By: Richard Katz, Co-Fund Manager, Westridge Lending Fund I and II | February 2022
The world is changing. It might not be completely perceptible in your day-to-day life, but if you take a minute to reflect, change is occurring at lightning speed, faster than it ever happened before. There is no time to breathe because the world is not the same by the time you take your next breath. It is pervasive, and real estate has yet to escape the fast pace of a literal and figurative changing landscape. We’ve seen seismic shifts happen in real estate due to the development and adoption of new technology. The recent pandemic hasn’t stalled those shifts. It has only accelerated the pace, acceptance, and understanding of technology, impacting real estate even more. What are some of the unintended and intended consequences that technology has had on real estate? What does the future hold for real estate?
In March of 2020, many businesses had to close their physical locations and were pushed out of their comfort zone to seek solutions to keep their businesses running. Zoom, Microsoft Teams, Google Meet, and many other videoconferencing applications became integral to business survival. Zoom was not just a way to communicate virtually with your company and clients. It quickly came to represent freedom from everyone being in one physical place. People realized that between Zoom and many software products living in the “cloud,” it was no longer necessary to be in an office and even in the same state or country as their colleagues. Many realized that they could draw their talent pool from anywhere. Our California-based company has employees from Los Angeles, Newport Beach, and Mexico City to New York City, Las Vegas, Austin, and Wisconsin. Our growing company now requires less office space because so many people rarely, if ever, come in, and we haven’t been able to ignore the impact this shift has had on the real estate industry. The office market has still not recovered from this shift and will likely never be as robust as it once was. In response, residential builders and remodelers are now making sure to include home offices and work-related spaces more than ever as part of their typical layouts. Technology is not slowing down, and innovation will occur, giving even less reason to permanently spend time in an office. Who knows, maybe one day our company will live on the Metaverse.
These changes are affecting office real estate with increasing vacancies. Innovative developers and forward-thinking private money bridge lending companies are embracing this change. We see office buildings being transformed into multi-family apartments or condominiums to fill the need for more housing. Other office buildings are changing to mixed-use layouts encompassing office, multi-family, and sometimes retail. Others are being transformed to both office and hospitality. Many developers who have embraced this shift have successfully changed their plight from having a vacant office building to having a vibrant, profitable multi-family or mixed-use property.
Let’s talk about the advent of Tesla and the Electric Vehicle market. The Teslafication of Real Estate is occurring as we speak, and it has already had an overwhelming effect on real estate, and we haven’t even scratched the surface. For instance, many real estate owners have had to embrace the investment in or partnership in providing charging stations for new homes, retail centers, multi-family and condo parking lots, and some even on vacant land. Today, there are more than 30,000 Tesla Superchargers across the country, and this number will continue to grow. ChargePoint now has over 18,000 charging stations and growing throughout the United States and Canada. As Tesla’s influence grows and new and traditional car companies plan our combustion-free future, changes to real estate will accelerate. GM, Mercedes, Volvo, and many others have committed to having a fully electric offering by the 2030s.
What other impact to real estate can come from our electric future? As more people choose to electrify, the need for gas stations will eventually go the way of Blockbuster Video. The redevelopment of gas stations is a bit more complicated due to environmental concerns, but still, with new technologies and understanding, it is quite possible. With the help of creative private money bridge lenders, many innovative developers will repurpose gas stations into car washes, residential properties, fast food locations, and who knows what else. We’re going to start seeing a need for additional charging stations and new technologies already available in China, like battery swapping stations, all of which will require acres of real estate.
As the EV market continues to transform the auto industry, it’s impact on real estate will be profound. There are already billions of dollars of planned development for both battery factories and EV car factories planned all around the country. These new factories also transform the areas they are in with the necessity for nearby suppliers, food choices and retail for factory employees, and housing nearby. Tesla has just built a “Giga Factory” near Austin, Texas. The development and changes to the area around the new factory are staggering. Almost every auto company in the area has announced new factory developments or renovation of previously defunct factories. The pace of this will only continue to increase. Private money bridge lenders are working with entrepreneurs and developers who embrace this pivotal time to develop innovative real estate solutions to support this new growth.
We even saw innovation with how Tesla decided to sell cars. Do you want to buy a Tesla? Then be prepared to purchase one through the internet. Yes, there are some Tesla storefronts, but there are no traditional Tesla car dealerships. New entrants into the EV market like Lucid, Rivian, and Fisker have all embraced a web or app-based buying process. The Covid-19 pandemic also quickly adopted a virtual car shopping experience for used and traditional cars.
Also, most electric vehicles do not need nearly as much maintenance as a traditional combustion engine automobile, so the need for dealership-based service stations will be required but diminished. Millennials and younger generations have embraced virtual buying decisions. Therefore, the number of auto dealerships will fall dramatically in the future. The cost savings and efficiencies of web and app-based selling that automotive companies can get are staggering. By eliminating the “middleman,” an automotive company can easily add to profitability. Will all auto dealerships disappear? Probably not, but many will, and some already have. With auto companies embracing direct selling through internet, apps, and the Metaverse, the need for dealerships will continue to fall off. We will still need places to get our vehicles serviced and a place for new cars to be delivered, but the need to have these centers in high-profile locations that a dealership requires will not be necessary. The question is, what do we do with the dealerships that close?
One of our clients made a deal with Amazon and converted multiple adjacent dealerships into an Amazon distribution center. The client transformed his marginally profitable dealerships into a valuable piece of real estate relevant to today’s economy. With the help of private money lenders, innovative developers and entrepreneurs have begun to transform dealerships into distribution centers, self-storage facilities, mixed use developments, and some even replaced the dealership with single-family residences.
The Amazon effect on real estate is well documented; however, an article about the future of real estate can’t avoid the profound impact this has had and will continue to have on real estate. Thousands of companies have closed their brick-and-mortar locations because of competition from online retailers and as traditional retailers embrace the online retail efficiencies. Again, the question is, what happens with all these empty locations?
Several of our clients have taken empty big-box retailers like Kmart and successfully transformed them into multi-tenant, thriving, vibrant centers that have become an essential part of the economy. Other clients have changed dead or near dead retail centers into much-needed self-storage facilities, while another client is developing a beautiful mixed-use community where an obsolete shopping mall was once located. We are already starting to see a mixture of single-family residences, multi-family condos, and a much smaller footprint for relevant brick-and-mortar retail. Rest assured that the pace of adoption of online retailers with fast delivery will continue to change the retail landscape.
All of the changes we’ve mentioned here will inherently bring out innovative entrepreneurs that can adapt and transform real estate into its future highest and best use. We chose to note private money lenders as a partner to this change because traditional banks are usually slow to adapt to change and are reluctant to embrace someone’s vision of the future, unlike private money lenders. Some banks are innovative; however, the private money lending industry is leading the charge in this unprecedented transformation of real estate. And think about it, do you think your children or grandchildren will ever enter a traditional bank branch in the future? What will happen with all that real estate? There is a solution, and it will be the innovative developers, entrepreneurs, and private money lenders leading the way.