By Julie Eisenhauer, CPA

I recently had the good fortune of moderating a panel of real estate and cybersecurity experts on the challenges facing asset managers. Many thanks to the following for sharing their knowledge with us: Bill Pollard, Managing Principal at Talon Private Capital; Greg Duff, Owner of the law firm Garvey Schubert Barer; and Susan Stead, Principal at insurance firm Parker Smith & Feek.

The conversations between the panel and the audience were engaging and wide-ranging, so for this article I distilled the event down into three main takeaways for real estate asset managers.

1. When it comes to sustainable growth, you need to be creative to add value.

Bill Pollard pointed out that, as pricing and valuations of commercial real estate have increased, there is also a lack of product and opportunity. Properties are full and rent is high, and owners have no reason to sell. Therefore, one should establish a possible migration of demand – pick a center and determine a perimeter of leakage. Bill sees a trend of not accecall out box outlinespting secondary/tertiary submarkets but expanding existing markets. But what does that type of expansion look like? He gave an example: downtown Bellevue has a diversity of amenities, transportation, and housing. One could buy real estate just north of downtown Bellevue, but an ecosystem needs to be created by providing a comparable set of amenities. In short, creativity comes into play – for example, bringing in food trucks or providing shuttle buses to transportation. Stretch and pull the amenity base to a broader area to add value, and be a first mover on this.

2. New trends in managing real estate

Greg Duff sees the role of tenant improvement (TI) allowances as being not as important as it was 10 years ago, and in most cases TI’s are a bad thing for the average space (the exception being restaurant spaces). More tenants are requesting “flex” space so that the space is adaptable for different uses.  He pointed out that when you start putting in gyms, showers, pet policies, etc., you need to negotiate a flexible schedule so all tenants needs/concerns are accommodated.

On the risk side, Susan Stead advised that landlords need to focus more on the details and not be in a hurry to get a deal done:  Does the insurance policy have a clause about pets/dog bites? What if the food truck runs over someone – who is liable? She stated that landlords need to bring everything to the insurance person’s attention. If it’s not defined in the lease, you need to figure it out.

Greg also said he’s seeing attention being paid to triple net leases. The state of the building is of major importance. Bill agreed and said that CFOs should pressure landlords on this.

3. Trends in smart buildings and technology – what’s important?

Greg sees more hotels are turning to artificial intelligence for managing building maintenance. There are alerts for aging parts and maintenance for more efficiency. From a tenant’s perspective, Wi-Fi strength and agility is important but that it comes with responsibility. Is the Wi-Fi encrypted? How secure is it?  Greg suggests that if connectivity is provided, use every disclaimer possible and consider it in the same way as a utility.

There was a discussion about smart buildings from a safety perspective. For example, if a tenant is an early morning worker, lights can come on automatically when they enter and let them know which elevator is available; however, a digital profile is then being created. If technology is smaller and portable now, the cost can be scalable. Because no one owns their own digital footprint,  the question for consideration should be, “Is it ok that someone has all of this digital information on me?” Greg said there should be an expectation that third-parties can harvest data and own it unless they are told otherwise.

So, how is technology risk mitigated? Susan offered that, while technology moves quickly and some risks can be insured, a company’s policies and procedures need to evaluated as well. If a building’s technology shuts down and the tenant can’t get in, is there business interruption insurance on smart systems?  She said there also needs to be an understanding of tenant expectations. There are cyber-liability policies available, but those are perhaps not as extensive coverage as some would like. The underwriters haven’t caught up with cyber criminals. Bill adds that there’s a movement to pull back with regard to cyber liability, the prevailing thought being, we’re providing a space, it’s up to tenants to cover themselves.

Other Items to Note

The panel discussion included observations on ADA enforcement by third parties, earthquake coverage, insurance disputes, and data analytics – all of which I’ll cover in my next article. In the meantime, please contact me if you have any questions about the topics covered here.

© Clark Nuber PS, 2017. All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.