually cut and paste things that we actually did that before it was done on a computer at physical, cutting, and physical, cutting, physical pasting, or taping, and putting it through a Xerox machine and that sort of thing. And that's actually, you would see a pack, we'd put together due diligence packages and it was a lot of cutting and pasting and a lot of time spent doing that. What's interesting to me is that actually we've changed very little. About what we are doing, except we've digitized a lot of those old processes.

Gunnar Branson (05:26) So I think it's changing, and I think some more innovative companies and individuals are obviously changing and using data in different ways and communicating that data in different ways. But I think too often what we're doing is that we've taken that piece of paper that we used to mess with. And we've put it on a computer, which, it's easier on a computer. You can change things more; you can do it. And it looks clean when you're done, but we're still thinking pieces of paper. We're still not thinking in terms of what needs to be, what that person needs to know and how they need to know it. Instead. We're just thinking here's the deck. And we still say the deck, even if we're not handing it to people.

Gunnar Branson (06:05) And I think those are things that we need to be concerned. Because I think the companies and the people that figured this out are going to have a clear strategic advantage in terms of how they communicate well with people. I think to a certain extent, the computers have been fantastic and the internet is fantastic and apps and all this, and it's really exciting, but we haven't kept up in terms of how we are communicating to others. We're dumping a lot of stuff onto a virtual page where not as good at saying what is real, what is true? How do I make sure that the people I'm interacting with can trust me and can trust what I say? Cause there's an interesting thing that happens. The more crap you put into what you say, the less credible you become, just like anything. It's very hard to find the bead. Now you can get people, listen to you by saying something that. It makes them angry or it makes them, makes them unreasonable in some way. We were all known to do that. We'll do that to grab people's attention, but it doesn't build trust. And what often builds trust is a kind of genuine quality, a quality that says, I don't know the answer, but here's how I'm going to try to find it.

Gunnar Branson (07:28) Genuine quality is I'm not the best at this, but here's why it still makes sense to work with me. I discovered something when I was at GE that was really wild and transformed the rest of my career and the way that I see the world. And that is so much of what marketing is or what we think marketing is actually a kind of civilized lying that I'm going to tell you nothing, but what's good about us now. It may be truthful. But I'm going to push it. I'm just going to sell it. I'm going to spin it. And there's an interesting thing about that process that we do. We all do it when we're selling things or where we're trying to get, maybe we're trying to get someone to date you or something. We do this and it's not the best way. And when we succeed in making the sale or making the business successful or getting people to believe, whatever idea you're selling, it's not because of that technique. It's, despite it, we are terrible marketers, even people that do marketing for a living as long as what we're doing is selling.

Gunnar Branson (08:37) So what I've discovered is that when I tell you something about me, that isn't so great. You automatically believe me. If I tell you something about me, that's wonderful. You won't believe me. So that insight, that idea of, okay let's just start with, I'm going to just tell you what's behind the curtain right now, simple ways. And I'm going to use that as a way to establish credibility and a relationship and just put it on the table. I'm not going to hide this anymore. So an example for me might be, if I were selling, when I was selling myself as a consultant would be, let's just start cards on the table. I'm a terrible accountant.

Gunnar Branson (09:23) The last person you'd want to hire to do accounting would be me. And there's a reason for that. I I think it's because I just, I never had the discipline to, to pay attention in school and looking at long rows of numbers and making sure that they're correct and everything else. It's just not something I've ever been any good at. Also, when I'm looking at those rows of numbers and when I look at a spreadsheet or I'm looking at a process map, I'm always trying to figure out a way to avoid doing this work that I really hate. I'm trying to figure out how to take a shortcut. Is there a way for me to get the same answer without all the work? Is there a way for me to be more reliable in my answers because I've changed the system in order to allow that to happen? Is there a way that I can Dodge the work completely and get a better answer at the end of the day? That's why you want to hire me as a consultant because that's what I do because I'm a terrible accountant. So that's a pitch, right? But that's just illustrative of the thinking of how you would go from understanding and being very open and clear. You don't want to lie about what's negative about you, but open with the negative, but also understand here's why that negative defines me in a way that's positive as well. It's just what you get. You're getting both when you're dealing with this firm, with this person now at GE. We were notorious in the nineties. We did really well. We were blessed by good fortune, but also by the size and the scope and the capabilities of GE. But most of our customers would talk about us this way.

Gunnar Branson (10:59) And this was actually something I heard we're slow, but we're expensive. So how do you market that? How do you put lipstick on that one? Really tricky, and so they didn't like our due diligence. They didn't like the way our credit process went and they felt that it was onerous and it was compared the IRS turned out to be easier to deal with from an auditing perspective. Okay. That's what we have to sell. I then sat down with as many customers as possible, and I started with customers that had been around for a long time. They were still doing business with GE. And there was an astonishing number of them. They all complained though about how awful it was to work with us.

Gunnar Branson (11:37) And it was really a kind of a head-scratcher. I then went down to one group and we were working on this with the internet was new. It was 96, 97. No one quite knew what it was at that point. But we were working on a new system that would help you actually do the initial loan request package, which is usually a deck and really big and lots of comps and all sorts of things that were in there. But to do it all digitally, we'd even give you a digital camera back then. That was a cool thing. And it would all, you wouldn't have to do any cutting and pasting and it would go straight up to our system and it would populate our spreadsheets with the information we needed. You can add all the other information you want, but we need a certain amount of information in a certain way. And instead of taking weeks to get back to you we could get back to you in a day. And then the other thing that we added to that with this kind of little group, we said, you know what? We've been doing deals with you for a long time, and we know what you do. And we have a high level of confidence about what you're doing.

Gunnar Branson (12:33) What if, when you use the system, we gave you a hard answer and would able to go to fund, not in 60, 90, or even 30 days, but in a couple of days, do you want that, would that be helpful for your business? And they all said, first off, yeah, that'd be fantastic. Sign me up. And then they all, a few moments later said something different and they said no. And here's why I'm the best there is in real estate. That's why, I get to borrow money from your guys. And I know more about what's going on in this market than you do, but I can't do the level of due diligence. You. You find all the problems that I don't see that one of the re the reason that I work with you is because you are such jerks and because you find all that stuff, and that was the insight was let's lead with that.

Gunnar Branson (13:34) So I sat down where I talked to all the salespeople all over the world to say, all right, instead of hiding what they used to do was I'll protect you from our credit committee. Don't worry, I'll protect you. I said, no, just tell them the real story. Tell them what it's really if you want, I've got some more stories for you. You can borrow. This is what it's like. When you go through credit committee, Mrs. White and grown men, indeed do cry. Just know that, then tell them why that's a good thing. And then our advertising basically did the same thing, talked about how we are passionate about getting the deal. And making sure that this is going to be a profitable deal going forward.

Gunnar Branson (14:15) That's why we're there. We had a record year that year. Now it wasn't just because of that. But it really suggested to me that there's a different way to think about how we communicate a way where we're instead of trying to sell a benefit or a feature or something like that to someone instead, we're saying, Hey, why don't you and I get on the same side of this table, let's be co-collaborators let's work together to make this work. And that all sounds all good and fuzzy and warm. And of course, everyone agrees with that, but the hard part is in order to do that, you're going to have to show off. What's not so great about you. You're going to have to own up to it. You're going to have to be real. That's hard, but the rewards are.

Adam Hooper (14:59) Wow. I am glad we're recording this because I'm going to go back and listen to that. A handful of times that's some good stuff. I think it is the genuine nature of communications. And I think to your earlier point there of largely we've digitized a paper process, we're still thinking about things in the older way, but just a better delivery mechanism maybe. But I agree with you that genuine tone is it flows through everything, right? And I think there is certainly a perception of when managers are being genuine. I think its people are pretty good intuits to try to sniff through that stuff. So, I think that's a good point and I'm hopeful that. Our listeners will get a lot from that. I know, I sure did. That's fantastic. What a great opener. Thank you. So, as we talk a little bit more now let's go to your role at a fire for listeners out there. Maybe they've heard of the organization, maybe not tell us a little bit about what you're focused on now and what a fire is help helping, institutional managers achieve these days.

Gunnar Branson (16:00) AFIRE is a fascinating group. The letters stand for association of foreign investors in real estate, and it was established about 35 years ago by my predecessor, Jim FET getter, when a group of Japanese and Dutch investors who were trying to invest in the U S really wanted to get insight about how to do how to deal with whatever regulatory and tax requirements were there, but also. How to connect to some of the best thinkers in the U S real estate markets as well. So half of a fire's membership are from outside the U S and the other half are inside the U S and it's made up mostly of investment managers but also a handful of three or four brokers and the four, the big four accounting firms, and then a handful of international attorneys.

Gunnar Branson (16:45) So all folks that are on hand, certainly they want to partner with them and everything else, but this is not a sales kind of setup. It's much more of an environment where colleagues are coming together, sharing best practices and learning from each other. It's a fascinating culture that I inherited, or I walked into to a certain extent. And it's never before have I seen such collegiality. And such a kind of sophisticated collegiality as well, where people are willing to share ideas and information, even if, at some point they're going to be competitors, but that really doesn't influence the competition. Whether or not they know one thing or the other.

Gunnar Branson (17:21) So there's a kind of understanding that we're all trying to figure out how to make what we know better. Because to a certain extent, there's a lot of opacity in real estate and the more we can create transparency and understanding the better, it's also wonderful to have people from 23 different countries all together. Although we haven't all been together because of COVID the borders have become a problem over the last couple of years. I'm hoping that will change soon, but we've been working a lot virtual agents like everyone else. And we've really augmented. Our journal, a fire summit, which I'm just so proud of in terms of the work that's being done by so many people on that. We've now won nine industry awards. It's available online. If any of your listeners want to take a look@afire.org and our podcast, and we're doing a lot of videos and things like that for our members, so that they can hear from political experts and from economic experts about what's going on in the us. They're still investing. You're seeing a very high degree of investment even through the worst of the lockdowns from Europe and Asia. And I think that in the middle east, and hopefully that will continue as we go forward.

Adam Hooper (18:24) And now you, us, the U S has always been, as you said, even back in the eighties, when the organization started has always been an attractive market for foreign investors to invest in w what makes the U S such a desirable location for foreign investors to invest in real.

Gunnar Branson (18:40)  There's several reasons. And I think there's a lot of things that people feel very good talking about. One is you do have a very large group of markets that all have the same legal system that all have the same, obviously the same currency that you have a certain level of stability and consistency in the west that you don't have in every country. The strength of the us dollar certainly is very helpful as well. But there's another aspect that I personally think has something to do with it. These are investors in global markets, so they look at 30 to 40 cities around the world. Those are the cities they invest in and of that list. Rhonda dozen or so, or U S cities.

Gunnar Branson (19:23) But if you go to these other cities, they're the only one in there. So you can go to a, a dozen to 20 different cities all in the United States, or you can go to a dozen to 20 countries and the complexities around that are significant in terms of doing that. So I think there's a, the fact that we have such global cities that have a deep real estate market. It's not just New York city, you have a lot more. And now in the current environment where you have such strong secondary markets that are growing so quickly, and that are attracting an interesting demographic, that's very attractive to an institutional investor as well. Interestingly, I think only in the last decade, have you seen a majority of the international investors going beyond our top gateway cities?

Gunnar Branson (20:09) Now they're doing that. And it's really interesting to see how that's changing. But yeah, you'll have a cornucopia of reasons why the U S is a pretty great place to invest as a non us investor. Frank frankly, I think part of it just is, this is a market that is still growing. Now our population is evening out because of, population trends. And also because of our our stance on migration, which I'm hoping might loosen a little bit in order to increase the population and allow us to continue to have a growing economy. But you compare where we are demographically to Europe or to Asia, and we still look pretty darn good. So there's a lot of different factors in terms of why you would want to invest in real estate here versus elsewhere. And I'm sure that many of my investors could come up with a list of half a dozen more as well.

Adam Hooper (20:58) And now when you look at the capital flows in. It seems like it's gone in waves, right? With different different countries being the primary source of capital. A lot of Asian money was coming in and maybe before that was the middle Eastern money. And now Canada is one of the largest foreign investors in the U S I'm curious, when you look at the origin of the capital flow in, does that follow a cycle? Is that more in line with what they're seeing in their home countries? Is that independent from what they're seeing in their local economies? How do, how does that capital flow in change over time with the U S I guess being more in Vogue than some of the other countries for investments?

Gunnar Branson (21:32)  Any cross border investing requires a certain kind of momentum in terms of the capital, because it's expensive. You have to be looking for characteristics that you can't get in your own country, whatever they might be. Now, Canada has actually been number one for a long time. It's been more than a decade They wanted what's driving them is they have a very robust and healthy pension system. So pensions that are investing that used to invest only in the U S or only in Canada, Canada are investing in the U S obviously we're right downstairs from them.

Gunnar Branson (22:06) So it's a lot easier for them to do that. They're also investing around the world, but the us is that wonderful, attractive market. That's, a quick drive or plane trip away. You do see ups and downs. For other reasons, China was significant back in 2016 was the last year that they were in a significant portion of the investing in the us. But then the Chinese government said, you guys are putting. Chinese capital in the U S we don't want you to do that anymore. So they stopped now, there are Chinese investors here, but they tend to be investing money that was already here. And then there's obviously some investing that's coming from countries like Hong Kong. I think it's driven a lot by pensions and large banks. There are people that can take a longer view that are institutional and focus. And you do have family offices and sovereign wealth groups that, and sovereign wealth groups are like a massive pension plan in terms of how they behave. And you need to have large pension plans that are looking to do something or sell sovereign wealth groups as in the middle east.

Gunnar Branson (23:00) And that's why they're there. And they tend to stay there for a long time, because they're really looking for the longer term, they're looking to take care of their pensioners over a very long period of time. So, they're not traders. They're not going in and out. They're not flipping. And so that's why you see it there. So I would, I have not seen any data that suggests a kind of cycle. I think there are reasons in different areas, but to support my thesis, just one last example would be what's happening in Japan and Korea. So, Japan has remained in the U S just at much lower levels than they were in the eighties. The pension plans are so again, so big and looking for yield that is better than what they have in both Korea, South Korea and Japan, that they are, they're basically preparing to make a major investment in the U S at that numbers that are just boggling. So that's part of what drives it, someone's, they run out of room in their mattress, and they have to go somewhere. So they come into us real estate, which is also real estate. As an asset class is more attractive and has been for awhile. Then other kind of standard. Investments that you can make because of the yields and because of that long-term stability and that the tendency for us to be boring. It's very exciting.

Adam Hooper (24:18) Yeah. And certainly if you're looking at it through the eyes of a pension, rightly so the much longer term horizon volatility, isn't necessarily their friend that more stable longterm cashflow to support that as is key. Yeah.

Gunnar Branson (24:29) Yeah. And I'd say that they that's increasing too.So we survey our members on the, on a regular basis. And at this point somewhere just shy of three quarters of them plan to increase their investments in the U S by a significant amount over the next few years. So it's not going away right now, that's the nightmare, oh, we want to pull back and what do we do? They're going in the absolute right direction for a us asset owner.

Adam Hooper (24:55) And so then when you look at the. Total capital flows, maybe pre COVID leading into that, where we've seen during COVID. And it sounds like some positive trends of more foreign capital coming into us. I'm just curious how those numbers looked over the last, maybe five, 10 years in terms of total capital flow in

Gunnar Branson (25:14)  total has been around the same percentage. It's basically been rising along with the with the domestic part of what's difficult in terms of the numbers. And I don't feel like any one really has a, an absolute picture of how much is here. I tend to call it the Toyota effect. That Toyota, you just bought, it was manufactured in Tennessee or someplace like that. And it was designed in California and the Toyota company is in Japan. But there are other parts that they sourced from India and Germany. And what have you, is that a Japanese. Is that an American car is, whatever it is. It's hard to tell even, cars that are American General Motors. It was made mostly in Canada. Is that an American car? So the same thing happens with real estate. There's so many different sources of capital in any given asset, especially if it's a large institutional asset that the ownership of that, it's very difficult to tell on a macro level, how much capital is here.

Gunnar Branson (26:13) Generally you see numbers depending on who's counting around 14%, 12 to 14% of the investments made in any given year. Over the last several years have been non us. I think that's low, especially when I do some surveying of major real estate players and ask them how much of your capital right now is coming from outside the U S seeing much larger numbers. I don't know how well it's being reported. I don't know how you would get those numbers. I don't want to fall to, whoever's putting those things together. It's really tricky. I know it's significant. And it's a big part of what the real estate business is.

Adam Hooper (26:50) And it sounds like what you're hearing is certainly the attractiveness of us as a place to invest remains and potentially even increasing for some of those foreign investors as they look at, coming out of COVID coming out of this reset it sounds like you're hearing some increasing allocations potentially to to the U S real estate asset class. Yeah.

Gunnar Branson (27:09) Yup. Pretty consistently. And part of that is in, we'll probably you'll, I'd love to talk a little bit about risks and everything else. But as you, as we do that, keep in mind, there are plenty of problems here. But if you take a global view, you start realizing, gosh, we're not special. These problems are. By the home countries of the investors as well to varying degrees, they might be able to laugh at us for whomever is in charge. We can turn around and laugh at them, six months later. So, it's, we're all facing a lot of the same problems.

Adam Hooper (27:41) Yeah. And so, let's dig into that. We're so we're recording this in early March coming on hopefully continued recovery from the pandemic. We've got some inflation risk, we've got some interest rate risks, we've got supply chain issues. We've got Ukraine in very much the early stages of what that conflict turns out to be. What are some of the risks that are maybe we can talk about what's unique to us investing in, in, in what you just mentioned there too, that these are a lot of these are shared risks, right? And there's a relative measure of risk. While you at the U S shares that risk, maybe it's at a less volatile level than what they see in their home country.

Adam Hooper (28:18) So maybe w how are foreign investors looking at risk and us, relative to maybe their home countries?

Gunnar Branson (28:23) It's interesting to me that a lot of the reaction while we certainly haven't accounted for the reaction to the Ukrainian conflict in the last week. But I was just reviewing some of the surveying that we've been doing over the last couple of months and high on the list was political and in terms of the risk that everyone's keeping their eye on. Now, that's certainly not a U S only, and that's everywhere right now, but extremism political instability are high on the list of these are risks to the health of my portfolio, to my assets and invest in going forward. Then I have to account for in a different way. The Ukraine problem also connects to another risk that global investors are paying very close attention to, and that is supply chain. So we have a significant conflict like that. And we have, basically the shutting down of Russia's economy and who knows how long that's going to last or how that's going to play out, but it certainly has a significant impact on the one commodity that kind of drives everything oil not to mention some of the major investors in real estate on a global basis are essentially investing petrodollars.

Gunnar Branson (29:34) So think Norway think the middle east. So these are. These will change construction costs have gone through the roof because of the supply chain problems that we've been having due to COVID. The question that I have when I look at that and that's the top of a lot of my investors list, cost of materials because they're facing it every single day that, how is that going to impact what they do? How does that impact supply coming on the market? There's some good things and some bad things that come from that, right? So if it's supply constraint than it means your existing assets may be worth more, but there are other issues that we have around that and trying to make those things work.

Gunnar Branson (30:10) So those are up there, interestingly. All right. So inflation interest rate, those are like evergreen problems, right? Even when they weren't problems years ago everyone worried about them. It's we've all been conditioned to worry about them for the rest of our lives. They are still a worry, but nowhere near as. As these other things, and, obviously the pandemic everyone's been worried about that. I think that's, that may be fading in our new surveys, it depends on what happens with that as you, you said earlier and so eloquently, I think we're, that's what we're waiting to find out about. How does that play? What gets me though are two that rise to the top of our lists a lot lately. One is cyber security. Now that comes and goes, depending on who got hacked or whatever at some point. But I think there's more and more concerned about that because people are realizing how exposed they are and how exposed real estate in particular is.

Gunnar Branson (31:10) We've been somewhat invisible. So hackers haven't gone after us as much. We have a lot of systems that are relying more and more on computers. We are starting to do more and more data centers. Strategy, and we need to be secure with that data and understand it and be able to know that it's real very big. The other concern with that is that you've got an older industry right now in terms of the leaders of this industry that the baby boomer generation really runs. It. There's not a lot of people underneath until you get to millennials and younger. And so you have this generation gap that's a little bit more exaggerated than perhaps we would like. And you do have this kind of I'm still writing out my PowerPoint slides before someone else does it versus the kid that you know, is doing everything in a database. I think there's a sense finally that we're going through a real change here and that those who are prepared to change and are prepared to make some mistakes and make some in.

Gunnar Branson (32:09) Are probably going to have an opportunity to really succeed. And that the level of investment in PropTech is just through the roof every yeah. And even through even three of the pandemic which is great, I think that's a direction. We have to go. Obviously, all of those companies are not going to succeed and there'll be some fallout and everything else, but I'm hearing more and more from institutional investors about how they are embracing it and they're figuring out what makes sense for them. And there, there is a kind of, moment where everyone puts their hands on their side and says, yeah, I have to stop relying on my gut. Just start taking space.

Adam Hooper (32:47)  It's interesting seeing, we've been in this now little over nine years at real crowd and seeing the prop tech industry change from 2012 13 to where he is today is just, it's been fascinating to watch. And we've talked about it on the show, a number of times of. As the industry gets younger leaders in positions of influence that are more comfortable with technology, the adoption curve has dramatically increased. I think the real estate industry for the longest time was maybe one of the slowest financial industries to adopt technology. Now, I think we're seeing such a rapid change, of course, with again, younger people coming into positions of leadership that are more comfortable with technology and realizing that there is there's so much room for efficiency and even getting back to what we talked about at the beginning of the show, rethinking just digitizing these old processes, rethinking, just doing the same thing, but on a computer, how do you truly change the nature of what you're trying to communicate or what you're trying to analyze through a more technology centric approach rather than. Applying technology, those old processes. So that's been fascinating for sure.

Adam Hooper (33:55) And the cybersecurity thing, right? I That's a very big point. As we see these conflicts continue to escalate, there is a huge vulnerability and in the real estate space thus far has been, as you said, somewhat insulated from that, but also the downside of being so slow to adopt technology is those older systems are probably pretty vulnerable or maybe they're old enough that they're not vulnerable anymore. I don't know

Gunnar Branson (34:18) If you just wait long enough.

Adam Hooper (34:21) So yeah, I think those are all fascinating points and the risks of managing that at a global scale, right? How much does that influence where. An institution chooses to invest. Is that a, does that go into a formal underwriting methodology? Is that more than, like you said, maybe some of the gut feel of these things. How do you quantify political instability or cybersecurity when you're looking at making an investment decision?

Gunnar Branson (34:45) That's hard. I think there are some groups that are starting to try to put some metrics to that, but I don't think we're, I really don't think we're there yet. And it's, I've seen a couple of different attempts at looking at political risk and trying to look at it from a region by region basis and being able to compare and see where, try to make some analysis around what the cost might be of that risk. But it's certainly above my pay grade in terms of what needs to happen. We do need to turn it into something that we can hold onto and make a metric. Unfortunately, it's so volatile. I don't think anyone was preparing for war in Ukraine two weeks ago. So this is fast and we've got a kind of a potentially a world order that is shifting in terms of, NATO matters again and everything else. Things are happening every day now. And it's going to take a while for some of this to happen. And for an institutional investor, this is all, this is, these are seconds. This is very fast and they're trying to figure out how to surf it over the next 10, 20 years. How do we do that? It's tricky and the volatility politically can throw an absolute wrench in everyone's work.

Gunnar Branson (35:49) W what I'm interested in though, frankly, and heartened by at the same time is that top of many questions we ask are on risk, really at the top. And even in the midst of. The pandemic and lockdowns and everyone's frustrations with that climate change. It's only getting bigger. And both from a standpoint of trying to be better at ESG, which they have to especially European investors right now and really look at the entire supply chain. And where's the carbon coming from. And do you really want to build that with concrete? How do you do that? Important questions and we need to figure them out, but also the risk impact of climate change itself. Certainly in the U S over the last few years, we have seen some dramatic impact, both from drought in the Southwest to an abundance of water in the Southeast that are impacting some of the most valuable markets and some of the fastest growing markets. There is a lot of concern, but there's also still an interest in. In these places. And so there's a conflict sitting there inside of us that we've got to figure out and come to terms with. And everyone's obviously going where the population is going, but that can change if we lose things.

Gunnar Branson (37:03) So there's a lot of discussion, a lot of concern, but I wouldn't say that everyone's there yet in terms of protecting themselves from climate change.

Adam Hooper (37:10) Yeah. As you were, as you're talking about the speed that the Ukraine crisis is unfolding, and we look at the speed that the pandemic unfolded, it was February, the world was fine. And then end of February, early March, we were shut down for a couple of years. You look at the financial crisis, right? September 18, the world changed. You look the.com crisis, right? That was a very quick, that was a very acute quick crisis. Contrasting that with climate change. There's it seems like there's. There's a more real time reaction to those acute crises where climate change is. It's a much longer-term thing. And is, are we not paying enough attention because it's not as acute, right? It didn't come on as quickly as some of these other crises that we have to manage.

Adam Hooper (37:55) So does it not get the attention that it deserves due to that? Longer-term nature of it?

Gunnar Branson (37:59) I think certainly over the last few decades that has been the case. I could be fooling myself. But part of what I'm seeing now is it feels acute. And so people are there's more energy around trying to figure out how to answer what seems like an impossible question to answer. And you're seeing that certainly with other industries, but, real estate we account for about half of the carbon problem. So we have. Certainly an obligation and an opportunity to figure it out. It's just so difficult to do. And you need so much, you need everyone on board that, this is what we're going to do, and we're going to work on this.

Gunnar Branson (38:39) So everyone in the value chain for real estate, whether it's the investors on down to the people that are actually executing on construction or managing a building, et cetera, we all have to be in, in some level. Now the good news is if the money wants in, everyone else tends to follow and pensions want in, they want ESG to happen. They want to solve the problem because their constituents care. So it's important to them especially in Europe, Canada's right behind them and we're behind them. And then Asia is behind us, but. It's happening. The question in my mind is are we going to accelerate in terms of what we're doing?

Gunnar Branson (39:18) Because I think actually real estate has done a fantastic job, even in the United States of, any new construction, that's a class new construction in the U S is it's going to be at the higher levels of ESG. It's going to be lead in some way, or it's going to have some other certification. We've done some really smart things. We have a lot more to do, but the fact that institutional quality real estate in the U S gets it like this is important. We're going to do this, whether it's important because the investor wants it, or it's important because I believe it to be important is almost immaterial. We are doing it. And I think, I hope as well as believe that we will, that we are going to get much faster, especially in the post COVID world that we find ourselves in, or I hope will be post COVID world.

Adam Hooper (40:07)  So when you look at some of those. Climate, of course being one of them. How does that inform or maybe influence where either geographically or product type, what these investors are looking for? Do you see any trends that would indicate one asset class, officer retailer, industrial multifamily across others, or is that pretty idiosyncratic to that, that actual investor?

Gunnar Branson (40:33) Yeah, I think it's less around the asset class. And probably more around kind of specifics of the investment itself, where it's located. I do think people are starting to change geographically where they're targeting things maybe high ground, literally within certain markets. But what's shifting investors investments in different real estate asset classes has much more to do with changes in the behavior of the users of. With the demographics being what they are and where they're going, a rapid, you've seen a rapid growth in demand for multifamily. You have a rapid growth in single family rental over the last 10 years, an amazing growth for a variety of different reasons in terms of what people are able to do, who rent houses or buy houses or rent apartments those things are changing and the institutions are taking notice. In fact, multi-family is their top asset class. That's where they want to be more than office, which is, it sounds weird if you were in this business 10 years ago, because institutions, all they wanted was to buy a bunch of shiny office buildings in downtown Manhattan or, in, in San Francisco or something like that.

Gunnar Branson (41:42) So that has changed the near the bottom of their list in terms of where they want to invest is. But right close to it, his office, and the reason is they don't know what's going to happen. It's not like they've gotten rid of their office buildings. And there are some investors that are buying office still. There's still opportunity there, especially trophy assets. But for the most part, as a group, folks are saying, I want to be very careful with office because I don't know what's going to happen. And certainly COVID and work-life balance. And we can have a whole podcast just on that.

Gunnar Branson (42:12) I'm sure you've had several that is changing their thinking. But I think the big shift for me is, wow. These institutions that really define themselves as office investors are not doing that anymore. And it's, they're generally moving to, a different kind of asset right below a multi-phase. Within multifamily as affordable housing, they see the same supply demand problems that everyone else sees. And there's a great interest in affordable housing. If they can scale it, the problem is usually scaling for an institution. Secondly, it's industrial and different forms of industrial. Now that's because the demographics have changed their behaviors. More and more people are ordering online. No one minds buying a Google distribution facility at this point or an Amazon distribution facility love it. They're going to want to invest there, but there's also other kinds of specialties that they're very interested in as well.

Gunnar Branson (43:04) But part of the reason why they're interested is yield. So w the farther you get into kind of specialty land, the more money you can potentially make, because you don't have a bunch of institutions there holding the prices. High office is very high because institutions already owned it all. And. Yeah, it's just very difficult to find alpha there

Adam Hooper (43:29) because they're not incentive to sell. I'm looking at that longer term horizon. They can write it out and there'll be okay.

Gunnar Branson (43:35) That's the theory. You also, you have this idea that multi-family, you're a little bit more protected because you're repricing potentially every year. So there, there are some real advantages to that, and that makes sense on the long-term as well. You do long-term leases with industrial for the most part as well. So that is attractive to folks, but the big attractor is the demand. The demand is just through the roof and has been for a couple of years now. So those tend to rise up hospitality rose up quickly. I, I was along with everyone else expecting hospitality to be in the doldrums for some time.

Gunnar Branson (44:06) And from an investment class standpoint, it never dropped in terms of values or a dropped very little it's doing very well. And there's a lot of folks that are doing hospitality strategies. Retail is retail at this point. And so on doesn't bear talking about, but again, I would say it's behavior it's the migration, the great kind of the migration that we saw both from the standpoint of, from cities to suburbs over the last couple of years, as well as from cities to excerpts or other parts of the country, entirely, as people figured out how they could be more flexible with their work. Now how much of that will remain? No one knows. And I think there's a lot of debate about how much of it will return, how much will everyone return back to New York? I think there's arguments to be made on both sides of that. In terms of what's going to happen with some of these cities in the north.

Gunnar Branson (44:55) There's also that north south migration, and I think that's something to watch. It's not something that just happened in COVID it's been going on for 20 years where the Southern. Kind of Sunbelt markets were more affordable obviously warmer, less winter and fast growing. So it attracted a lot of people. A lot of tech, a lot of companies, a lot of young people, lots of excitement. There's something interesting that's happening dynamic wise, especially with COVID one. The affordability is no longer a big Delta between there and many of the Northern cities. So, it's less of an advantage than it was before.

Gunnar Branson (45:28) Energy costs tend to be very high in places like Phoenix, not to mention water and issues around that. Texas has a, an infrastructure problem, although Texas is doing extraordinarily well. And two of the favorite markets for institutional investors are in Texas. They have tech and all that stuff that's going on. So, they're defying. Things that would break other states quite well. Florida Georgia. Goodness. These are where a lot of the growth has been. And a lot of that growth has also been reinforced by tech and med tech, really taking these regions by storm, and really looking for that young very talented and educated employee that can't afford or doesn't want to afford a lifestyle in New York or San Francisco. So, I think that's a big part of it and a big part of what people are trying to figure out.

Adam Hooper (46:14) And then maybe as we start to wrap up here a little bit, what of those lessons are what, from the trends that you're seeing at the institutional investor level can, and again, a lot of listeners of the show are individual investors. What can they learn from some of those trends or insights. Maybe these institutional investors that have massive investment teams and ultra-sophisticated decision-making processes. Is there much that a, an individual investor that's looking at participating in, in the real estate space can learn from those capital flows? Are those insights?

Gunnar Branson (46:44) I think the thing to keep in mind and and to watch I'm a big fan of real capital analytics data. A lot of institutional data in terms of where they're buying on a quarterly basis that can tell you what their thesis is, to a certain extent what they're chasing what everyone should be, demographics, where are the people going that, at the end of the day, it's always around that. And around those people I also would pay attention to what their risk officer's. These areas that we talked about they're not going away. We can just, hope they won't affect us, but I think that's a limited strategy. And it can hurt us.

Gunnar Branson (47:20) I think also realize that there's a lot of specialty stuff that's popping up. Obviously data centers and MedTech are, everyone wants a piece of that. And when you think about what they are, med tech has essentially office with a lot more hair on it, more operational challenges or their data centers, basically it's industrial where you have data inside it. So you've got to know certain things. It can't just build one, near a highway and be good. A sector that I've been learning about media studios, filmmaking and video and streaming and all this stuff has exploded even in the pandemic as demand globally has just skyrocketed. So, you're seeing studios being built all over the world that are fantastic businesses. Because they're not just a warehouse, they're a warehouse plus equipment and sometimes even plus staff. There's a fellow by the name of Hackman. That's been doing a lot of investing in that area and he started in the industrial space. He now owns Culver city studios and many others but really interesting that kind of looking at a different space that's real estate.

Gunnar Branson (48:18) Plus it has something else which makes it harder to be a passive investor. You've got to be a little bit more active operator, but think about how we were seeing more hybridization between hotels. And apartments that may continue. And there may be a kind of specialized asset class there. If you are willing to take on a little bit more of an operational challenge and not just a passive investment, I think we're going to see and office, I think how office evolves and where it goes. It, there are very few stories around that in terms of prognostication that say, and you will have less operational exposure. I think those things are going to get more tricky. So that means we have to understand it as investors and even a smaller investor. And I think small investors have a great opportunity to be the innovators in these spaces.

Gunnar Branson (49:05) They don't have to please a very large board of folks and they don't have to educate them and bring them up to speed. You just have to know them. And I think if I were an independent investor right now, I would be focused on those weird hybrids and on those conversion opportunities for assets that are no longer. As they are. And the folks that, that I know that are smaller investors, that's what they're doing. And they're hitting it out of the park on some of that. So I'm a big believer in that. The other thing too, that I would point out that one advantage that a non U S investor has, whether they're institutional or small, is that by definition, they have to have an open mind because real estate isn't the same everywhere.

Gunnar Branson (49:55) And there's a tendency for all of us to go into a formula. This is what I've done for 10, 20 years. Always works this way. This is what it looks like. This is what it feels like. Let's just do it, that rigidity and an environment where everything's changing can be incredibly dangerous. And the, I believe the international investor has a little bit of an advantage because they're already a stranger in a strange. They're already going, whoa, wait a minute. You do multifamily that way. You actually provide appliances, a German investor go. Why would you have a appliances that you pay for whoever's renting? The place puts their own appliances in that's because people rent space for 40 years there. They don't do that in the U S it's things like that.

Gunnar Branson (50:37) They have to learn. They have to see something new that they haven't grown up with, that they haven't lived with. And that open mind is so crucial when everything's hitting the fan. Like it is right now.

Adam Hooper (50:52) Fascinating. This has been a very interesting conversation and absolutely appreciate you coming on here. As we end, we always ask a few questions. We've talked about some of the risks what's in, in today's environment right now. What real estate related what's keeping you in.

Gunnar Branson (51:12) Climate change. Yeah. It's one of those things where I feel like those of us that are focused on that are like chicken little. I'm genuinely concerned. I also, frankly, worry about with climate change, with political turmoil, with all the things that we have here, we have got to think broadly and holistically and realize that it's not just on the surface, that there's so many different implications to everything that's happening right now. And so many people are being affected. So, we need that open mind.

Adam Hooper (51:46) Is there much of a how different is the approach to climate change? When you look at different countries? Again, my very us centric view of how we've addressed it or haven't addressed it here. How do you see many differences based on country of origin in how they're approaching climate change?

Gunnar Branson (52:02) Absolutely. I think it, some of how, and it's not just country by country, it's where you were from. And how much have you experienced climate change? Where I grew up there used to be a lot of glaciers. They're not there anymore. That will convince you like, oh my God, this is big. What I've noticed in, in, in Europe specifically in Germany, I think their vulnerability to oil and gas supplies has driven a different kind of thinking of very pragmatic thinking around this. And in some ways, it is taken them to some very positive places. So, it's not even a question of having to prove that it's. They just know they have to do it. And I think, they may argue with what the strategy is, or do we really need to focus on that solar panel or not in a place that has no sun, there's lots of arguments. There is everywhere, but there is there is certainly an imperative that is, felt there more acutely across Europe than it is felt. And there are people that object and deny and all those things, but it's not felt as acutely in the United States. And I think partly because we have room, you don't have to say,

Adam Hooper (53:11) it's not a problem until it's a problem. If it doesn't affect you personally, it's hard to identify with the bigger picture sometimes.

Gunnar Branson (53:17) But I do think that the annual series of catastrophic storms and fires and things like that, it's starting to change minds here. So, I think we'll catch up pretty quickly.

Adam Hooper (53:26) Okay. With that said, what has you most optimistic about the future here for real estate?

Gunnar Branson (53:30) I was thinking about, where is the optimism? And, it comes at me every time I have a meeting or a conference with folks in this industry, we're all talking, we're having conversations. We didn't have a couple of years ago, couple years ago, we were just talking about the next deal. Now we're talking about stuff. That's personal, that's real. And we are at the beginning of change. So, when I was doing change consulting for companies, one of the things that you learn is that people have to really hurt before they'll change, because change is something we hate doing. It's unpredictable, it's difficult.

Gunnar Branson (54:13) It's, everything else. But if people understand how much this is personal, then they change because you have no other choice. Like I have to, I think we are. If we're not there, we're darn close to it as a community, but, as a culture I've never had the kinds of conversations that I'm having right now with colleagues and people that I meet in real estate, people are really looking hard at themselves at their businesses at their investments and saying, what can what's the path forward? It's probably not the path from the past.

Adam Hooper (54:50) We are grateful for you coming on and having this conversation with us to share with our listeners today. This has been fantastic. Thank you. It's been an absolute joy.

Gunnar Branson (54:54) Thanks Adam.

Adam Hooper (54:57) So why don't you let listeners know, how can they learn more about a fire and get access to some of the great content that you all are putting out?

Gunnar Branson (55:03) The easiest thing to do is go to AFIRE.org

Where you'll see our journal, a lot of our stories and our research as well as our podcast.

Adam Hooper (55:12) Fantastic. I would highly recommend everybody goes, subscribe really good content. Gunnar, grateful for your time. And thank you so much for coming on today.

Gunnar Branson (55:20) Thanks, Adam.

Adam Hooper (55:22) Listeners, that’s all I hope you enjoy this one. I know, again, as I said before, I'm going to go back and listen to this a bunch especially that early stuff about being genuine in your messaging. So that's all we've got for today as always, if you have any comments or questions, send us a note to podcast@realcrowd.com. And with that, we'll catch you on the next one.

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