A Year of Change
I’ve learned over the years as an entrepreneur that not only do you need to keep innovating but be willing to break the status quo and embrace change. While most leaders thrive in flux, they overestimate other people’s ability to process change and today’s instantaneous technological shifts only exacerbate feelings of uncertainty and a loss of control.
Last September, my wife and I were recognized by the Orange County Business Journal with their Innovator of the Year Award in recognition of our disruption of the tried-and-true approach to philanthropy. Specifically, we developed an idea and platform to attract engaged philanthropists who retained discretion to fund best ideas within the healthcare space. You might envision a Shark Tank combined with a TED Talk where doctors pitch their ideas to our group about healthcare innovation that can tangibly impact varied practices and institutes while providing improved outcomes.
Kitty and I were convinced that other donors would follow suit with this relational and educational approach to philanthropy and, in fact, our field of dreams became a reality as five years later, over 65 families are now participating in Hoag Innovators. Interestingly, this new product and process attracted a new segment of the population not typically philanthropically engaged. To date, Innovators has made 19 investments ranging from NK Cell Therapy, which supports immunotherapy clinical trials for pancreatic cancer, to Invenio’s Laser Imaging which allows neurosurgeons to make more accurate and expeditious diagnoses to investing in Germ Zapping Robots to further infection prevention.
While proud of our growing philanthropic enterprise, it did not catch on overnight as donors were used to the standard way of giving. Similarly, the real estate investment business has not been well suited to an immediacy of change with its needed entitlement and development downtimes, extended nature of leases and changing use requirements. Fortunately, real estate’s foundational hard asset nature and operational necessity has enabled it to remain central to the evolving business models of inventors and innovators.
Looking back, 2023 has forced the real estate industry to undergo its own year of innovation, change and adoption. The capital dependency and leverage requirements of real estate has always caused its valuations and capitalizations to be vulnerable to the mercurial nature of the capital markets. While banks have been the work horse of real estate lending, their growing absence has forced a new breed of players to the market with varied innovative private credit structures providing the necessary liquidity.
Loans dressed as construction, bridge, mezzanine, and equity restructured as preferred or recapitalized equity have opportunistically arrived as rescue capital. They have led the market back to new price discovery allowing the greater market to value and predictably transact. In turn this private credit and equity is being funded predominantly by high-net-worth investors and family offices who recognize the associated opportunity as they have taken similar risks in creating their wealth as a first mover to providing solutions or as a creator of their own business.
Next, it is not lost on most that the office segment of the real estate industry is going through one of the most significant transformations in its history as users search for the right office use formula for their business. Capital has been virtually non-existent as current landlords and potential new participants look for some guideposts to tenant usage and appropriate market yields associated with the new risk model. The innovator or change agent, however, has recognized that for the well-located office asset, the bid /ask spread has narrowed allowing for a sound basis play affirmed by new leasing absorption. Equally important is the recognition that the right office environment, with enhanced amenity packages and common areas, will aid tenants in rebuilding a collaborative environment to both appeal to existing employees while attracting new talent.
Supplementing this office use conundrum has been a recognition by the real estate pioneer to understand an alternative or higher and better use to the existing office building through either its adaptive reuse or redevelopment given its key land value. Tenant users have become office building speculators realizing both the investment opportunity to house their operations and correlated decrease in their occupancy costs for owning vs renting.
There is no doubt that today we are recognizing some of the best buying opportunities in the past decade due to less competition and less liquidity. Necessary though for the innovator in capturing these opportunities is to have the appropriate conviction, the right set of current circumstances and an experience base honed through prior experimentation and cycle navigation. Buchanan, as it completes its 24th year, has prioritized the refinement of its business, and with clear judgement, to continually innovate as the market allows.
Just as Hoag Innovators has sought to redefine the way that donors direct and deploy capital towards new and improved healthcare, the real estate investment industry will continue to evolve its use of space, capital access and the return expectations for its market participants. Yes, for some, 2024 will be a reset and an acceptance of the going forward change quotient at play in today’s real estate environment. For most however, the new year should serve as a reminder that while our asset class has greatly matured with its educated workforce, its immediate access to information, its improved use of public debt and equity and finally its performance outcomes, it will still require innovative leadership with prescient vision to communicate its evolving future and lead its participants.