What Asset Managers need to get right with generative AI
Generative AI (gen AI) is predicted to impact over two-thirds of all functions across the capital markets industry1, suggesting that the technology has the potential to significantly transform all its segments—including asset management.
But we feel this time the situation is different because of the far-reaching effects gen AI will have across technology, operations, data management, ways of working, culture, and ultimately for the way firms create value. The majority of asset manager have already started on this journey.
You don’t have to be a leader, but you have to get started
To harness the potential of gen AI, firms need to take action and begin exploring its benefits. While concerns around complexity, privacy, and security may hinder immediate widespread adoption, these risks can be managed through careful selection of use cases and appropriate governance practices.
Firms could start by taking a gradual approach—identifying specific use cases, launching pilot projects, and cultivating a culture that embraces innovation. A good starting point could be around general productivity use cases that do not require confidential information or impact external clients. An incremental strategy would allow organizations to integrate gen AI across the enterprise at a pace that aligns with its respective risk tolerance.
Gen AI is coming for tasks; it isn’t coming for jobs
Asset managers can take solace in the fact that they can start small. Having the right prioritization framework in place could allow teams to identify those use cases that minimize risk, add value, and contribute to learnings advancing the overall AI journey. Some elements of such a prioritization framework may include the use of public versus private data, end user of the output, regulatory considerations, and the level of human involvement. We would recommend starting by looking across the below categories (non-exhaustive examples) for exploring use cases:
1. Revenue generation: Summarization of sell-side research, personalized investment strategies, portfolio manager assistant, product ideation
2. Stakeholder engagement: Smart account planning, client onboarding automation, know-your-customer (KYC) support, financial advisor/sales assistant, legal review
3. Operations & productivity: Explanation of exceptions (Net Asset Values (NAVs), pricing, corp. actions), intelligent email services, request for proposal (RfP) authoring/reviewing, performance report generation
4. Data management & technology: Metadata harvesting, creation of data dictionaries, coding assistance, code modernization, software development lifecycle (SDLC) automation, synthetic data/testing environments generation, cybersecurity assistant
CREDIT ACCENTURE
Artificial Intelligence: Real Estate Revolution or Evolution?
The potential for artificial intelligence (AI) to transform businesses, industries and society has been mounting for decades. But recent advancements, have moved the science from niche to mainstream. The technology’s proficiency in writing, drawing, coding and composing has compelled corporate leaders to consider both the opportunities and threats that AI presents for their future.
For commercial real estate, it’s clear that strategically embracing AI could transform the sector. In JLL's 2023 Global Real Estate Technology Survey*, AI and generative AI were ranked among the top 3 technologies that were expected to have the greatest impact on real estate over the next three years by investors, developers and corporate occupiers. Less clear are the details of what exactly comes next. Respondents indicated the least understanding of AI and generative AI, when compared to other surveyed technologies such as blockchain, virtual reality and robotics.
Still, acutely aware of the impending change, real estate industry leaders are continuing to explore ways to harness AI’s transformative possibilities.
AI vs Generative AI – what is the difference?
First, it’s important to clarify the scope of discussion by differentiating the definitions of AI and generative AI. AI, in a broad sense, uses machine learning and deep learning algorithms to perform tasks that require the ability to learn from experience, understand complex concepts, recognize patterns, interpret the nuances of natural language and independently make decisions.
Generative AI is a subset of artificial intelligence that focuses on what its name implies – generating new content, designs or solutions. It employs advanced algorithms to create outputs, including synthetic data, images, text and music.
Both AI and Generative AI will have an impact on commercial real estate. In this article, we will focus on AI in a broader context, while specifically emphasizing the role of generative AI where applicable.
PropTech adoption has laid a solid foundation for AI integration in real estate. Organizations will need to consider how they can harness AI strategically and ethically, piloting applications before scaling to deliver value.
With AI, we anticipate a similar five-fold impact in the long run. While it remains to be seen how AI will be applied to specific sectors like healthcare and how much this growth will generate space demand, some influences are already emerging.
1. Geolocation: AI companies and investments have been observed to cluster around established tech markets. Going forward, growth is likely to be concentrated in locations where AI talent is available, namely tech hubs, innovation centers and universities.
2. Altered demand among assets: AI development calls for more and better data centers, energy grids and connectivity infrastructure.
3. New asset and product types: the birth of the ‘real intelligent building’ is imminent. AI-compliant infrastructure will become a default just as internet connections are a default feature of current buildings. AI will also help deliver net-zero buildings with high sustainability performance.
4. Revenue and investment: AI-powered underwriting and processes will enable faster transactions and more efficient understanding of properties and markets, catalyzing investments at a global scale. AI-compliant infrastructure and the ability to plug in multiple systems could also enable the expansion of ‘space as a service’ models and new revenue streams for landlords and developers.
5. Design and space function: AI will allow for experience-driven design and highly customizable environmental settings.
CREDIT JLL
A startup's guide to office space
Over the last decade, the startup landscape in India has seen unprecedented growth, so much so that the country has become the third-largest startup ecosystem in the world. From just ~700 startups recognized by DPIIT in FY 2016-17 the number now stands at over 82,000.
This means that in the last seven years, there has been 9x increase in the number of investors and 7x increase in the total funding. Now, India is home to 107 unicorns, with 65 unicorns added over just the last two years. These unicorns are valued at over USD 343 bn and have raised USD 94 bn in funding to date.
In terms of capital inflow, investments in Indian startups grew at a compound annual growth rate of 49% from 2014-2021. It is believed that with a collective effort by all stakeholders within the startup ecosystem, India can become the second largest start-up ecosystem by 2025.
The rising number of startups has also resulted in an upward spike when it comes to their real estate needs. In the first half of 2022, Indian startups leased 28% of the 24.8mn sq ft of office space leased to companies.
The first question to be answered is in which city should the office be set?
Delectus dicta assumenda omnis enim. Quidem magni eligendi sed exercitationem harum corporis odit nostrum quae nam nisi officia labore, Over the years, metros have been the preferred hub for most startups leasing their first office. However, smaller cities like Pune, Jaipur, Ahmedabad, Coimbatore, Indore among others have also seen a steady increase in leasing. With a larger talent pool available to work from anywhere, lower cost of living, government incentives and reduced capital spends, smaller cities have proven to be an easier mode to get into the market directly.
Most companies today are also looking to minimize the negative impact their office and work processes could have on the environment. This happens by adopting innovative green methods, including designing a biophilic office that uses energy-saving technology, sustainable materials and recycling.
When designing a startup office, one has to take into consideration, the lifestyle it portrays. The design has to seamlessly integrate fast-evolving work styles and the collaborative workforce. Based on this, there are many design types, including:
1. A flexible office design – where spaces can be changed as dynamically as the office requirements
2. Activity based design – offering a variety of environments for employees’ comfort
3. Technology enabled spaces – innovative solutions to ensure a touchless yet all-encompassing experience
To manage all of this, and to ensure daily operations run smoothly, an experienced and competent facilities management team can be included.
CREDIT JLL
Economic Watch: Fed Likely to Raise Interest Rates This Month Despite Slower Job Growth in June
Office-using jobs increased by 31,000 in June, with professional & business services gaining 21,000 and financial activities 10,000. Despite these gains, structural changes in office usage and corporate cost cutting will continue to temper occupier demand.
The Bottom Line
Although June marked the first month in more than a year that job growth was below expectations, the labor market remains historically strong. Job growth was well above what is needed to absorb new entrants into the labor market, maintaining a historically low unemployment rate. Year-over-year wage growth of 4.4% in June remained above a level consistent with the Fed’s 2% inflation target, and prime-age worker employment (25 to 54) was at levels not seen since the early 2000s. Particularly with continued strong wage growth, we expect that the Fed will hike the federal funds rate by 25 bps later this month.
However, leasing activity may improve if GDP growth remains solid in Q3. A full property market recover is unlikely until mid-to-late 2024.
Executive Summary
1. The U.S. added 209,000 jobs in June, below consensus estimates of 240,000. Job growth was 306,000 for May (revised down by 33,000) and 217,000 for April (revised down by 77,000).
2. June marked the first month in more than a year that new job creation was below expectations and was the lowest monthly total since December 2020.
3. The largest job gains were in state & local governments with 60,000, followed by health care with 41,000, social assistance with 24,000 and construction with 23,000.
4. The unemployment rate fell by 10 basis points (bps) to 3.6%, while the labor force participation rate remained at 62.6% for the fourth consecutive month. Average hourly earnings continued to grow solidly, up by 4.4% on a year-over-year basis.
5. Despite the slowdown in job growth, we expect the Fed will increase the federal funds rate by 25 bps later this month. However, we believe that core inflation will fall in coming months, reducing the likelihood of additional rate hikes.
6. We do not expect that commercial real estate investment and leasing activity will begin to improve until the end of 2023 at the earliest. The bulk of that recovery likely won’t occur until next year.
CREDIT CBRE
The Office Sector Debt-Funding Gap is Likely to Increase
As the largest source of capital for commercial real estate, debt financing plays a major role in facilitating investment activity. Amid tighter financial conditions and a hawkish Fed, interest rates and swaps have risen sharply. As lenders become more selective, borrowers may face a debt-funding gap issue if they need to refinance.
To understand the debt-funding gap, consider a theoretical office building worth $100 million in 2019 shown in Figure 1. By 2024, we expect the value of the property to have fallen by 29% to $71.2 million. With a constant LTV of 72%, the property owner could expect to borrow $51.3 million against it. So far, this would create a debt-funding gap of ($72 – $51.3) $20.7 million. It is important to note that at this stage the owner’s equity is already completely wiped out. However, once the lower LTV of 57% is used, the property owner can only borrow $40.6 million.
The Bottom Line
So far in 2023, lending conditions have become tighter with lower LTVs across all commercial real estate sectors. The office sector in the United States in recent years has faced both lower LTVs and falling values. The retail sector faces the same problem, but at a much smaller magnitude. The multifamily and industrial sectors have also faced lower LTVs but have previously had large value increases to offset this. By combining sector-level origination data from the Mortgage Bankers Association, average LTVs and terms from CBRE-brokered commercial mortgages, and CBRE EA expected changes in values, we can estimate the funding gap each sector will face in a given year1.
For each origination year and sector, we calculate the fraction of loans due within five years. We then divide this volume by the average LTV in the origination year to calculate the total value of a property with upcoming debt expirations. We then adjust the value of this property to reflect the expected change in the EA value index. Using this new value, we size a refinance loan based on a forecasted LTV ratio. The forecasted LTV is assumed to remain constant relative to H2 2022 average LTV figures for loans closed by CBRE Capital Markets professionals. We then compare the refinance loan amount against the original loan amount to calculate the debt-funding gap by maturity year.
The United States office sector faces a large aggregate future funding gap in the near-term due to lower LTVs and substantial value erosion.
Executive Summary
1. Commercial properties face funding gaps when investors are forced to refinance at a loan-to-value (LTV) ratio lower than the one at which they first borrowed or when the value has fallen since the loan was originated.
2. The heavy concentration in the office sector differentiates the current funding gap from the Global Financial Crisis (GFC) when large funding gaps were prevalent across all major sectors.
3. 26.4% is The lending volume originated in 2018-2020
4. The GFC had large debt gaps across all asset classes whereas currently it is concentrated in the office sector.
5. The GFC was characterized by a steep one-year decline in office values followed by a quick recovery, whereas our forecasted losses are deeper and longer lasting due to secular decline in demand for office space and higher borrowing costs.
CREDIT CBRE
The Next Generation of the Scientific Workplace
Across the world, there has been an explosion of scientific discovery. Fueling this progress is a convergence of breakthroughs in biological sciences, automation, data harnessing, computing power, and software infrastructure. These are already driving changes in laboratory architecture, bringing automation and digitization to the fore to connect the physical and cultural attributes of laboratory space and scientific practice.
The physical layout and organization of laboratories have experienced great change across centuries of scientific experimentation.
The Bottom Line
The evolution of scientific space can be divided into four historical phases: individual exploration, professional research, centralized research and integrated interdisciplinary research. The era of professional scientific research laboratories increasingly shifted from individual to cooperative research. Centralized organization arose and space topology changed, with greater integration of experimental and transitional spaces.
Currently, the complexity of scientific research and the necessity of multidisciplinary, face-to-face interaction among teams positions scientific enterprise as an increasingly social activity. Stimulating innovation and promoting communication are the focal considerations in laboratory design. Functional space is no longer adequate to meet research needs.
Executive Summary
1. Traditional Laboratory Centered around a broad range of desktop experimentation and organized as repetitive workstations designated for specific utilities
2. Collaborative Laboratory Brings together a variety of disciplines to realize the goal of producing innovative solutions from all personnel involved in the delivery and impact of laboratory output
3. Laboratory automation Increasingly, laboratory equipment is moving away from batch to continuous-flow instrumentation. Search lab automation paves the way for methodical and standardized processes, with miniaturization and parallelization empowering laboratories to screen several experimental conditions.
4. Cloud technology The direction of laboratory design and architecture is becoming increasingly built around the rise of the robot researcher. Cloud labs present a means by which anybody, anywhere can conduct experiments via remote control, facilitated by remote access.
5. Digital twin technology A digital twin provides a replicated virtual model of the physical system. In the life sciences, the use of digital twin technology is in its infancy.
CREDIT CBRE
Business Transformation: Navigating Change in Turbulent Times.
Transformation is an overused and often misunderstood term. Simply put, organizational transformation is an intentional shift in how, when and where work is done. Successful transformation lets everyone work effectively to innovate and advance the company’s vision and culture. The goal is to get the right people with the right skills in the right places at the right time so organizations can achieve their objectives and teams can reach their potential.
Transformation requires a highly strategic game plan that reflects the drivers behind the company’s success while guiding employees through the change process. That plan includes asking tough questions about the company’s operations and being open to new ways of doing things.
How does transformation start?
A successful transformation starts with questions. At the outset, leadership and stakeholders must define the purpose:
-> What are the company’s goals, and what does success look like?
-> How will the company meet customer expectations amid change?
-> How can the company maintain a high level of productivity?
-> Are people, skills and offices located where they are needed?
-> Are the right technologies and processes in place to maintain workflow?
-> Most importantly, all stakeholders must align on the objectives and the strategy for transformation.
If mergers and acquisitions are on the horizon, the transformation strategy may focus on eliminating redundancy in talent, functions or locations. Any transformation has to address the digital changes needed to support the physical changes. With today’s hybrid models, the transformation strategy must enable employees to work anytime, anywhere, seamlessly and efficiently. Productivity should be location-agnostic, ensuring employees have the same access to tools, technologies and resources whether working on-site or remotely.
Empowering people and organizations to deliver the best results for their customers is the endgame, and success can only happen with the right space to support it. NexHive leaders are ideally positioned to align people, process and portfolio in a radically changed work model.
What is the NexHive executive’s role?
1. Reduce portfolio costs while optimizing “me” and “we” space for individual and team work.
2. Retain employees and support their productivity.
3. Grow capabilities that can adapt to evolving company goals.
4. Shift the culture to create new team and organizational norms.
5. Foster day-to-day collaboration.
6. Provide the skills and tools teams need to innovate and compete.
CREDIT CBRE
Occupier Outlook - Beyond the C-suite’s hybrid messaging
Hybrid work remains a high-visibility initiative across enterprises and many C-suite executives place the adoption of these models as a high priority for CRE teams. In addition, CRE leaders are simultaneously asked to optimize the portfolio and budget, determine areas of investment and contraction and address enterprise-level imperatives such as cost reduction and sustainability commitments.
How does transformation start?
As global events have transformed the way enterprises operate, businesses now demand more from their real estate footprint and CRE leaders are working to address key priorities within their sectors.
What is the NexHive executive’s role?
1. Tech, Media & Telecom: Connecting the office’s purpose to company culture continues to lead in most organizations’ strategies. Creating environments that foster innovation and connection are top priorities.
2. Financial & Professional Services: organizations are realizing that they need to “earn the commute” and deliver exceptional workplace experiences when teams arrive to the office. Re-onboarding of employees and training managers on the importance of being present is a key objective for both CRE teams and HR/People teams.
3. Healthcare: Health systems are re-evaluating their go-to-market strategies, focusing on portfolio optimization and reducing capital deployment for clinical and administrative facilities.
4. Life Sciences: Scientific research sites are becoming more collaborative—with strong focus on experience, productivity and resiliency.
CREDIT CBRE
