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The 4 CRE bets that will pay off for risk-takers in 2017


Success in commercial real estate is all about identifying risky opportunities and betting on them for a big payoff. Which trends are ripe for exploitation in 2017? PwC and the Urban Land Institute's annual Emerging Trends in Real Estate report offers four suggestions:


1. BE A PROBLEM SOLVER IN THE MIDDLE OF THE CAPITAL STACK. Between lenders keeping LTVs low and senior equity seeking to manage the amount of capital they have at risk, a need exists to secure either subordinated debt or preferred equity to make deals fly.


By far, the choice right now is preferred equity. Lenders’ regulators strongly tilt toward more equity, and capital sources think it’s better to hold the equity position in case of future trouble, rather than find themselves members of a creditors’ committee and subordinate to a senior lender.


The real estate niche where such capital is most needed is in development, since high-volatility real estate lending most often means land and construction financing. With the generally low levels of building activity, preferred equity providers can be pretty selective about the market and property type risks they choose to take on.


2. TAKE ADVANTAGE OF CHANGES IN CONSTRUCTION TECHNOLOGY. The building industry is seeing accelerating technological change. Technology is evolving rapidly and will advance further, even in small shops, with job sites featuring integrated software systems, data mobility, and real-time communications.


With delay costly, keeping the project timeline is ever more valuable. Off-site construction—prefabricated or modular building—is working through its growing pains.


Factory-built housing has been around for quite a while, but adapting the concept to high-rise projects is now on the docket. Fabricating whole segments of buildings and trucking the completed units to sites has advantages in cost and speed, in part because weather is less of a factor and workforce supervision is easier.


3. SECURING THE 'LAST MILE' ADVANTAGE IN THE ERA OF E-COMMERCE. From a real estate standpoint, having an in-city distribution facility is the very antithesis of the land-hungry exurban warehouse.


Promise next-day delivery and you might be able to get away with an out-of-town fulfillment center. Promise same-day delivery and you had better be a lot closer.


Customers care about cost, transparency, speed, and frictionless transactions. If you are committed to delivery within a few hours, you need to have inventory in places with high densities. 


4. FIGURING OUT THE NEXT 'ADJACENCIES' IN PATHS OF GROWTH. Looking for the next neighborhood or suburb in the established path of growth is the key to getting ahead of the market. Advanced geographic information systems can help.


The real estate sector now benefits from databases with geo-coded sales information. Instead of relying on decennial U.S. Census Bureau data, the American Community Survey tracks trends annually.


Major changes in transportation systems are known well in advance and can help identify when accessibility characteristics will shift.


Traffic maps are now updated almost to the minute, and so patterns of congestion are readily identifiable.

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