Why I Joined Fifth Wall
In a way, announcing my having joined Fifth Wall in a blog post perfectly encapsulates the dichotomy between the world I leave behind and the new world I am entering. Over the 20+ years I spent in investment banking, I penned more than my fair share of pitch books and memos, and even a handful of IPO registration statements. But this is my first blog, and I couldn’t be more excited about its subject matter: to announce my joining Fifth Wall.
I’m thrilled to have been offered the opportunity to join the firm as a Partner, where I will lead corporate partnerships and head up our capital markets business. I plan to draw on my banking experience — most recently as co-head of the US Real Estate, Gaming, and Lodging group at Credit Suisse — but also the relationships I formed during my long tenure in Equity Capital Markets and Sales and Trading at Deutsche Bank. After just a few short weeks at Fifth Wall, I know I made the right move, and I’ve truly enjoyed immersing myself within such a dynamic, innovative organization with such a fantastic, progressive team.
In order to understand why I ended up in this role at Fifth Wall, I think it’s important for readers to get a sense for how I’ve observed the real estate industry’s evolution over the past two decades. Because for the first time ever, and as is the case in every other industry in the world, tech FINALLY matters in real estate.
This technological transformation is happening fast — like hyperspeed fast — and tech is not something that most real estate owners, operators, or developers have ever been comfortable with. Real estate firms need technology evaluation and investment expertise to help them understand the opportunities in front of them. Based on its stellar performance and having secured 70+ leading real estate organizations as partners, it became clear to me that Fifth Wall was the leading tech-enablement platform for the real estate industry. And I’m excited to now help deliver the Fifth Wall platform to my many clients and friends throughout the real estate world.
So first, a little background on how we got here…
THE BEGINNING — REAL ESTATE THROUGH AN EQUITY MARKETS INVESTOR’S LENS
I spent the vast majority of my 21 years on Wall Street focusing on the publicly traded real estate sector. I learned early on that public equity markets tell a story about where we are headed, and I’ve always tried to look at the world of real estate through the lens of an equity investor — a perspective that has evolved over time.
When I was first getting started, REIT investors looked at REITs simply as collections of assets. These investors wanted to own shares of the REITs that owned buildings in the best locations and in the best markets. They measured quality based on traditional real estate metrics like “sales per square foot” for retail assets or “revenue per available room” (RevPAR) for hotel assets. They looked at value on a price-to-net asset-value (“P/NAV”) basis, driven by what the REITs had in place today — the real estate value of its assets — and not based on where these companies were heading in the future. As a result, the underlying REITs’ relative valuations were highly correlated to these metrics.
In addition, “institutional” real estate was cut-and-dry and consisted almost exclusively of office, retail, industrial, hotels, and apartment properties. Other segments of real estate were considered unappealing and hard to value due to concerns like barriers to entry, operational intensity, and high ongoing maintenance CapEx requirements.
This “conventional” way of investing in the REIT market persisted for much of my formative years in banking, and most CEOs, as a result, ran their businesses to respond to these first-order-metrics-driven dynamics. After all, a CEO is judged based on share performance, so it logically followed that REIT CEOs would run their companies in a way that appealed to the investors who were buying their shares.
CHANGING TIDES — FROM PORTFOLIOS OF ASSETS TO OPERATING COMPANIES
In the mid-2010s, however, I began to observe a shift in the behavior of real estate investors and, as a result, CEOs. This shift was directly related to three key trends that began to emerge:
- Many of the leading dedicated REIT investors were underperforming, and their assets were shrinking as a result.
- Generalist investors were taking an increased interest in the real estate sector and were becoming the marginal buyer of shares.
- Technology was beginning to have a tangible impact in significant, unprecedented ways.
Let me tackle these points one by one:
1. REIT Investors Were Underperforming
Many of the key REIT investors continued to invest as they always had, but it stopped working. In fact, their unwillingness to move off of their approach to investing made matters worse for them as the traditional sectors began to struggle. This made the stock valuations look even more attractive on a P/NAV basis. As a result, these investors allocated MORE capital to those sectors which lead to even GREATER underperformance, which of course led to a further DECLINE in assets under management. This is the opposite of a virtuous circle.
2. Generalist Investors Were Taking an Increased Interest in Real Estate
At the same time real estate was becoming a more meaningful part of the market at large. In March of 2015, it was announced that real estate would become one of 11 standalone segments of the S&P (other segments include Tech, Industrials, Financials, Consumer, Energy, Utilities, etc.-– real estate had previously been buried in Financials). This FORCED generalist investors to pay attention.
It also proved to be a massive catalyst for change. Generalists are stock investors, and those stock investors looked at REITs the same way they looked at other companies: as stocks, not as portfolios of buildings. They valued these stocks based on earnings and future growth, just as they did every other stock in the universe.
This turned out to be a game changer for real estate capital markets. It didn’t matter anymore if you had the buildings with the highest rents on Park Avenue or the hotel with the best RevPAR. Generalist investors didn’t care — they wanted to understand future earnings potential, and how management was utilizing their platforms and exploiting access to the capital markets for growth — both M&A and organic. They were buying into companies — not buildings — and picking the stocks they thought would outperform using a more conventional approach to investing.
The result: a generational shift. Real estate companies in non-traditional sectors began emerging as market leaders. Some examples:
- Healthcare — a play on demographics and aging of baby boomers;
- Data centers and towers — a play on demand for data storage and streaming;
- Cold storage and logistics — a play on eCommerce and last mile distribution; and
- Single Family for Rent — a play on declining home ownership and millennial demographics.
In addition, even attitudes within traditional sectors were flipped on their heads. For example:
- Apartments — investors began to favor B apartments in the sunbelt vs highrise in New York City and San Francisco.
- Hotels — limited service (think Hampton Inn) REITs were trading at premiums to their luxury peers (think Ritz Carlton).
- Retail — necessity-driven (think grocery or drug store anchored) became favored vs. high-quality malls.
It’s obvious now that this new paradigm is here to stay. While many CEOs have adapted their business models, others have been slower. They all need help since the decades-old playbook has been thrown out the window. Which leads me to point number three — technology.
3. Technology Was Infiltrating — and Disrupting — Traditional Ways of Doing Business in Real Estate
There have always been a handful of players in real estate who dabbled (mostly without success) in tech investing, but it never moved the needle. Today, much of the investor shift I highlighted above is being driven by technology. And importantly, the investors that are driving performance are focused on technology. THEY CARE A LOT! First it was the technology centric sectors outperforming (data centers, towers, etc.). But as time passed it was clear that CEO’s across the real estate universe needed to focus on tech for three reasons:
- Technology was DISRUPTING their businesses;
- Smart investment in technology could accelerate their growth and lead to outperformance; and
- Because investors started to demand it.
This has led to a few trends that are now emerging in the sector.
Operationally intensive businesses, which were historically shunned by REIT investors, could thrive. Utilizing technology would make these businesses more efficient and drive margins and outsized growth. This has opened up the REIT sector to a host of new interesting property types and, as a result, given investors a wider variety of investment options.
In the traditional sectors, most CEOs have caught on and are in the process of adapting. They can articulate an understanding of how their businesses are being disrupted and how they are responding. Plans have been laid out for using tech investment to accelerate growth, and these companies have begun to reap the rewards.
Unfortunately, some CEO’s have chosen to deny disruption was occurring to their businesses, fearing that acknowledging the threats would be an indictment of their company. Many of those same CEOs have decided that given their unattractive cost of capital, it would be too difficult to invest in innovation…so they’ve fallen further behind.
PIECING IT ALL TOGETHER AT FIFTH WALL
The third dynamic I outlined above — tech transforming real estate — is the most visceral and powerful. And I think it’s great that most real estate firms now recognize that tech is important. Many have realized that their companies are platforms that can utilize and exploit technology — not simply collections of assets. But they don’t know how to leverage their platforms. Fifth Wall can help them. They can rely on Fifth Wall’s ability to identify the best proptech companies and to provide distribution to help those companies scale. This is unique, and it benefits from Fifth Wall’s unmatched distribution — 70+ real estate firms from all around the world — which helps us generate massive alpha for all of our partners. Real estate firms can also rely on Fifth Wall to help them understand how to best consume technology, and that’s grounded in Fifth Wall’s unmatched uknowledge of…just about every proptech company on earth.
So there you have it. I was drawn to Fifth Wall because I want to help the real estate industry navigate this scary but exciting crossroads. For over 20 years I have worked closely with management teams across real estate — helping them tell their stories, navigating public markets, advising on capital raising, and evaluating M&A strategies. And it was always about driving shareholder value. This is paramount to every single CEO I’ve worked with. Today, the only way real estate CEO’s will succeed is by embracing and investing in technology — whether to address challenges and opportunities in their operations using PropTech or to decarbonize by investing in and utilizing new climate technologies.
The Fifth Wall model provides the best avenue for real estate companies to successfully achieve these objectives. I look forward to partnering with the Fifth Wall team to help the real estate industry execute on its objectives and to help the leading companies drive value for their stakeholders.
You can learn more about Jeremy, his previous experience, and how he plans to engage with Fifth Wall’s partners in the below videos.
Forward-looking statements and opinions as to real estate markets or any other matters, as expressed in this post cannot constitute a guarantee of future success or profitable results. As a result, investors should not rely on such forward-looking statements and/or opinions, or on anything else contained in this post, in making their investment decisions.
The information discussed above is presented solely for informational purposes and should not be interpreted as an offer or recommendation to buy or sell securities.
The portfolio companies described above may not be representative of all investments in funds managed by Fifth Wall, as the number and composition of investments will vary over time. There can be no assurance that any investment will be profitable or that future investments will have similar characteristics or results. Certain portfolio companies may be excluded from this list if the company requests that it not be publicized or included on this website. The inclusion of a portfolio company in the above list should not be considered a recommendation or endorsement of Fifth Wall by that company.