STL Lab Hosts Three Edge Sessions at the 2017 World Real Estate Forum

The STL Lab hosted three Edge Sessions at the 2017 World Real Estate Forum, held at the MIT Media Lab in Cambridge, MA. 

3D, Stackable, Modular: Innovation and the Global Housing Crisis
by Waishan Qiu, MCP

On May 19, 2017, at MIT’s Media Lab, Zhengzhen Tan, the Assistant Director of STL Lab, moderated a special session for the 2017 World Real Estate Forum. This session focused on innovative 3D, stackable, and modular construction practices that aim to mitigate global housing scarcity. Speakers on this panel included Patrick Kennedy (MIT ‘85 and owner of Panoramic Interests), Roger Krulak (CEO of Full Stack Modular) and Tod Desmarais (Senior Associate of Gensler).

Ms. Tan gave a brief introduction about the speakers and explained the motivations for showcasing this topic. Acknowledging the global crisis in housing and its construction, this panel aimed to surface innovative approaches in the real estate market, motivate current real estate practice, and showcase real estate entrepreneurship to rising generations of academics and practitioners.

Mr. Desmarais was the first speaker. He began with Gensler’s cutting edge practices in 3D printing. Mr. Desmarais utilized dynamic videos and illustrations that showed the capacity of fast, customized, and integrated construction processes enabled by full scale 3D printing technology. He also presented several 3D printing prototypes in Shanghai, Dubai, and other cities worldwide. The main office of the Future Museum in Shanghai is one example of how 3D printing can be used in real estate development. The technology is estimated to have saved 50%-70% construction time and reduced the labor force budget by 50%-80%. It also saved 30%-60% waste from construction materials. He also emphasized that, while 3D printing can be highly customizable and nonlinear, identifying affordable and durable material is a consistent issue. Gensler has also focused on integrating isolation and fire-protection layers with concrete by using 3D printing technology at architecture scale. The prototypes completed in Shanghai and other countries worldwide represent the most advanced accomplishments in 3D printing in the world.

The CEO of Full Stack Modular, Roger Krulak, was the second speaker. He began his speech with the question, “Why does the construction process of real estate development utilize the largest labor force but produce the least profits?” Despite 25 years experience in the construction industry, this question continues to elude Mr. Krulak. He challenges the existing practices of construction, and is inspired by advanced, accurate, and efficient ways that engineers can approach a project. Mr. Krulak believes that incorporating modular components with facilities and infrastructure to build housing and other real estate projects will save human labor and improve building efficiency. His extensive experience with both the construction and development sides of the real estate business made his idea a success. Ultimately, this led to developing a company with expertise in modular construction and integrated infrastructure. In 2008, Mr. Krulak spearheaded the first R&D project for modular construction models, which led to the creation of FC Modular in 2012.   The subsequent the construction of a factory and business ultimately catalyzed the construction of the tallest modular building in the world. Mr. Krulak’s vision and entrepreneurship practices led to groundbreaking industry changes, such as the movement to off-site built construction for large scale urban multifamily projects. As a 2014 recipient of the Popular Mechanics Breakthrough Award for his work on the high-rise modular process, Mr. Krulak and his innovative construction practice has been widely recognized as a leader in real estate entrepreneurship.

MIT ‘85 alumni and owner of Panoramic Interests, Patrick Kennedy, was the final speaker. Mr. Kennedy’s firm has been building housing, live-work space, and commercial property in the Bay Area since 1990. He opened his presentation by describing how some high-income computer science engineers working in Silicon Valley cannot afford a room in the San Fransciso Bay area, with some living in RVs on the side of the road. Surprsingly, even people with income higher than one hunded thousand per year cannot find housing reasonably close to their employment in California. By contextually establishing the housing crisis issue in relaton to the availability of land and urban space, Mr. Kennedy addressed the main goal of his business. The aim of Panoramic Interests is to offer affordable, multi-use and adequate space for a new generation in the Bay Area. The new generation, according to Mr. Kennedy, are largely car-free minimalists. The demand for small units with appropriate facilities is high.  

Since 1995, Panoramic Interests has built 689 units of housing in several mixed-use projects in and around Berkeley and San Francisco. The firm’s projects incorporate “smart growth” principles designed to discourage auto use, mitigate sprawl, and encourage local businesses to enhance the pedestrian streetscape. In April 2007, Panoramic Interests sold its rental portfolio of seven buildings to the Equity Residential Apartment REIT of Chicago for $146,000,000—the largest real-estate transaction in Berkeley’s history. Now, Panoramic Interests is exclusively focusing on small, stylish, efficient, and walkable neighborhoods.  In August 2015, the firm completed the first high-rise micro-apartment in the U.S; a 160-unit car-free housing complex that is one block from the Twitter headquarters.

New Trends in China's Real Estate Development
by Joanne Wong, MCP Candidate, STL Fellow

The latest innovations in the Chinese real estate market range from delivering products to changing demographic groups to increasing the liquidity of the market for more effective financing of projects, according to two industry professionals at MIT’s World Real Estate Forum on May 19. Part of the Track on Entrepreneurship and Innovation in China Real Estate, the panel was moderated by Siqi Zheng, the Samuel Tak Lee Associate Professor of Real Estate Development and Entrepreneurship and the faculty director of the MIT STL Lab. The speakers were Changfeng Ling, executive director of China Property at Hongkong Land, a property investment, management and development group founded in 1889 with holdings across Asia, and Dr. Chenyang (Jason) Wei, senior managing director of Zenity Holdings and head of Zenity Holdings New York.

Three demographic trends in China are changing the way Hongkong Land manages innovation in real estate, said Ling. First, an exploding aging population poses a challenge to traditional developments of senior living communities. These projects tend to experience very high vacancy rates and are not profitable. Ling argues that this model is not well-received by the market because of the culture around “xiao” or filial piety, which compels younger generations to care for elderly relatives and thus home-based care remains in the mainstream. The solution offered by Hongkong Land is a new community designed to accommodate both elderly people and their children in separate living spaces within walking distance of one another. The second trend concerns the rise of the middle class, which is projected to reach over 300 million households—the entire population of the United States—by 2020. With this market segment that is spending more of its disposable income on e-commerce, Hongkong Land’s challenge was in the retail space. Since “experience is everything” for this group, Hongkong Land is developing destination commercial complexes that offer attractions like wax museums and aquariums, as well as various festivals and activities. The final trend Ling discussed was that of a new generation of consumers living in cities who have an increased focus on personal health and quality of life. Hongkong Land’s answer to their demands includes courting private clinics to be tenants in their office buildings to make medical care more accessible, and to launch developments with prominent green features such as air purification and smart energy management systems. 

Wei’s presentation focused on another source of innovation in the space—the creation of asset-backed securities (ABS) to increase liquidity in the Chinese real estate market. Currently, the degree of securitization is not yet comparable to that in the United States, but is increasing as the idea matures in China. At the last ABS annual conference in Las Vegas, a half-day program with Chinese as its working language was dedicated to these emerging instruments. The government would like to open this up to make project financing more effective, and have been issuing securities backed by public-private partnerships (PPPs). The PPP-backed ABS market enables profit- and risk-sharing between the public and private sectors, and generally cultivates long-term partnership relationships of ten years or longer. Wei noted that for instance, China Fortune Land Development has made agreements in more than ten countries to develop new industrial cities through PPP opportunities. While this capital market is not yet open to foreign buyers, there is reason to be optimistic about its future because the government is very willing to develop it, he added.

Global Capital Imbalances: Impacts on Real Estate Markets Globally
by Wangke Wu, MCP

At the beginning of the session, MIT Professor Bill Wheaton provided a history of the global capital market. In his opinion, since 1990, the high saving rates of emerging countries provides the momentum for the overall increase of global saving rates.  Currently, the main investments of most emerging countries is outside of their local market, instead investing in other countries.  As a result, the capital market of developed countries is inundated with capital from emerging nations.  For example, because of its low risk, government debt draws a lot of investment from emerging countries.  This causes a decrease in the overall yield rate.  Previously, the yield rate of the bond and real estate market almost equaled the yield rate of the stock market.  However, since 2007, the central government of many countries started to purchase large assets from the market in order to expand their accumulated asset holdings.  As a result, the supply of capital is increasing in the market. 

Professor Wheaton then explored the topic of real estate return. In the last 25 years, real estate yields were around 8.0%, but dropped to 4.5% as value rise, while rent revenue only increased 2.0%. He believes that, in the next 25 years, the situation could be different. We are now transitioning from a market with surplus capital to a market of insufficient capital.  He provided three reasons for this shift.  First, global population aging could lower savings, hence reduce a major source of capital supply. Second, effectively tackling climate change could dramatically increase the need for new capital. For example, to meet the Paris Accord energy goals, a one trillion dollar annual investment is projected to sustain and develop the renewable energy sector. Third, central banks will try to reduce accumulated asset holdings. This will further decrease the supply of capital. In conclusion, with increased demand and decreased supply of capital, Professor Wheaton is sure that real interest rate will go up.

Next, Alice Gao from ICBC USA,  gave a talk on Chinese investor’s impact on US and global real estate markets. Chinese investors are now the world’s largest buyers of overseas real estate. In December 2016, foreign direct investment from China fell almost 40% because of capital control. The reason for the capital control is because of the drop of the foreign currency reserve.

However, since there is no change in the “Open Policy,” China will push forward with opening up its capital account in a prudent and orderly way, and Chinese foreign investment will ultimately continue. From an individual perspective, currency value is uncertain and policy is unpredictable in China, hence investment diversification will continue.  As a result, investor’s groups will continue to become more diversified.

Following, Dr. Henry Mo, the Chief Economist for AIG, discussed US cross-border commercial real estate investment. He thinks that capital inflow from China to the US will slowdown. Since December 2016, because of capital control, the direct investment from China slowed down quickly. As a result, Dr. Mo believes that the real interest rate will ultimately decrease. There are factors pushing down the interest, for example, the demand for low risk investment.

In 2016, global capital flow to the US fell from the 2015 peak but remained elevated. Similarly, cross border transactions also slightly decreased. The share of cross-border mergers and acquisitions amounted to 14% of the total acquisitions. Increasingly, capital from China plays a more important role in the US commercial real estate market. In terms of these shares, capital from China in 2016 accounted for about 20% of the commercial real estate market, surpassing Canada and thus becoming the largest commercial state investor outside the United States.

In 2015, Chinese capital in the US was mainly invested into industrial properties.  In 2016, Chinese investments shifted to hotels. The major metropolitan cities, such as New York, Los Angeles, and Chicago, took the most shares in hotel investment. In other cities, the industrial land is more important. While the major cities were most impacted by capital control measures from China’s central government, Dr. Mo believes the policy will become less stringent.

The last speaker, Jerome Yuan, used his company ASAP Holdings as a case study to demonstrate capital flow. Since 2011, they bought 30 hotels. The total room count is around 8000. They started in California, but then moved to other parts of US when California became too expensive. In 2014-2015, real estate investment trusts such as ASAP Holdings stopped buying new property, but now real estate investment trusts will go back to purchasing property. Mr. Yuan thinks that RMB will slow down depreciation for three reasons. First, capital control. Second, the US dollar remains strong. Third, political and economic reasons. Overall, China's interest to invest in foreign properties may shift to Asia.