6 WAYS TECHNOLOGY IMPACTS THE VALUE OF REAL ESTATE: BEYOND BRICKS & MORTAR

Real Estate has managed to be somewhat immune from the onslaught of technological advancement that has forced the re-invention of other industries and asset classes. However, it is starting to be obvious that change is happening.

 

The industry is starting to evolve from traditional ownership and more about consumer access – presenting both a challenge, but also an opportunity.

 

Simply put, the industry is changing from a passive “bricks-and-mortar” model to one that is of an active and operational. This shift is playing an increasing role in positive economic activity –  the faster real estate companies stop burying its head in the sand, the better. The industry is at a transitional moment – what does it look like now? What about in 10 years’ time? Or beyond?

 

Embracing technological change is more important that ever and those companies who are unwilling or unable to do that, risk being left behind.

 

Here are 6 ways that we feel that rapid, disruptive change driven by technology is happening to the industry – and why embracing change matters now more than ever.

 

  1. The new revenue streams

Bricks and mortar, defined in the Cambridge Dictionary as ‘a way of referring to buildings, and especially in how much they are worth’ – is relevant in the Real Estate industry.

 

 

Questions like “How much return can I get?” and “How much does stuff rent for per square foot in this area?” are good starting points where from there, you build a model that spits out what return on capital deployed to build or buy a building (with leverage) will be earned based on the yield. Pretty basic? Yes.

 

Is this the only way to calculate return? No.

 

The economics of buildings is changing. Here are some auxiliary revenue streams that could be derived from real estate:

  1. Energy — with the advent of solar energy and other localised energy sources, buildings can produce more energy than they need from time to time. That energy can be resold into the grid.
  2. Data — as IOT (‘internet of things’) begins to take hold in buildings, terabytes of data about how the building is ‘performing’ will be thrown off to the landlord. Real Estate owners can sell building performance information to institutional investors to help them make better decisions.
  3. 5G — as 5G is rolled out globally, there will be a proliferation of smaller localised telecommunication masts and internal building infrastructure. Telecommunication companies may seek to rent rooftops of buildings to do so!

 

  1. The possible savings

One word: Blockchain.

 

A blockchain contains almost no transaction cost.

 

What it provides to the industry is a truly secure, fast, transparent, cheap way to handle transactions that would normally cost money and time. It can potentially transform core operations such as purchase, sale, leasing and management transactions.

 

Right off, the property title management comes into mind as it takes a long time to transfer ownership between parties given the arcane (often blackbox) legal and stewardship processes that govern exchange. The Propy Transaction Platform in 2018 announced its first California Property sale on its platform.

 

  1. The golden circle of Artificial Intelligence, Big Data and Machine Learning

Technology that gives you the heads up to predict trends that will affect prices of land or property would be worth its weight in gold.

 

Artificial intelligence processes data via machine learning that gives insight that helps you do that prediction – whatever you are looking to prove. Most systems can process structured data, but increasingly, IoT data are unstructured data – and having a system sophisticated enough to structure and analyse these data can be costly. The benefits, if done correctly, are endless: allowing companies to set their portfolio apart from the competition and charge premium prices based on that intel.

 

  1. The reinvention of the landlord-tenant relationship

The physicality of our built environment has limited our ability to re-imagine it in more abstract terms and this has limited its potential as an asset class. Real estate is full of inertia. It’s an expensive asset that requires large capital outlays. It is conceived of in vertical silos so it fits in the categories of retail, industrial, residential, office etc. It is traditionally lumbered with very long leases because the economics favour that approach.

 

WeWork is a great of example of where the vision lead the way to a simple change in the business model of traditional landlord/tenant dynamic. WeWork intermediates by taking wholesale leases on long terms and offers the space on a flexible short term lease basis to small tenants. The model definitely reinvents the landlord-tenant relationship.

 

 

  1. The redevelopment of sectors

One sector that can be seen rapidly evolving is the retail sector.

 

Shopping mall investors and developers are now past the phase of wondering what to do with empty space in their properties. They are getting on and converting it to other uses, such as co-working space, libraries and health care centres. The shopper experience has changed as well – revolving around the customer experience, whether offline or online.

 

Technology such as CBRE’s Calibrate provides occupiers, landlords and investors with unique access to consumer profiling and retail spending behaviours covering type of purchase, location by store and time. This maximises the location’s potential and enables more accurate investment decisions.

 

  1. The shift in talent pool

Traditional real estate skills versus knowledge of new technology and business models will need to be re-weighted. Hiring in real estate will change. Real estate companies will start to look to hire people with science and tech backgrounds to complement the skillset of the traditional staff – it’s more important to hire more people at the bottom who understand technology than just one person at the top.

 

These changes and their impact on real estate should not be taken lightly, owners and investors who understand how the advancements of today will impact the profits of tomorrow stand the best chance of thriving in the future.

 

 

Myles Clarke, Managing Director CBRE Ireland

 

 

 

 

 

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