COMMERCIAL REAL ESTATE INVESTING IN MEXICO- THE END OF THE “SAFE BET”?

Facing catastrophic losses from the pandemic, commercial real estate investors in the US are turning toward technology as a hedge against an uncertain future.  Will Mexico’s follow suit?

Spanish version available here.

Historically, real estate investing has been a comparatively safe bet.  Back at the dawn of the dot.com era, investing in startups was only for those with the thickest of skin.  Huge sums of money were directed into hundreds of high concept startups like WebVan, Myspace, eToys, only to spectacularly sink, without a trace, below the waves.  Real estate investing, especially the commercial kind, was seen as a much more stable path.  Even if the hot new startup that had rented your ten thousand square foot office space in SOMA went down the tubes overnight, there was another one right behind it – flush with VC cash and ready to move in.  Your investment was, at the very least, grounded in the actual physical brick-and-mortar building.  Its relative value was subject to overall market demand but the fundamental value proposition – housing office workers – was unlikely to go to zero.   

Then around the mid 2010s this conventional wisdom was challenged.   Ideas and concepts, especially those that were expressed as software, became increasingly more valuable.  Tangible assets and physical locations, while once a cornerstone of lasting value, began to be viewed as anchors – making it more difficult for their owners to adapt quickly to the changing needs of the market.  This shift was seen in the markets as traditional companies like General Electric, ExxonMobile, and Pfizer were replaced by Apple, Facebook, Google and Amazon as the most valuable in terms of brand and market cap.

Perhaps most galling to the real estate investment world was the success of AirBnB and WeWork – two high-concept tech-oriented newcomers that crashed the real estate party and built a market cap for themselves worth many times that of the traditional real estate investment funds that had been slogging away for decades.

Then came Covid.

The “virtualization” trend that had been ominously hovering in the background became the dominant paradigm – overnight.  Within a month, commercial offices went from bustling centers of culture to cavernous, silent tombs.   James Gorman, the CEO of Morgan Stanley, which until last year had been the largest office tenant in New York City with more than 180,000 in-office workers, recently stated that they have “proven we can operate with no footprint.”  The impact of “working from home” will have a dramatic impact on the entire urban ecosystem:  from transit to restaurants, to taxes. 

And the pain may be just beginning.  The historical reliability of commercial real estate as an asset class may be its undoing as massive borrowing was done against what was, until recently, a secure income stream.  As tenants allowed their leases to expire and others became unable to pay their rents, property owners began to fall behind on their debts while the number of defaults continued to climb.

After spending months in denial, many of the more forward-looking real estate investors took action.  After sitting on the sidelines and watching the value of the companies that empowered the office virtualization (Slack, Zoom, Amazon) skyrocket, they decided, if you can’t beat ‘em, join ‘em.

The second half of 2020 saw a flurry of investment activity in property tech with newly-formed private equity vehicles called Special Purpose Acquisition Companies (SPACs) merging with existing Proptech startups.  In July, Porch merged with Proptech Acquisition Corp (at a value of $523 million).  In September, OpenDoor agreed to merge with Social Capital Hedosophia II – taking the private company public in the process.  While in November, Tishman Speyer, one of the largest commercial real estate landlords in the US launched a $300 million fund to invest in Proptech.

These are just the tip of the iceberg with real estate investors flocking to Proptech companies in droves.  The recent pandemic was the catalyst needed to motivate the real estate investment community to look to the future.  While traditionally slow to adapt to technology, this market is making up for lost time.

But what about South of the border?  Will Mexico’s traditionally lucrative real estate sector make a similar move?

If real estate investors in the US are some of the last groups to jump on the tech bandwagon, their counterparts in Mexico seem unaware that the bandwagon even exists.  In general terms, Mexican tech investment, as measured by VC funds deployed, is less than one half of one percent of that of the US.  Even corrected for size of GDP, the amount is tiny.   Of that meager amount, only 7% is invested in Proptech.

For Mexico, automating and modernizing the real estate space represents a huge opportunity.  Property owners, both big and small, have a tremendous advantage.  They can invest in early stage Proptech startups at low valuations.  Then by providing guidance and by deploying these solutions throughout the network of their buildings, they not only increase the value of their real estate holdings through modernization, they drive a dramatic increase in the valuation of the startup.  Later stage investment rounds, either with a VC firm or via private equity, at much higher valuations would allow them to cash out a portion of their holdings at many many times their cost basis.         

So far we’ve created and launched two Proptech-related startups.  The first, LobbyFix, is a visitor management solution that is seeing rapid adoption in buildings such as Distrito La Perla in Guadalajara and Fibra MTY in Mexico City and Monterrey.   The second, EasyLex, is an online platform that makes it easier to create, negotiate, execute, and store legal documents such as rental contracts. 

Although the pandemic has dealt a tremendous blow to the commercial real estate marketing in Mexico, predicting the end of office hours may be premature.  Working together, face-to-face, is a basic human trait that goes back to the beginning of time.  The effects of COVID 19, while unprecedented, are unlikely to entirely rewire the human need for connection.

Working remotely may have seemed a panacea initially, but its downsides are starting to show.  For many, especially developers and other tech workers, one’s social group is formed by co-workers.  It seems that the lack of  in-person meetings, and hallway conversations, has driven a proliferation in workplace anxiety and depression.

Likewise it’s difficult to build a sense of group cohesion, or shared purpose when co-workers exist only as Slack names.  Company culture is built through the day-to-day, real world interactions and without it, employees feel more like replaceable cogs in the machine.  With this as a background,  employee motivation and retention become difficult.

In the end, when offices do tentatively start opening, the reasons we were originally drawn to the office are likely to reemerge.   When the in-person teams begin to feel more productive and energized, we’ll see a subtle motivation and drive to “rejoin” the herd.  Missing out on the water cooler or board room gossip will eventually leave remote workers out of the loop and at a disadvantage.  As vaccines become the norm and the pandemic fades, we can expect that some hybrid model will emerge.  The traditional 8-5, Monday through Friday office hours may be a thing of the past but it’s equally likely that most employees will want to put in some sort of physical appearance.

While the pandemic has certainly highlighted an uncertain future for in-office workers, a hybrid model, with workers balancing their time between office and home hours, is likely to emerge as COVID recedes.

This brief pause, or realignment of the real estate sector represents an excellent opportunity for property owners to rethink their relationship with technology and the future.  Those that understand this reality and aggressively diversify their portfolio to include Proptech will be at an advantage as this brave new world emerges.