raghavsapra

The next 20 - 30 years will be the data age -- how we capture and structure data to impact the built environment.

Currently, developers or city planners use traffic and construction data from Department of Transportation, Department of Buildings respectively to project impact of new developments. 

All the data is one dimensional. Very high level.

Now, with technology, we can do more... 

University of Virginia Professor Andrew Mondschein with help of students is deploying “apps and wearables to monitor temperature, light levels, green cover, noise pollution and carbon monoxide emissions in every corner of the development” to provide a pedestrian’s point of view. (Link to detail about the study.)

With affordable hardware and apps, the possibilities are limitless.

This is multi-dimensional. Very ground-level. Very collaborative. 

Dan Doctoroff (Sidewalk Labs) and Alicia Glen (Deputy Mayor of Housing NYC) spoke on two interesting topics at the Cities for Tomorrow Conference 2015-- 

Economic drivers to the next chapter of NYC’s economy.

Dueling perspectives on developing Sunnyside, Queens.

A good watch:

Image: The Guardian

He arguably has had the greatest influence on post-Independence architecture in India. 

He challenged the design paradigm that Lutyens and British Raj stiff armed on the Indians. Architecture to him was “a three-legged stool: climate, technology and culture”. 

His work was deceptively simple -- lots of open, elevated spaces. His response was unique to the Indian culture and the idea of an extended family under one roof. 

He captured the importance of the cosmos.

He spoke to functional design. His structures were for the city, the people and less about fashion and whimsy. 

He pursued “the idea that buildings should use passive means to protect people against the elements – not mechanical air conditioning and heating, but breezes, shade, orientation, the ability of masonry to absorb heat, and what he calls ‘using a house in a nomadic way’”

In the 1970s and 1980s, he taught us how low-rise, high-density affordable housing could work. The housing he created didn’t endure the will of developers who fancied high-rise solutions. Though, it is ironic that today’s urban planners in India are re-embracing Correa’s approach.

(photo: NY Times)

Buildings are products that solves a problem for a targeted audience at a specific point in time. As with most products, they eventually become obsolete and replaced by something more inventive, innovative, or efficient. 

If a building no longer has a “product - market” fit and hated by so many, why preserve it or defend it? 

Do we preserve a building for the sake of history and tourism?

Permanence in our world is rare. Enjoy the experience, the present function served, then move on. 

Residential architecture in Japan is the most progressive in the world. The creative outlet is so large that there are approximately 4x more architects per capita in Japan than in the United States. 

...Three of the last five Pritzker Prize winners hail from Japan.

I’m curious of the regulatory, cultural and economic systems that encouraged the Japanese to place a high value on individual expression, innovation, and creativity. 

In random order, here are 8 reasons why: 

Japanese homes are considered “durable goods”.  Market value declines faster than the book value. Within 15 years, houses have lost all economic value. Houses in the United States are considered “capital goods” and generally appreciate in value if properly maintained. 

The resale market for homes is virtually non-existent. Buyers are buying the land not the house.

Culturally and spiritually, the Japanese place a higher value on what is new and “clean”.

Japanese believe nothing is permanent. (A tenant of Buddhist philosophy.)

Japan is at the epicenter at a major earthquake fault line. With every major earthquake (approximately 10 to 20 years), building codes are revised to more stringent standards. 

World War II and the atomic bombs flattened nearly 500k homes. To rebuild homes quickly, builders sacrificed construction standards. Houses had no insulation, tin roofs, etc. – third-world standards. The homes stood no chance at staying upright during the next large earthquake.

Regulations for residential homes are designed to limit Floor Area Ratio.

Japan is not a litigious society. Architects are encouraged to take risks. There is no fear of lawsuits.

Many of the above points are from reading Alistair Townsend’s writings on his blog. 

Paper - Obstacles to Affluence: Thoughts on Japanese Housing

Wall Street Journal: Japan’s Creative Ephemeral Homes

Irrespective of cause, the Amtrak derailment on the Northeast Corridor is a reminder of the antiquated state of infrastructure in the United States. 

The train infrastructure and Amtrak system are from the 1970s, the NYC subway has more delays (and crimes) than ever and only accepts manual swiping cards, increasing number of planes in the sky overwhelms air traffic control systems, highways are clogged with unbearable delays. 

The negative externalities are more extensive –productivity loss, congestion, pollution, carbon emissions, etc. – As a nation, we lose hundreds of billions of dollars.

If we take a trip around the world – China, Japan, UK, Continental Europe, even India and Africa – travel development and innovation progress at a faster rate. 

Yes, most countries are starting from “zero” and there are visible initiatives under development in the US – driverless cars, electric cars, and hyperloops –but I feel our there’s an opportunity for more attention. 

It’s hard to imagine in a country with the most talented entrepreneurs “the time it takes United States entrepreneurs to launch a parking app, other nations might revamp an entire national system.”

Reconfiguring institutional priorities and legacies are important.

Airbnb versus hotel companies. The upstart versus the incumbent. The comparison fits Clayton Christensen’s Innovator’s Dilemma definition to a “T”.  

While I don’t think Airbnb will make traditional hotel companies obsolete, Airbnb has developed a better distribution channel and community. 

Tom Barrack of Colony Capital says it best:

“[Airbnb] is killing [the hospitality industry]…If you look at the hospitality industry, …you have to adapt the regulatory environment, the tax environment, all of the local handicap requirements … keeping full-time employees. You just impute that on capital structure, versus a non-asset intensive engine of management, you can’t compete.”

Airbnb has a better asset-light strategy. It’s the lightest of all asset-light strategies.

So what happens when you have a better asset-light strategy? 

Airbnb can open a market cheaper and faster. Airbnb can grow “room count” and “occupied rooms nights” cheaper and faster. Airbnb can build communities cheaper and faster. Airbnb can extend distribution cheaper and faster. 

For example, while hotel companies salivate to enter Cuba, Airbnb is already there.

I would also argue Airbnb’s brand over time will be stronger than the traditional hotel companies. Airbnb is in all the same consumer segments as the traditional hotel companies--budget to luxury--but unified under one brand “Airbnb”. Whereas between Hilton and Marriott, you have 32 different brands, one for each segment.

As development rights climb towards $1,000 per square foot, many developers, including luxury residential developers, are stepping to the sideline. 

…but, there are opportunities.

I like public-private partnerships because the subset of developers in the space is smaller, and there’s arbitrage. Developers can acquire land and development rights through the RFP process at higher “public agency” cap rates, re-entitle the project before closing, and re-capitalize at private market cap rates. The re-entitlement before closing de-risks elements of the deal.

A rough and simple example of the math…A developer acquires at a 10 cap, re-entitles to meet project specifics, and re-capitalizes or sells at a 9 cap. In a short time period with little capital outlay, the developer realizes an 11% capital appreciation.

Learning how the best investors translate current events to investment theses is fascinating. This year's Milken Institute Global Real Estate Panel was no different.

The panel (Sam Zell, John Pattar, Eyal Ofer, Minta Kay, Tom Barrack)

The topics covered:

Opportunities / Challenges in India

Why China needs our cash

Rule of Law, government instability in emerging countries 

Regulatory environment  -- (a) US: Disintermediation across financial industries (Dodd Frank, Volker) has caused total return to fade and created opportunities in credit. (b) Europe: End of private banking secrecy in Europe reason for emerging "safety deposit box"  ie. $100 million apartment market. 

Misperceptions of Europe's political and legal systems

Impact of Asia sovereign, corporate capital -- Segment started from a zero basis, now diversifying internationally. The impact is permanent. To invest on their turf, look at B+ assets.

Implications of low interest rates

Changing demographics

Rising Student Debt -- Impact on real estate and why it's an accelerant for sharing economy

Regulatory environment in US and Europe -- Dodd, Volcker end of banking secrecy.

Plants and animals have designed the most efficient habitats and sustainable systems on Earth. 

Their design adapts. Their design is seamless.

The environment camouflages the design. The design mimics the environment. There’s no waste. There’s recycling. — Therein lies the beauty, the sense of place.  

The concept has existed for centuries. The earliest bazaars and cities to modern constructs – shared work spaces and manufacturing centers. In NYC, two visible examples are WeWork, New Labs at Brooklyn Navy Yards, and, at a stretch, the ever-popular food halls… 

What is agglomeration? The benefits that firms obtain by locating near each other. (wikipedia)

What are characteristics of agglomeration? Industries cluster, skilled labor (specialized inputs) pools form, networks form, economies of scale emerge, knowledge is shared…society and economic activity grows. Even when clustering is among competition, advantages surface. 

The key takeaway is innovative activity is spatially concentrated. 

The rate at which outcomes occur among different clusters and geographies is an interesting study in public policy and entrepreneurship. Of course, my bias is to study how real estate entrepreneurs can influence the process. 

A few examples: Detroit (1900s) - automobile industry; Cleveland - financing for second industrial revolution; Nashville - country music; Boston Rte 128 - semiconductor industry; New Lab at Brooklyn Navy Yards - 3D manufacturing.

China’s reputation for copying iconic streetscapes, landmarks, and buildings of the west is borne from admiration, aspiration, and desire to prove their skills to counterparts in the West. 

From the exterior the homages are countless… the Eiffel Tower, The Sphinx, The White House, The Colosseum, suburban Mcmansions…

However, the interiors tell a different story. The Chinese still embrace their “traditional Chinese tearoom, or courtyard, or subtle feng-shui principles”.  

Eventually, the exterior facades of West will crumble and the true design character that exists on the interior will blossom. A modern China will emerge. 

It’s happening, albeit slowly.

One of my favorites is Sunrise Kempinski Hotel in Beijing. Embedded in the design are Chinese philosophies and traditions.

In the event that a residential developer does not complete a development, buyers can lose “upfront deposits that are at least 30% to 50% of the purchase price. In India, developers typically have to pay a 5% penalty to home buyers for not delivering apartments on time, which is far lower than the 16% to 18% interest rate on bank loans, making it easier for developers to walk away from uncompleted projects.”

I don’t care much about top 10 lists of any sort because of the extraordinary biases that influence the creation and publication. 

…That said, Fast Company published a list, Fast Company: World’s Most Innovative Firms in Architecture. Noteworthy about the companies on the list is each company’s focus to create an environment that reflects the intersection of consumer and environmental demands. 

…It’s not just about the physical space.  

In the 1800s small and mid-size businesses migrated to Minneapolis for its geographic advantages -- location to water source and hub for regional talent. The companies grew to Fortune 500s (19 in total) as did the educated, talent pool. 

Historically, as companies grew and the workforce achieved wealth, the demand for middle-class housing has outpaced supply, resulting in residential areas becoming unaffordable for lower-income people. 

Instead of displacing low-income people, state and local legislature took a unique approach that has retained Fortune 500s and talent in the region:

1) "In 1971, the Minnesota state legislature passed a law requiring all of the region’s local governments—in Minneapolis and St. Paul and throughout their ring of suburbs—to contribute almost half of the growth in their commercial tax revenues to a regional pool, from which the money would be distributed to tax-poor areas." 

The benefit:

the redistribution of revenue provided an equal-level of services and higher quality of life to low-income areas.

2) In 1976, the legislature required local governments to plan for an equitable share of affordable housing. The cities enforced the rule vigorously, compelling the construction of low-income housing throughout the fastest-growing suburbs.

The benefit: 

nearly 70 percent of affordable housing was built in the wealthiest white neighborhoods (fastest growing suburbs). This prevented a concentration of low-income housing as seen in New York City or other major metros. 

the strong public schools in these suburbs gave children from low-income families an opportunity to progress from low income to middle income.

Despite the Minneapolis's success, no other US city has adopted similar policy; however, Seoul, South Korea's government did. The results in Seoul are similar. 

Fundamentally, the structure of China's public debt markets allowed local governments and private companies to excessively leverage infrastructure projects with public high-grade debt.   

"According to IMF estimates, local-government debt reached 36% of GDP in 2013, double its share of GDP in 2008, and will increase to 52% of GDP in 2019." -- this is much larger than the ratios of Japan, US, and South Korea prior to 2008 recession...

It's a new world in real estate. Interest rates in the US are so low that sovereigns see real estate as inflation-protected bonds.

"Real estate guys are having to get used to the fact that we're seeing a lot of strange capital in our market that's here as a fixed-income investment ... You're seeing it. Look out the window. These buildings, every one of them, is a bond to these investors..."

"...It's getting to the point of absurdity when they already own all these [low-yielding] bonds...I can buy more Treasurys which we print more of ... or I can own a real asset, which might benefit someday if there's inflation."