Colony Capital [NYSE: CLNY], after a disastrous 2017 merger with NorthStar Asset Management, is reinventing itself, and its plan says something interesting about economic and real estate trends. CEO Thomas Barrack announced two weeks ago that the company would be shedding as much as 90% of its existing portfolio — consisting largely of legacy assets like hotels, warehouses, and other commercial real estate — to focus on data centers, mobile towers, and a growing dgitial real-estate investment management business. In July, CLNY acquired Digital Bridge Holdings, a company which manages almost $20 billion in digital real estate, and Digital Bridge CEO Mark Ganzi will eventually replace Mr Barrack.
Prospective stockholders, in the face of the 2017 deal that saw CLNY’s share price drop by some 60%, are likely skeptical and will take a wait-and-see approach.
To us, the announcement is more interesting for its general significance than as an investment case for CLNY (which we are not making). CLNY clearly sees a future runway in real estate assets tied to technology — to cloud growth, the digitization of the economy, continued expansion of wireless technology and data usage, and the application of digital solutions to real estate management itself. Whatever we think of the likelihood that CLNY will successfully reinvent itself, the trend of growth in digital real estate is likely to continue.
A related trend is in logistics. We also read recently that big e-commerce retailers are building multistory warehouses and logistics centers in urban areas — where as one industry executive says, 50-acre spaces are hard to come by. Here also the trend is likely to continue. Amazon [NASDAQ: AMZN], after sparking a two-day delivery rush, is now moving the whole e-commerce cohort towards one-day delivery thanks to the launch of Prime One-Day. This may put pressure on AMZN’s already razor-thin margins for the immediate future — but its competitors will have to adapt, and that means again that the trend towards multistory urban logistics real estate will likely continue and accelerate.
Investment implications: Real estate markets are shifting. We believe the trends towards demand for data center, wireless infrastructure, and urban rapid-delivery logistics will be durable, and that real estate investors should keep these trends in mind. Please note that principals of Guild Investment Management, Inc. (“Guild”) and/or Guild’s clients may at any time own any of the stocks mentioned in this article, and may sell them at any time. Currently, Guild’s clients own AMZN. In addition, for investment advisory clients of Guild, please check with Guild prior to taking positions in any of the companies mentioned in this article, since Guild may not believe that particular stock is right for the client, either because Guild has already taken a position in that stock for the client or for other reasons.
