Real Estate in a Decentralized World - Axia Real Assets

The Value of Real Estate in a Decentralized World

Josh Varghese
May 31, 2021 • 8 min read

A Typical Day

A woman wakes up early on Friday morning, puts on her gym clothes and gets ready to go to the gym on her Peleton bike for an intense 45 minute workout, where she will be led by an instructor to compete with thousands of athletes around the world. During her ride she tunes in to her favourite radio station taps on songs of different genres that pop up on the Peleton playlist to automatically download the ones she likes. After her workout, she goes to the doctor looks at her Apple watch to check her heart rate, calories burned and estimate her VO-2 max. She showers, pours herself a coffee and sits down to read the newspaper scroll through an app that curates news from many sources across the globe with various perspectives. She would normally get her children ready to go to school log in to their Zoom classes, however the pandemic is over and she’s thrilled to get them the h#1! out of the house and so she logs them into their Zoom classes gets them ready for school. Her kids love don’t love school but they do love seeing their friends with whom they will talk about their experiences on Roblox where they are learning coding and game design in a digitally social environment.

She needs to place some trades on her personal investment account, but it is early in the morning and no markets are open so she goes to the bank, stands in line and completes a bunch of paperwork for a bunch of fees for something that will take at least 3 days to process logs into her Coinbase account and buys some more Ethereum. She is tired of working from home for now because of the past 14 months of being forced to do so, so she drives through 40 minutes of traffic to her office walks to her local coffee shop where two of her friends in unrelated industries are also working. Here she can sit in an office with an occasional water cooler run-in with someone she may or may not want to talk to be social with people of her choosing, can be productive and get work done, and she finds the rustic style of the coffee shop and her interactions with people of differing perspectives inspires creativity. It is a perfect environment for today that will allow her to get her presentations ready for when she will be in the office later next week to pitch to her clients. She calls her associate into her office shares the presentation on SharePoint with her associate who is working from their parents’ cottage and they collaborate to refine the presentation.

She receives a reminder on her phone of a trip she will be taking in two weeks from the hotel AirBnB that she had booked and realizes that she needs to buy some clothes for that trip. So she heads to the mall for a couple hours visits several websites and buys some outfits online in a couple minutes that are set to be delivered soon.

On the way home she goes into stops outside a grocery store to pick up an online order she made earlier. She’s cooking a meal tonight for her children before they spend $100 going to a movie theatre watch Netflix. It should be a fun night before Saturday when she sits them in front of their iPads all day takes them rock climbing.

Age of Decentralization

This is the Age of Decentralization. It rests on a distributed model, and it is being enabled by massive and accelerating leaps in technology. Decentralization means that we are less reliant on single places to carry out tasks and activities, and instead we have many micro, distributed options to carry out those same tasks (an important asterisk here is that these decentralized options themselves are becoming more dependent than ever on centralized groups such as Apple, Google, Amazon, Alibaba and Tencent). If we want to watch a movie, we are not beholden to one store or one theatre. If we want to shop, we are not limited to having to go to a mall or store. If we want to become a famous media star, we are not reliant on one agent or one label. If we want to work, we are not confined to one office, or even to one company. If we want to enter into financial transactions, we are becoming less dependent on one financial institution or system. If we want to learn new topics we are not forced to pay tuition to one institution to learn them. If we want to become a politician, no need to rise up within an established Party, a strong Twitter following will do the trick. If we want to become a boxing star, we don’t have to develop boxing experience in a sanctioned association (we can just become a YouTube star and jump the line into a money-making fight!)

People have increasing access to opportunities through an expanding variety of channels and this is very clearly having an impact on how our lives function. This puts incumbent systems, companies and assets at risk. If you are a retailer is your competition one other retailer? Or is it the 1 million businesses on Shopify? Does it even matter if competitor business models are profitable or not? Many incumbents, who are used to fighting a handful of known opponents with a familiar set of weapons are now blindfolded trying to fight a fragmented army with each solider having differing goals and weapons. Companies and investors whose models relied on centralized businesses and assets are facing the dilemma of whether to re-think and re-model their business with high costs and high risk or to remain status quo with likely much higher cost and higher risk.

Implications for real estate

Real estate is no exception and norms must be re-thought. As we continue to be able to do most things from almost anywhere, the question arises, what type of physical space will we find valuable? Sometimes a glimpse into public expectations can be found by looking at public markets. It is interesting to note what investors found valuable 10 years ago and what they find valuable today. In 2011, 5 of the top 5 companies¹ in the MSCI US REIT Index were owners of what I would call “centralization-enablers”, the types of properties that enable people to congregate together, whose values increase with more demand from individual users. The types of properties in this group were malls, offices, and multi-residential. Today, 4 of the top 5 companies² are “decentralization-enablers”, where the more they allow people to carry out decentralized functions, the more valuable they are. This property list includes industrial, data centers and self-storage. Interestingly, the people-count inside these buildings are extremely low compared to centralization-enablers. According to the public markets, the most valuable type of real estate is seeming to house the least amount of people inside it.

Venturing off the REIT indices and looking at 7 of the 10 most valuable companies in the world, Microsoft, Apple, Amazon, Alphabet, Facebook, Alibaba and Tencent, it seems that the global markets are also valuing decentralization-enablers as these companies create value by allowing their users to do many things from most places.

This does not mean that we will cease to value human to human or group interaction nor that we will cease to congregate in crowds. But it does mean that people have more options than ever and centralization-enabling assets will have to rethink and reinvest to create and sustain appeal.

Property-specific implications

Look across any property type and there is likely a technological or societal shift that will significantly change its attractiveness positively or negatively. Decentralization-enablers appear to currently be in the lead. Here are some examples of technology-enabled structural trends and potentially impacted property types with those impacted negatively in red and positively in green:

E-commerce: Malls, warehouses
Digital work: Offices, apartments, condos, single family homes, cottages/secondary dwellings, beachfront property, data centers, cell towers
Shared accommodations: Urban hotels, single family homes, apartments, condos, cottages
Food flexibility (delivery, pickup): Restaurants, grocery stores, cold storage
Online fitness: Gyms, individuals’ homes
Virtual medical care: Medical offices
Remote education and free online learning: Universities, individuals’ homes
Biotechnology, health improvement: Independent seniors housing, life science campuses

Being negatively impacted does not mean that the impacted property type is dead or without value. It does, however mean two things. The first being that pricing expectations for these assets will likely have to reflect future assumptions that differ materially from past reality. And the second being that they are facing decentralized competition and can no longer rely on broad tailwinds to increase their values. They will require innovation and capital investment to stand out versus vs their decentralized competition in order to secure their place in the new economy. They will need to work to create and curate culture, purpose and function for their users. Those that can successfully do this will thrive. On the other hand, the property types in green will largely benefit from widespread tailwinds that should be supportive of increasing values for the foreseeable future. It will not be enough to look at trends today and project them into the future. With such rapid acceleration of technology and innovation it will be useful to assume that every business, including the disruptors, can and will be disrupted at some point with timing being the most difficult question to answer. With a long-term asset such as real estate, it will be most fruitful to find the assets that have the longest runway until this happens and keeping a keen eye on societal and technological changes will be paramount.

1 Simon Property Group, Equity Residential, Boston Properties, Vornado Realty Trust, General Growth Properties https://www.reit.com/sites/default/files/returns/FNUSIC2011.pdf

2 Prologis, Equinix, Public Storage, Digital Realty Trust, Simon Property Group https://www.msci.com/documents/10199/08f87379-0d69-442a-b26d-46f749bb459b