As we begin another new year, this one seemingly at a much more apprehensive starting point, it made me think of a term that is the by-product of two separate premises. Two premises that provide turbulence and uncertainty in their own right, yet also offer investment opportunity and the potential for longer-term, sustained market growth. The term: Controlled Disruption.
The first part of the phrase comes from a term I recently heard and borrowed from the VC / technology world, and that is controlled deflation. Similar to their industry, our real estate industry could benefit from some controlled deflation. What the market seems to need right now is a healthy breather. An opportunity for price discovery to be tempered and re-established based on current fundamentals and an outlook for steady, moderate growth. While difficult to achieve in a lumpy, illiquid asset class, a slight increase in interest rates, proper containment of debt underwriting, and (the wild card in both directions of severe inflation and deflation) a moderation of international capital flows into the U.S., could provide the environment needed to achieve a controlled deflation objective.
The second part of the phrase comes from a more common term which is market disruption. Like controlled deflation, the negative ramifications of this premise are also accompanied by positive aspects and market opportunity. Our industry seems abound with market disruption. From increased regulatory and compliance requirements, to crowdfunding platforms, to secondary market exchanges, and the dis-intermediation of capital allocators, it seems our historically laggard real estate industry is beginning to embrace technology and the change that comes with it. The real estate investment market is not only gaining increased acceptance and allocation from institutional investors, but is also extending into a living room near you. We believe this transformation will take place over a number of years, potentially providing opportunity for market participants through both good times and bad.
While we are aware of the all-too familiar danger signs that confront us in the current market, we also focus on the changes taking place within our industry and embrace the positive aspects that can result from a controlled disruption.
By Dave Kidder, President and Managing Director