Are Your Real Estate Investments Ready for the AI Revolution?
Welcome to another edition of The Private Investor, a monthly newsletter that provides insider access to private real estate’s latest trends, brightest minds, and top investment ideas.
This newsletter is a 4-minute read.
Make a trend your friend.
In 2013, Starwood Capital raised eyebrows when they went all in on a new investment strategy. That year the firm acquired 7 regional shopping malls for $1 billion. Over the next two years, they gobbled up another $6 billion.
Fast forward – the esteemed firm has since defaulted on most of its loans and lost control of its mall portfolio.
What went wrong? Starwood believed weakening mall performance created an opportunity to buy assets at a discount in what was still a core property sector at the time. However, they underestimated the trend of e-commerce. In 2013, online sales were still less than 10% of total retail sales and Amazon’s market cap was only $125 billion (vs. ~25%1 and ~$1.9 trillion today).
How do I know all of this? Because I worked at Starwood as a young financial analyst while the firm went on its buying spree.
It was an important lesson to learn early in my career. Never underestimate a technological trend and its potential impact on physical space (aka real estate).
Today, that technological trend is artificial intelligence. As an avid daily user of AI, I believe its future impact should be taken seriously by all real estate investors.
What is AI?
Most of us really only became familiar with AI in November 2022 when ChatGPT was first released to the public. Immediately, people were awed by the text and image generation capabilities (fyi - I used DALL·E to make the futuristic image at the top of this newsletter in less than 10 seconds).
But AI is more than just Siri on steroids. As an engine that can “learn” when fed reams of data and information, AI is already being “trained” in specific and complicated disciplines, like law and medicine. It doesn’t just answer email using your tone and humor. It can write legal briefs citing case law that would have taken hours for lawyers to dig up. Even mental health professionals are starting to use AI to diagnose and counsel people in crisis.
The future is already here.
You don’t need to look too hard to see AI’s impacts on businesses already. Swedish financial technology company Klarna said its AI assistant is so good it can do the work of 700 of its customer service pros. They then laid off those 700 workers, and estimate the move will improve profits by $40 million in 2024.
Filmmaker Tyler Perry was so awed by AI he changed his mind about building an $800 million studio expansion in Atlanta. Perry explained, "I don’t have to put a set on my lot. I can sit in an office and do this with a computer."
And the companies leading the growth of AI see massive expansion. Microsoft and OpenAI are planning a new $100 billion data center to house their new supercomputer. The facility could require its own nuclear power plant to operate it.
Which real estate sectors will be impacted the most?
Here are the winners and losers that I expect will come into focus in the years ahead.
Winners
Data Centers: The clear beneficiary as AI demands more and more computational power and storage. This was already a healthy sector, but is expected to have sustained growth as AI gains widespread adoption.
Industrial: If AI speeds e-commerce and increases profitability, demand for warehouses should continue to grow.
Life Sciences: Many believe AI will supercharge the development of new drugs and other discoveries. This trend is likely to increase demand for lab and production space.
Losers
Office: The most obvious casualty of AI. Already the new technology is replacing jobs and is likely to continue doing so. Demand for office space is naturally going to weaken.
Retail: E-commerce had already been growing, and any efficiencies it generates will only further fuel that. Unfortunately, that likely means more bad news for overall retail space demand.
Multifamily: This one is more controversial, but Cohen & Steers has theorized “displacement of jobs could lead to lower employment and reduce wage growth”2. I worry about this as well. If this happens, who will rent all the high-end apartments across the country?
Bottom line
Anyone who has toyed around with AI, or perhaps even implemented it into everyday life, knows it’s the real deal. And ChatGPT only launched less than a year and half ago.
Over the next few years, stories like the ones about Klarna and Tyler Perry will be the norm, not the exception. That’s why it’s so important to future-proof your new real estate allocations now, as your investments will undoubtedly be impacted by the rapid adoption of AI.
Starwood, for one, seems determined not to underestimate new technology again. In fact, they recently formed Starwood Digital Ventures to invest billions in the asset class set to benefit the most from AI’s growth.