By Robert A. Frank

While many in the real estate community will acknowledge the importance of wired real estate in the new economy, controversy continues to revolve around who will benefit most from this trend—the telecom service provider or the real estate owner. There are those who contend that real estate people should stick to their knitting, and not be engaged in the business of providing telecom and broadband communication services to their tenants. They feel real estate should be seen simply as a "dumb pipe"—merely providing the platform for telecom companies to offer services to their tenants and share in a portion of the fee.

Some real estate owners, however, are taking a more active approach. These entrepreneurs believe that in conjunction with the leasing of real (physical) space they should own and operate some portion of the broadband service, thereby extending their physical space services into cyberspace so that they can satisfy all their tenants' 'spatial' needs.

To deal with the great variance in these two visions of the future of technology and real estate, it would be very beneficial for REIT and REOC managers to employ scenario investing to assist in their forward looking projections. Typical scenario investing models employ highly exaggerated constructs in order to make a clear point—much like a caricature exaggerates an aspect of a person’s appearance to make a point about his or her character. Despite the exaggerated nature of the models, as a planning tool, scenario investing projections can be a very useful for managers and investors as they allow us to prepare for a wide variety of circumstances, stress test the likely case, and be prepared to spring into action if evidence of an alternative scenario begins to play out.

Scenario investing can be very helpful in this unsettled era when a number of totally new variables have been introduced into the real estate equation. The REIT Modernization Act, for example, which went into effect in January, allows REITs to own taxable REIT subsidiaries (TRS) and become direct owners and operators of telecom services. But is this the scenario that will best serve the REITs and their investors?

Obviously, the answer to this question will be determined on a case-by-case basis taking into consideration the nature of the properties owned, the need for broadband telecommunication services, and the comfort of management teams with the execution of telecom services.

Whatever the decision regarding the level of direct telecom participation, we highly recommend REIT and REOC managers engage in some serious scenario testing regarding the impact of cyberspace on their basic real estate business and their relative position on the new cyber/real space continuum—now and in the future. This should help make their actual investing plans more likely to succeed in an ever-changing technological landscape.