Christopher Gannatti (CFA) and Eric Rothman (CFA)
New economy real estate can be easily described as real estate where other “megatrend” technologies and innovations occur. These are the physical buildings that house the internet and bio-life sciences technology.of A communication tower that transmits data. Properties related to logistics (especially e-commerce).
We also focus on markets and cities where innovation and technology are concentrated. For example, the golden triangle between London, Cambridge and Oxford is the site of many universities promoting innovation in biotechnology, life sciences and medicine.
Another example is South San Francisco, which has a mix of computer science, artificial intelligence (AI) technology, and life science technology. Boston, Tokyo’s Shibuya Ward, and Switzerland’s Geneva may also come to mind.All of these markets are highly concentrated in technology The economic composition of the industry as a whole.
These cities or regions have the fastest growing property types behind them. They are highly specialized, mission-critical properties and are in low supply.
Therefore, if you own these buildings in these locations, you may be able to claim higher than average rent growth. As such, ‘new economy’ real estate is the ‘best of the best’ and the ‘point of the spear’ of the real estate market.
Please note that this is not an old economy property. Residential and outdated office spaces are less included and outright retail properties (which are rapidly being replaced by the shift to internet purchases) are avoided. We have identified the following key areas for new economy real estate:
- data center
- cell phone tower
- Logistics facility
- Characteristics of biotechnology
- technical characteristics
Growing needs for data centers
We consume enormous amounts of data and this is increasing every day. Take YouTube for example. Over 500 hours of video are uploaded to our video platform every minute.1
Figure 1: Video hours uploaded to YouTube every minute as of February 2023
In one year, this is the equivalent of thousands of years of content. The same thing is happening on platforms like TikTok. If you sit down and try to watch all the video content on the internet from start to finish, you’re back in the dinosaurs.
That’s about it. Global data consumption has accelerated at a compound annual growth rate of 30% over the past decade and is expected to continue accelerating at a compound annual growth rate of 30%.2
This is a huge amount of data that needs to be processed and stored somewhere – data centers – so trends like 5G, Internet of Things and artificial intelligence are driving the demand for data centers as well. With the emergence of new AI technologies like ChatGPT, this will only grow further.
Better connectivity = more cell phone towers
We are using our phones more and transmitting more data. The big story from a macro perspective focuses on the transition to 5G. This “upgrade” will require more antennas and more service points.
We are building 5G now, and over the next three years, US carriers (and global carriers) will spend record amounts of money building their networks.
That level of investment directly benefits the owners of the communication towers. Every time a company installs another antenna on top of an existing one, it pays the owner of the tower underneath. So, we can see that there is a strong underlying demand, fueled by this macro trend of us all using our phones more.
Modernizing global supply chains
E-commerce is growing exponentially, fueled by the COVID-19 pandemic, accelerating a tremendous shift from physical stores to online shopping. This growing demand for e-commerce is driving demand for logistics and space for storing, processing, and distributing consumer products.
Facilities and warehouses related to e-commerce need to be large. At a glance, e-commerce supply chains typically require three times the amount of warehousing and logistics space than traditional brick-and-mortar supply chains.3
Not only that, but the building should be close to the consumer. When people place their orders over the phone, they expect their items to arrive within hours instead of weeks. However, as we know, there is not a large amount of empty space near cities that house many “shopping” consumers.
As such, we now see a very limited supply, as determined by the fundamental economic laws of supply and demand, leading to increased demand and higher prices charged by those who own those assets. You will be able to
Additionally, the actual machines in these buildings that facilitate the rapid processing of packages are unique and relatively rare. So to some extent, if you are the owner of these assets, you can charge whatever you want.
E-commerce companies have no choice but to use these valuable facilities. In fact, in many markets there is no asking rent for that type of property. They literally let potential tenants into the room and ask them to bid on the space.
Why do we need new economy real estate now?
The example above clearly shows the high level of demand for this type of property. But what about supply, and all-important valuations? Well, recent interest rate changes and the immediate impact on the public markets, and the repricing of all real estate, have pushed valuations down and likely to drop significantly. You have a unique opportunity to
Figure 2 shows how these multiples have changed over the past decade. What are the highs, lows and averages over the last 3 years? Looking at the position of today’s multiples, we can see that in each case they are well below the average over the last 3 years and at the bottom of the historical range.
So from a repricing perspective, now may be a good time to get into these sectors on the open market as they have already been repriced.
For those looking to invest in New Economy Real Estate, consider the WisdomTree New Economy Real Estate Fund (WTRE). It is designed to track the return after fees and expenses of the Center Square New Economy Property Index. Many of the ideas discussed in this blog are areas of immediate focus for this particular index methodology.
1 Source: Statista, February 20232 Source: Global Data Consumption Chart, Statista January 2023. 3 Source: CBRE, Impact of e-commerce on demand for industrial real estate
Christopher Gannatti, CFA, Global Head of Research
Christopher Gannatti joined WisdomTree in December 2010 as a Research Analyst, working directly with CFA® Research Director Jeremy Schwartz. In January 2014, he was promoted to Associate Director of Research, responsible for leading various groups of analysts and strategists within WisdomTree’s extensive research team. In February 2018, Christopher was promoted to Head of Research for Europe, WisdomTree’s London office where he will be based, in the European market he will be responsible for all WisdomTree’s research activities, and UCIT where he will support the platform globally. increase. Christopher joined WisdomTree from Lord Abbett, where he worked as a regional consultant for four and a half years. He received his MBA in Finance, Accounting and Economics from New York University’s Stern School of Business in 2010 and a BA in Economics from Colgate University in 2006.
Eric Rothman, CFA, Portfolio Manager at CenterSquare Investment Management
Editor’s Note: The summary bullet points for this article were chosen by the editors of Seeking Alpha.