We may be entering a new dot com era with Groupon watching its stock collapse and many questioning the viability of its business model. Facebook stock is off 50% from the offering and there are questions as to how they grow the company into new areas. Numerous internet, game, app, social media, credit card swiping and other startups are popping up all over, and just as happened last time, many will fail. The same mania as we experienced back in the nineties seem to be sweeping the coasts all over again. There are many very smart young people with cool new ideas which they are trying to turn into companies, and some will surely succeed or get acquired. Many others will fold fairly quickly. It reminds me of the early eighties when over 100 startups were each going to take just 10% of IBM’s business. It seems since the internet and Apple and Microsoft, we have these periodic surges of tech mania and dozens of companies start up, get some venture funding, go public and then blow up. Since I am too old to understand a lot of the underlying technology issues or even some of the concepts, I have no idea which might be good or which will fail. What I do know is many will fail and even companies like Groupon might fail. Just as I have witnessed since the early eighties, many of these smart kids have a great ability to come up with the next new idea, but they have absolutely no concept of a real sustainable business plan. Many are dupiciative and many will be overtaken by the next new idea before the first one really gets established.
Now we have a scientific breakthrough where they can store the Library of Congress in a couple of test tubes on DNA. How this is done is so far beyond my ability to understand that it is hard to grasp, but it is the lesson we need take away that is easy to grasp
Whether it is Groupon, Facebook, or one of the dozens of new apps, or social media ventures, many will fail or become financially hobbled. We just have no idea today which they may be. In the case of storing documents on DNA, it is not happening today, but it is coming. In five years or whenever, it will likely be sooner than later.
For landlords and others in real estate, you need to be very careful not to get swept up in the mania. You don’t really understand much about that field, and so you do not understand who is really a sustainable company and who will not be. Just because Groupon went public and was exciting a few months ago, does not mean it will survive. Or maybe it will and become larger. Those of us in real estate are really not well qualified to understand it well. Nor can any of us really understand a timeline for DNA storage or all that it might mean.
My point in all of this is to be very careful who you rent space to. What if DNA storage becomes commercially viable in 5 to 7 years. Do all the server farms shrink, go away, get radically rebuilt. What does this new technology mean to space needs. If everything can fit into a test tube who needs buildings. I have no idea. I just raise the issue as one you need to get a grip on as best you can if you are leasing a server farm to a tech group. Is Twitter a sustainable business model, or Groupon, or other similar ventures. Will then survive for 5 years or more. Will they get acquired and merged into Google.
While this is an issue for understanding any tenant, it is far more risk in the tech world today. Things are moving so fast, and new ideas are leapfrogging others within months. This current social media race, and app race, is very similar to the early eighties computer race and to the dot com era. I only suggest, do your due diligence on these types of companies carefully before signing a lease, check their true financial backing, and if they really have a unique concept, and never assume they will survive long term. There is just no way to really know today.
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Joel Ross
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.
