2nd Quarter, 2017
Just Hummin the Summertime Blues: …. blue sky, warm evenings, long days and cool nights….lots of family time….lounging like lizards…time to reflect on the past 25 years working on DJM…Nonetheless, busy times as we launched our $500 million net lease Fund II, the recapitalization of Lido Marina Village, the completion of two creative and complex proposals for a large marina/retail repositioning in Southern California, and an iconic retail “reimagining” project in downtown San Francisco, along with our recent success in winning the creative and competitive contest to rebrand and re-tenant The Runway in Playa Vista (props to Alanna Bram and Stenn Parton of DJM). We are also in the early stages of creating an analytical scoring/risk computer program based on big data specific to single tenant net lease retail. Technological advances have impacted every aspect of our lives, and commercial real estate is no exception.
Knock Knock, Who’s There?: Predictive Analytics & Neural Networks-That’s Who! What? A computer system modeled on the human brain and nervous system-a humorless robot! In light of all the buzz around, “Artificial Intelligence” and “Machine Learning”, I began researching the feasibility off combining targeted market socio-demographics (markets DJM has identified) and tenant credit as a basis for quantifying risk and “Scoring” the acquisition based on defined data points. I went deep down the rabbit hole and learned how we are in the depths of the most socially disruptive period of our lifetime. A recent article in Tech Crunch suggests that “the efficacy of machine learning, more than anything else, has been responsible for ushering in a new era of artificial intelligence; the neural network may well be one of the most fundamentally disruptive technologies in existence today. The early concept of AI taught that if you load up as much information as possible into a powerful computer, it ought to be able to “think.” Known as deep learning, or neural networks, this technology has been around since the 1940s, but because of today’s big data, along with supercharged computers, it is at last able to fulfill its true potential”. DJM isn’t breaking new ground but simply following what other investment managers, like Blackstone, are doing; harnessing the massive amount of consumer behavior, regional demographics, company financial performance, household income, personal consumption-the data points are infinite, in-store and on-line sales, etc… all with the emphasis on patterns and risk.
Rome and Algorithms weren’t built in a Day: No surprise that our industry’s use of predictive analytics based on tracking nearly every human behavior through our smart phones, social media and internet searches has recorded our every habit, travel destination, shopping history, restaurant visits, medical prescriptions, media consumed, ad nauseam: Anonymity is a thing of the past.
Is This the Future (of Gordon’s Pizza): “Hello! Gordon's pizza? - [Computer voice responds]. No sir, this is Google pizza. Sorry, I must have dialed a wrong number. No sir, Google owns Gordon's Pizza. OK. Take my order please. OK sir, would you like your usual. The usual? You know me? According to our caller-ID database, your last 12 orders were for pizza with cheese and sausage toppings, thick crust and crisp. Wow; you’re right! That's it! May I suggest this time you add ricotta, arugula with dry tomato toppings? What? I hate vegetables! Your cholesterol is not good, sir. How do you know that? We cross-matched your phone number with your name and your online medical portal. We have the result of your blood tests for the past 7 years.
Okay, but I do not want those toppings, I already take medicine. Excuse me, but you have not taken your medicine regularly. We can see from our database, 4 months ago, you only purchased a box with 30 cholesterol tablets at CVS. I bought more from another pharmacy. Such a transaction is not showing in your credit card account. I paid in cash. But you did not withdraw that much cash according to your recent bank statements. I have another source of cash. That is not showing as per your latest tax return unless you obtained it from an undeclared income source. “WHAT THE.....” I'm sorry, sir, we use such information only with the intention of helping you. Enough! I'm sick of Google, Facebook, Twitter, WhatsApp. I'm going to an Island without internet, cable TV, where there is no cell phone service and no one to spy on me. I understand sir but you'll need to renew your passport first because it expired 6 weeks ago.” Thank you, Marc Shea…
Can’t Tweet This: Based on Amazon’s $13 Billion purchase of Whole Foods and Warren Buffett’s $377 million investment in STORE Capital, the merging of in-store and on-line consumption is well established, clearly validated by these two. Wren Capital, DJM’s placement agent for Fund II, studied the potential impact of on-line sales coupled with in-store purchases for the net lease properties, in general, and Whole Foods in particular. They found that “underlying the acquisition of Whole Foods, Amazon fully comprehends the value of the multi-channel shopper. Statistically, this shopper consumes/ spends 2-3xmore than a single channel customer”. Jeff Bezos has 13 billion reasons to exploit these sales channels as do I, which is why I continue to be bullish on daily needs retail, both multi-tenant and single tenant properties.
Tech’s Collateral Damage: Putting people out of work by eliminating jobs; replaced by thinking machines? What is “universal basic income (UBI)”? A controversial topic addressing income inequality and the disruption from tech on the workforce and the potential for grave financial and social consequences. A recent report issued by PwC forecast that more than a third of U.S. jobs were at risk from automation; a guaranteed paycheck could offset potential poverty/unemployment in the future U.S. economy; Tesla CEO Elon Musk, Facebook’s Mark Zuckerberg and eBay Founder Pierre Omidyar are big fans of UBI. Many economists today nervously eye the wave of disruption posed by automation. Robot-to-worker ratios are increasing at a steady pace worldwide, and that has broad implications for a workforce lacking in technology-related skills. A 2016 analysis from the World Bank estimated that roughly two-thirds of all jobs in developing nations are susceptible to replacement by automation and that 47% of American jobs could potentially be displaced by robots and automated technology over the next 20 years. "To ignore the possibility and not plan [for automation] would be a huge mistake" warns former Microsoft CEO Bill Gates… "Studies all say there will be a massive disruption in jobs." As your investor manager, it is one of DJM’s task to remain vigilant on the growing impact on consumers and tenants by tech, and invest accordingly.
So Where were We?: “Back to Long Days and Cool Nights”...Thanks to Eddie Cochran, humming the summertime blues goes like this- “I'm gonna raise a fuss, I'm gonna raise a holler / About a-workin' all summer just to try to earn a dollar / Every time I call my baby, try to get a date / My boss says, "no dice son, you gotta work late"…Still no substitute for hard work.. Enjoy your Summer!
DJM Capital Partners, Inc.
D. John Miller, Founder & CEO