The Digital Revolution Impact On Real Estate

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We have all been hearing about Twitter, Facebook, Fliker andmany other forms of digital communication and how younger peopleare spending their time online, on mobile devices, and changing thesocial patterns. What you do not hear about much is the massiveimpact all of this is starting to have on real estate and the speedat which it is suddenly happening. Office space requirements arechanging at many companies, law firms, banks and other places.Private offices are quickly becoming obsolete in many companies.Open spaces and less space per employee is now becoming the rule.One major law firm has now set 210 sq ft as the space allotted toany person-including partners. If a partner takes more space it isdeducted from the available to others, so partners are gettingsmaller offices. The law library is gone. Paper storage is almostgone. The big secretarial pool is gone. The media, ad agencies, andsimilar companies are knocking down offices and making cubicles andopen spaces. Some companies have departments where two people sharea cubicle with one in the office two days and the other two orthree. With I pads, I phones, blackberrys and the like, many youngpeople work from all sorts of alternative locations. Just multiplythis times all the major companies, and the office space requiredin the future will shrink materially. Lease terms will require verydifferent TI and shorter term so the tenant can change as its needsreduce. Young staff-under 35- think it fine to be working from outof the office. Teenagers spend huge amounts of time online in oneway or another.

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Recruiting for law firms and other kinds of companies haschanged dramatically lately with the firms having to offer verydifferent work environments. Talk to young executives and they talkabout the environment more than anything. In retail the way storesaccommodate online shopping in the future, how stores are laid out,how brands promote themselves, is all changing rapidly. While brickstores are not going away, the demand for additional retail spaceis likely to be curtailed as more and more shopping is online. Itis becoming common for a physical store to be the showroom, andthen the customer goes home and executes the purchase online. Somefirms now give a new employee $3,000 on their first day to go buytheir own computer, but out of the $3,000 the employee must pay tomaintain it himself. The firm only provides the servers andprinting, not maintenance.

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Video conferencing from mobile phones and I Pads is now here. Itis brand new, but sweeping in at warp speed. Why travel if you cansit at home or in the park and hold a video conference. Whilepressing the flesh is always going to be important, it will be muchless so as the younger generation grows up and become employees.They conduct their whole life online today. They no longer watch TVor go to the movie theater. They watch on their PDA or theircomputer. You may say who wants to watch a movie on a PDA, but theydo. So what happens to movie theaters over the next ten years.

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If all of this seems to you to be out there in make believe, orif you think you heard this all before and nothing really changed,or it is just not your experience, then you are about tot beoverrun. I just spent two hours with several gurus in this area inpreparation for a ULI New York panel we are running Oct 5 on thissubject. I have a hard time recalling any two hours that was moreeye opening and fascinating. The change is already here and youneed to get informed, or it will cost you money in the future.

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If you invest, lend to, operate, or design real estate of anykind, you need to get informed on where the digital world is going,and you need to start now. It is a revolution that is equal to theindustrial revolution in terms of the long term impact on how wewill live and work, and how the culture is changing over the nextten years and forward. The impact on which buildings will be thetrophy properties because they provide the electronic and otheramenitized environment, including green, that is already beingdemanded by young employees, will affect who makes money in realestate over the next 10 years. Which residential buildings arewired to accommodate the coming demands for power and outlets. Evenmy panelists, who are young and the real gurus of this world, saythey have trouble keeping up because it is changing so fast, andthe rest of us are not even in the starting blocks.

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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.