Launch
Letter

Introduction

Zigg Capital is a global investment organization with a singular mission: to accelerate the combination of real estate and technology, improving our collective quality of life, work, and community.

From Great Development to Stillness

On the television show Mad Men, when Sterling Cooper Draper Pryce’s longest serving employee, Ida Blankenship, dies at her office desk in the spring of 1965, her longtime colleague Bert Cooper affectionately observes, “She was born in 1898 in a barn. She died on the 37th floor of a skyscraper. She was an astronaut.”

Advances in transportation, construction and finance during the first half of the 20th century radically altered how and where people lived and worked. And then, around the time of the microprocessor’s invention in 1968, real estate innovation inexplicably stagnated. Over the last 50 years, developers and property managers made a lot of money doing the same things they always did – focusing on transit proximity, benefitting from information opacity, and relying on trusted banking relationships - unperturbed by the introduction of the internet, mobile and cloud computing.

When it comes to real estate, despite massive innovation in myriad fields, we find ourselves remarkably, living in a world that Ms. Blankenship would recognize. Maybe buildings are lined with fiber instead of copper, maybe underwriting models are stored in Excel rather than on paper. But the ways we value, construct, and inhabit the buildings around us has remained surprisingly static.

The industry’s mantra has long been “location, location, location,” but changes in construction, transportation, demographics, and commerce are changing real estate, and fast.

Construction Technologies

In 1890, the world’s tallest building, Chicago’s Home Insurance Building, stood 138 feet high. Conventional methods of masonry and brick had reached their limits in the late 19th century, so construction workers began experimenting with steel frames. Between 1875 and 1920, American steel production grew 160x. Plentiful and inexpensive steel allowed for new construction methodologies, yielding skyscrapers, bridges and railroads. By 1909, the Met Life Tower claimed the title of world’s tallest skyscraper at 700 feet and by 1931 the Empire State Building reached 1,250 feet. Explosive growth of vertical construction rested on steel foundations and the development of urban infrastructure. The technological innovation yielding these new feats of construction was viewed as a harbinger of social good. The official guide to the 1939 New York World’s Fair referenced the Trylon, an enormous architectural tower forming part of the central attraction as a "symbol of the Fair's lofty purpose" which was "to show the way toward the improvement of all of the factors contributing to human welfare."

And then, stagnation: the Empire State Building stood as the world's tallest building for nearly 40 years until the completions of the World Trade Center (1971) and the Sears Tower (1973), which remained the earth’s tallest buildings until completion of the Petronas Towers (1998).

Lack of focus on construction innovation has resulted in missed opportunities to enhance worker safety, eliminate rework, reduce costs, lower environmental impacts, and expand tenant access.

Residential Finance

Before the Great Depression, all mortgages were private loans with average 5-year terms and home purchases required 50% equity down. Lack of credit meant only 40% of American households owned their place of residence. The 1934 creation of the Federal Housing Administration introduced mortgage amortization schedules and mortgage insurance, and extended lending terms to 20 years. The 1938 creation of the Federal National Mortgage Association (Fannie Mae) mandated fair and efficient lending practices and expanded the money supply available to borrowers using mortgage securitization by creating the secondary mortgage market. Homeownership rates in the United States increased steadily until 1966 when 64% of Americans owned their residence and then flatlined at this threshold until the late 1990s.

And then, stagnation: loose underwriting standards led to a temporary spike in homeownership during the years preceding the Global Financial Crisis, but today, approximately 65% of Americans own their home, nearly identical to 1966. Further, homeownership has become more expensive. In 1950, the average U.S. home cost 2.47x household median income; in 1980 the average U.S. home cost 2.66x household median income; in 2010 the average U.S. home cost 4.48x household median income.

Technology has driven down the costs of communication, money transmission, travel, manufacturing, basic medicine, foodstuffs, and new business creation over the last five decades. It should do the same for home affordability.

Transportation

In 1908, Henry Ford’s first Model T rolled off the production line at Detroit’s Piquette Avenue Plant. The mass-produced automobile allowed people to travel farther and faster, expanding the very definition of accessibility. In 1926, the establishment of the United States Numbered Highway System introduced the transportation veins of America, allowing goods and people to travel broadly between major cities. By the mid-1930s, there was already one registered automobile per every two U.S. households. In the 1950s, the U.S. federal government offered a 90% match to establish the Interstate Highway System, connecting rural areas to urban cores. Average commute times, however, have not improved for American workers. In 1960, the average commute was 28 minutes long and today, the average American’s commute time is approximately 26 minutes. This transit inertia is baffling, as it coincides with significant urbanization (70% of the U.S. population was urban in 1960 versus 82% today)—most of the population is proximally closer to their work. As shared commutes became less common (carpooling has declined from 20% of workers in the 1970s to less than 9% today), congestion has worsened.

And then, stagnation: average commute times have not improved in the past 60 years, even as public infrastructure has generally improved, and city populations have increased. Densification is a limiting factor on reducing transportation times.

Reducing commute duration will improve safety, productivity, demonstrably improve worker happiness, and allow people to spend more time with friends and family.

The Old Paradigm is Breaking

Beneath our feet, shifting transportation, demographic, and commerce trends are beginning to force change upon real estate assets. Zigg believes that the industry is poised to see more advancement in the next decade than it has in the previous six.

Many factors observed in the fintech revolution are present in real estate technology.

Falling barriers to entry. Technology allows innovative players to do things cheaper, better, and faster.

Demand for better user experiences. Traditional players are unable to meet the demanding needs/expectations of new age consumers.

Democratization of access. Certain (lucrative) markets were previously only available to institutional investors. New solutions cater to pent up demand from retail capital.

New emphasis on transparency. Traditional players historically benefitted from opacity but modern users are increasingly distrustful of incumbent structures. New entrants have focused on transparency.

These factors, and others, portend major changes; each of which will radically impact real estate values: innovations in transportation, changes in demographics, and the evolution of retail.

Transportation

Ridesharing, micromobility solutions, electric vehicles, and ultimately, autonomous vehicles are fundamentally altering how people move. The cost per mile of transportation is dropping because of renewable energy sources and as smart pooling technologies effectively group riders and reduce vehicles on the road. As commutes become cheaper, faster, and more productive, the historical premia that land owners have paid for convenience and proximity to public transit will decrease. Manifestation of these trends does not require Jetsons-style autonomous vehicles—in fact, it’s already observable. Historically, apartments in New York’s Alphabet City priced at a discount to comparable stock units elsewhere in Manhattan. The reason for this deduction was that Alphabet City lacked convenient access to public transportation and, given natural traffic patterns, it was historically difficult to find a taxi in the neighborhood. Around 2012, the introductions of Citi Bike and Uber fundamentally transformed the accessibility of Alphabet City – demand took off and spreads for units compared to comparable stock approached parity. The reverse trend is observed in San Francisco, where the introduction of Uber and Lyft have significantly reduced the premium that on-transit apartments demand.

Rent Premium for On-Transit Apartments in San Francisco

Demographics

Anecdotally, we often hear that the real estate industry is old, and a quick quantitative analysis proves this hypothesis. Using Bureau of Labor Statistics (BLS) tracked job functions—property managers, appraisers, brokers, construction and building inspectors—the real estate industry is significantly older than the U.S. employed population as a whole. Nearly a third of real estate industry workers are aged 55+ years old, suggesting the industry will experience a cascade of retirements over the next decade. In the absence of younger talent to backfill retirees, the real estate industry will turn to technology and automation. U.S. immigration policy is likely to compound hiring challenges, particularly in construction related fields. Further, a younger cohort of industry leadership is inclined to embrace innovation, as we have seen in fintech.

U.S. Age Distribution by Real Estate Occupation

Demographic trends in home ownership also suggest change is upon the real estate industry. Millennials now constitute the largest segment of the workforce, representing 35% of all workers. Largely because of the legacy of the financial crisis and the burden of student debt, American millennials only own ~11% of owner-occupied housing. As mortgage underwriting standards became tougher and young workers found it more difficult to find jobs with enough compensation to make a down payment, millennials shifted toward rentership. Beginning around 2012, home ownership rates among 18- to 34-year-olds began inching higher. One of two things is true: either we’ve witnessed a permanent shift toward rentals which will require a transformation of the U.S. residential market, or the market will experience a wave of millennial home buyers. These first-time acquirers are likely more technologically inclined, and more familiar with consumer web interfaces for property identification and transaction.

Retail

E-commerce has radically disordered traditional retail and the trend is only accelerating. Depending on where one looks, there are a range of estimates, but according to Census Burau Data, online transactions in the U.S. represent roughly 11% of commerce. Retail landlords faced a brutal 2018, with the most closings on a square foot and unit basis in history - Toys R Us, Sears, Gymboree, and Mattress Firm—gone! On a unit basis, these closings have been offset by openings of small format stores but on a square-foot basis retail, real estate is broken. Landlords are waiting for new tenants to fill vacant space, but omni-channel retail has upended the scale and space brands demand.

Conclusion

Driven by these developments, Zigg intends to help create a less expensive, safer, more comfortable new world in construction, property ownership, rentership, property management, office, retail and hospitality.

Many of the technologies and ideas to create this future already exist—marketplaces, SaaS platforms, underwriting tools, and fractionalized ownership have transformed finance and will serve as the foundation for the spaces of tomorrow.

In partnership with the world’s most passionate entrepreneurs, we seek to rebuild the places we live and work, and engage.

Zigg Capital

January 2019

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