As we recently discussed, the next bull market in real estate will come after the junk debt causing the global sovereign debt crisis is eradicated -- a process that will send interest rates up, which in turn reduces demand for purchases made with credit, like real estate. After that sequence of events, real estate will drop to a bottom from which it can rally. But what will be the source of value? In other words, from where will the earnings come that will lead to higher real estate valuations?
To put it succinctly: companies that build new cities. New cities with smart transportation systems, in which mass transit systems communicate with roads to navigate traffic; which have location-based social networking, local shopping, community currencies, and more to serve as the foundation for an economic revival. Companies like Groupon (GRPN), Google (GOOG), Facebook, Foursquare, Craigslist, AirBnb, Zillow (Z) and others that touch upon the intersection of social networking and local communities are well-positioned for this re-positioning of value chains.
I suspect a problem that is likely to rise is conflict with municipal, state, and federal governments as to who actually owns the land, and what can be done with it. Many aspects that are key assets for these networking technology companies are viewed in a different legal light than how national and supranational governments view these same assets. For instance, social networking companies often benefit from proposed net neutrality regulations that potentially limit the power of Internet service providers to regulate applications and content on the network, as well as from reduced software patenting; companies that have stronger lobbies and ties to Washington, like AT&T (T), IBM (IBM), and Microsoft (MSFT), hold opposing positions. How can location-based networking companies acquire the real estate they will need to build future cities against the wishes of federal government regulators? And how can these companies win the hearts and minds of investors?
At this point, I don’t think there is a clear answer; I believe it needs to be invented. As the global sovereign debt crisis and the U.S. municipal bond crisis escalates and contributes to greater tightening of global credit markets, an opportunity will emerge to create new cities that will play a crucial role in the next secular bull market in real estate and equities -- and especially location-based social networking.