Our expert insight series continues with Norm Miller, PhD, the Hahn Chair of Real Estate Finance at the University of San Diego. He has helped develop real estate analytic products and tools to support financial institutions, banks and investors, including valuation models, mortgage risk products, and using machine learning for data analytics. Currently, he is helping to manage Hanapepe Holdings, an investment management firm. We caught up with him to see how different real estate asset types are changing in the post-COVID era and how the future might play out.
Dr. Norm Miller, Hahn Chair of Real Estate Finance at the University of San Diego
Could you start by telling us a little bit about your background and why you chose your career?
As an undergrad I was interested in architecture and engineering and ended up taking a number of real estate courses. I became President of the Real Estate Society at Ohio State, and later got three degrees there, including my PhD.
While there as an undergrad, I met Dick Royer because of my involvement in the Real Estate Society. Dick helped me buy my very first property in the senior year of my undergraduate degree program. I used my own (borrowed) equity and convinced three friends to come into the deal as partners on a four-unit rowhouse. And that was really my start.
On that deal I got to act as the broker, the property manager, the partnership manager and the contractor doing upgrades. I learned so much from that small-scale investment. That deal, combined with my studies, made it obvious that real estate finance, investments and economics were strong interests for me.
After we sold that property, I acquired another one on my own and continued, deal-by-deal while in grad school. The hands-on experience, combined with real estate coursework, provided a complimentary perspective. The key thing was having a mentor who helped give me the confidence to buy that first property.
Considering the COVID-19 outbreak, what are your thoughts on the CRE market in the US today in terms of trends and challenges?
We were already automating jobs and moving towards more e-commerce and COVID-19 simply accelerated underlying trends by 5 to 10 years. The trade war with China has hurt the U.S. economy, but in general, we know the following about each property type:
Most at risk are: hotels, senior care, airport and tourist oriented retail, conference centers, movie theaters, student housing, regional malls, co-working platforms and many offices, especially those with proptechs will take a hit.
But at the same time, there are many property types benefitting from the accelerated changes including: data centers, bio-tech life sciences, industrial, self-storage, medical office and health clinics, grocery and drugstores, ghost kitchens, and micro-fulfilment centers. The immediate problem for those at risk is rent collection and how much the stimulus checks mitigate underlying risks that will surface in August or so.
Challenges are many, including operational and protocol changes, design changes, renegotiating loan terms (impossible for CMBS) and dealing with new consumer protection proposals that are consumer oriented but ignore the owner side of the equation.
How have you seen the industry evolve in the past years?
Automation of building (BIM), and operations and facilities management has accelerated and now we have everything connected, from every item in a building to every person. We have yet to fully exploit the capability of these new tools, from construction to video touring to automated facilities management, but we are starting to do so, and firms like Microsoft and Google and Schneider Electric are showing us what is possible. Hundreds of proptech firms have sprung up and some will change our industry, from automated appraisal firms to touring, financing and closing remotely. Firms like OpenPath and Docusign, and Collateral Analytics (now Black Knight) are examples of the future services and efficiencies possible, but they will displace some people along the way, so try and pick a career path that cannot be automated away.
Where do you see it going in the future?
Touchless everything, better air quality, more energy efficiency, more self-generated power and microgrids. Designs that maximize productivity while being more sustainable and buildings that can be easily reconfigured and taken apart. In terms of what we develop, we should be doing more re-use and mixed use, live-work units, live-play units, live-work-play all in the same complexes, with less car ownership, and more shared amenities. Again, automation will play a major role making the transactions and management of buildings easier and better, but with some pain of transitions and displacement.
Are there any lessons from the past few years that you would impart as an absolute must for those looking to get into the CRE industry?
Get a good mentor, or two, or three. Ask them lots of questions about past recessions and strategies to prosper afterwards, including distress investors, facility managers, project managers, asset managers, brokers’ lenders and developers. Get a Master’s in Real Estate, at a top-notch program in a city you would not mind living in and working in the future, like the University of San Diego.
Also, you are never too old to have mentors and mentor others.
What is your general assessment for the commercial real estate market in 2020? Have you spotted some interesting market trends, especially considering the current pandemic?
Normally we have demand decrease and too much supply, but this time supply also pulled back and so the price effects on some markets like single family residential are not clear. Interest rates are very low, and capital has no place to go. Bonds are too risky if rates climb, so cap rates may not go up much. We may see May declines in prices, with June and July increases based on all that stimulus money and then August stabilize. By fall we will see lower priced tiers decline in price as the longer-term unemployed run out of benefits and state and local governments cut back on personnel. We have never had a market with so much of a safety net and federal stimulus before. Of course, these endless checks written in haste will need to be paid back by the next generation or two and that will result in a very painful depression when we can no longer kick the can down the road, maybe by 2030.
There will be several good distress opportunities including lower priced single family, failed department store-owned real estate, some highly leveraged hotels, restaurants, theaters, car lots and more. Next cycle, business owners will keep more reserves and not live month to month. Households in the U.S. may learn to save more as well, all of which will make us more resilient next time.
How do you think the evolution of online marketing has impacted the commercial real estate industry?
No question, future retail will be a hybrid, and we will see new real estate tenant types like ghost kitchens and micro-fulfilment centers. We also will see a higher proportion of experience tenants and less in-store goods as a proportion of the total retail pie, a trend we have already seen for many years, but now accelerated.
Any other insights that you’d like to share?
Financing will be tighter for a while with more conservative loan to value ratios, and more reserves required, but if flood risk and hurricanes provide a history lesson for us, we will mostly forget about all the risks of the next pandemic in about two years.
We should also keep in mind we almost never beat or wipe out a virus, we merely control infections better over time, so we can expect another wave and then another wave of this virus, which may help prolong our memories just a bit longer than when we are flooded from storms.
Dr. Miller is the Hahn Chair of Real Estate Finance at the University of San Diego (USD), and is affiliated with the Burnham-Moores Center for Real Estate. He is also Vice-President of the Homer Hoyt Institute, a think tank of global real estate scholars and industry research directors.
Prior to joining USD, he was Academic Director and the founder of the real estate program at the University of Cincinnati. He received his Ph.D. from the Ohio State University from the Finance department. Currently he teaches in the MSRE program at the University of San Diego.
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