Change is the only constant in today’s commercial real estate industry. With increasing demands for environmentally friendly buildings and advancements in technology, developers must go beyond traditional practices of foundation preparation, frame installation, and cladding.
In a recent McKinsey article titled “Unconventional Partnerships: The Real Estate Developer’s Innovation Edge,” it was highlighted that collaborating with non-traditional partners can give developers access to skills outside their core competencies.
These unconventional partnerships are defined as innovative collaborations that extend beyond the typical developer-contractor relationship. This can include partnering with technology companies specializing in AI, service providers, brands, logistics experts – even waste management companies.
Challenges Drive Unique Collaborations
According to a survey conducted by McKinsey of 50 chief investment officers at large global real estate companies, 74% believe high interest rates are a major challenge while 84% pointed to fluctuations in material costs as problematic.
As development and renovation challenges continue to increase within the industry,
more commercial real estate companies are turning towards nontraditional partnerships. These collaborations bring much-needed expertise from outside sources into commercial real estate projects.
“In 2022,
approximately 30% of all real estate partnerships consisted of alliances or joint ventures with partners operating in industries such as hospitality or environmental services,” stated the article. This figure has increased from just over 20% back in2013.” Additionally there has been an uptickinpartnershipswithcompaniesoperatingintechoralternativeenergysources.”
Steps for Successful Partnerships
The article outlined five key steps for successful collaboration between CRE developers and non-traditional partners:
1) Conduct specialized due diligence – As these unconventional partnerships involve different models than traditional ventures,it is importantto conduct thorough research beforehand.This may include assessing tech infrastructure or auditing intellectual property rights using valuation methodologies.
2) Determine effective partnership formats – Acquisitions,jointventures,andstrategicalliancesarethemostcommonformats.Thearticle suggests clearly defining roles, equity stakes, and profit sharing approaches to ensure clarity and align interests.
3) Understand shared objectives – When both parties are not familiar with each other’s operations or have historically pursued different paths,it is importantto establish aligned objectives. For example,developers may ask partners to help create AI-generated decarbonization plans for real estate portfolios using an algorithmic approach.
4) Develop a strong governance development model – This process involves clearly defining the objectives and purposes of a management team while also recognizing and bridging cultural differences. Risk management should also be a focus in areas such as regulatory compliance and reputation protection.
5) Establish metricsandexitstrategies-Partnersshouldagreewithperformancemetrics todetermineprogress.Buildinga clearexitplaninthecaseofapartypullingoutofthepartnershipisalsoimportant.
In conclusion,the successful collaboration between CRE developersandnon-traditionalpartnerscanbringvaluableexpertiseandskillsintotheindustrywhile helping companies navigate challenges such as high interest rates or material costs fluctuations.By following these steps outlined by McKinsey,realestatedeveloperscancreatestrongpartnerships that drive innovation,and ultimately lead to success in today’s ever-changing commercial real estate landscape.
