Core Can Become White Elephants

The digital revolution will have more impact on real estate that almost anyone realizes. The change in the way the new generation of workers-under 30- functions and looks at work and where they work is entirely different than any generation preceding it. They live mobile on their smart phones. They are not committed to any employer and they demand sustainable buildings and other similar things. They function in ways that are completely different than the rest of us who are over 30. In addition, large corporations are beginning to react to these trends and are reducing space requirements, demanding sustainable buildings and buildings which can easily accommodate the digital and power demands of the coming era.

What are the implications and when? This revolution is here now and moving at a speed unlike anything we have ever seen in history. Ramp up time for social networks, smart phone usage, apps and other related things happens in months not years, and by tens of millions. These kids are simply refusing to work the way we did and are quickly forcing corporations and law firms and others to adapt. The kids are able to readapt to new trends at light speed because they know all about it in a click as opposed to have to wait for the memo from on high. Change is the standard by which they live.

The result is core is not going to be the same in ten years. Old core assets in major cities like New York will become empty white elephants unable to compete for major tenants without huge retrofit expenditures and even then some of these buildings will simply not work in ways to meet the coming requirements. New air handling systems, huge power availability to every floor, issues related to light and clean air. As corporations require buildings with these attributes the old buildings will simply not be competitive. There will also be much less space required at headquarters. Large companies are now starting to set up satellite locations where employees can go periodically with their I Pad or laptop, hook into the Cisco teleconference system and be part of major meetings. In time it is likely that a Skype type system will become routine where staff can be anywhere and fully participate in video link to any meeting as though they were there.

While many of us feel, probably correctly, that there is no substitute for face to face, in person collaboration, and that will always be true, there is already a drift to some staff being out of the office a lot of the time. This means less space needed in headquarters. Just ask AT&T or several other major users where they think real estate space usage is headed and you will get a first hand understanding of what I am talking about.

For those of you buying what is today, a class A core asset with a major tenant, you need to wake up to reality. Depending on the building and its attributes, and the term of the existing lease, you may find at lease expiry that you have a white elephant and not a core asset any longer. It may become a huge loser for you if it is old and does not meet the requirements of core tenants 10 years from now. Manhattan is about to see the largest boom in new large office construction in possibly 30 years. These will be buildings which accommodate all of the things I mentioned above. That is no accident of the capital markets. It is the realization of some forward looking landlords to understand where the world is headed. If you are a large owner of old buildings which may seem like icons now, you will be in for a rude awakening ten years or sooner form now.

The digital revolution has drastically changed the new generation way of living and working

and it is happening at a speed you cannot comprehend. If you do not quickly learn how this is all

happening, you will be very regretful.

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Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.