Trends in Commercial Real Estate Technology

Trends in Commercial Real Estate Technology
Real estate professionals tend to be old-school. A room full of investors, brokers, and mortgage lenders may resemble an episode of Mad Men more so than an episode of Silicon Valley, complete with the bourbon and the blue blazers. Real estate, they say, is a business of relationships—a series of handshakes, meetings, and phone calls, learning who can play ball and who can't over luncheons, mixers, tee times, and kids' graduation parties. That's how deals get done.

They’re not wrong. Relationships still matter, the math still works the same way, and principles like location, market fundamentals, and risk-vs-reward still apply, just like they did a hundred years ago.

But commercial real estate investors ignore technology trends at their peril. At Feldman Equities, we value staying up-to-date with modern trends (including technology) as a way to get ahead with  fundamental strategies. Here’s our guide to trends in commercial real estate technology.

Related: Commercial Real Estate Trends in 2020

What is Real Estate Technology?

City Center

City Center

Real estate technology is sometimes referred to as “RE Tech” or “PropTech.” The real estate industry may have been historically resistant to change, but that stubbornness is passing. In the first half of 2019 alone, venture capitalists and angel investors poured $12.9 billion into real estate startups.

PropTech does not necessarily seek to re-invent the wheel on real estate transactions or investing practices. No tech startup is likely to invent new land or a whole new kind of real estate outside of residential, commercial, and industrial. No Isaac Newton of real estate is waiting in the wings to discover a whole new fundamental theory of real estate to go alongside Cap Rates, IRR’s, or Cash-on-Cash Return. (Or maybe they are! Never say never.)

What PropTech has the potential to do in the near term is to change how we do business as real estate investors—how fast we find, evaluate, and close deals; how we relate with partners, co-investors, and tenants; how we market properties and gain competitive advantage.

The real estate game is the same; how we play it is changing rapidly. PropTech is poised to provide more intelligent solutions for Landlords, tenants and investors.

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Is Technology Disrupting Commercial Real Estate?

“Disruption” sounds like a bad thing, like when a disobedient student “disrupts” class. However, “market disruptions” have a different meaning. Business-as-usual cannot continue after a market disruption. The landscape has changed too dramatically. Market disruptions often push business and society forward to higher levels of technological sophistication. Think of the fate of the CD or cassette tape after Apple debuted the iPod, or the outlook for horse-drawn buggies at the advent of the automobile.

We see this kind of change looming in the commercial real estate sector in any number of ways. For example:

  • Investors are less likely to trust a sparkling smile, a bespoke suit, and a firm handshake. They want to see numbers and data, and they want that data to be predictive.
  • Historic middlemen are being phased out. Buyers, sellers, investors, and tenants depend less than ever on banks, lawyers, and escrow companies. The gap between buyer and seller gets smaller every year, cutting middleman expenses out of transactions.
  • The “cloud” continues to be king. Real estate changes hands without a drop of ink on actual paper. Digital data and authentication allow deals to close faster than ever.
  • Real estate investing moves closer and closer to the hands of “the people.” Before, only the elite could invest in real estate. Now, more and more players, even those of modest means, can join the game through crowdfunding platforms.
  • Although the trend is towards the democratization of real estate investing, there are some limitations. For example, the rules that restrict certain investments to “accredited” (high-income, high net worth) investors may seem like a stodgy tool to prop up an aristocracy. However, these rules debuted in response to frauds perpetrated on average citizens by snake oil salesmen, offering to sell gullible people the Brooklyn Bridge. Lower-earning individuals may have been closed off from lucrative deals, but they were also more protected from swindles. The spirit of the “accredited investor” rule is that if you have a lot of money, you should know better, or at least you can afford to take a loss if things don’t go exactly to plan.

Other hazards of a market disruption include:

  • Added costs to integrate new technology.
  • The learning curve to integrate new technology.
  • Resistance from earlier generations, many of them seasoned experts with priceless institutional memory.
  • Information overload—so much data online, it can be hard to make a decision at all (“analysis paralysis”).
  • Data is powerful, but personal relationships still have their place—evaluating the likelihood of a buyer to close a deal; the suitability of an investment; the undeniable magic of a “gut feeling.”

Technology Trends That are Disrupting Commercial Real Estate

Morgan Stanley Tower

Many technology trends try to make the business of real estate easier. A few represent the potential for a seismic change in the industry. These technologies have not reached their full potential yet. Many kinks have to be worked out. However, a creative and forward-thinking mind can see the potential to speed and streamline transactions, make them transparent and fraud-resistant, and bring the wealth potential of real estate to the public at large rather than an elite few.

Will they make the real estate industry better, or cause more problems than they are worth? Regardless, they are here, and their influence is growing …

Blockchain

For all the noise of the cryptocurrency boom and bust, the potential of blockchain is little-understood and far bigger than Bitcoin. In fact, blockchain technology stands to revolutionize even a dusty old investment vehicle like real estate through the advantages of tokenization and smart contracts.

Tokenization

Tokenization is the “cryptocurrency” function of the blockchain. Assets held in the blockchain can be split up into tokens on the chain, instead of clunky and heavily-regulated shares of an LLC. This effectively allows a property owner to sell a portion of their property, or investors to resell their shares of property in a secondary market.

The effect, for better or worse, is often lauded as being the democratization of real estate investing. Individuals who never had a chance to invest in commercial real estate will have a chance to put their money in commercial deals. They didn’t have this opportunity before because they were either too far away, too poorly-connected, or “too poor” (not accredited).

Tokenization remains, however, highly speculative and consequently, very high risk. Investing in real estate through untested and unproven technologies, like tokenization, is a fast track to substantial losses.

Other options are available for investors. Regulatory changes, acknowledging the desire many investors have to place their savings in commercial real estate opportunities that have previously been inaccessible to them, have made this possible without the need to invest using untested technologies.  Real estate crowdfunding, for example, provides a direct pathway to high quality real estate investments that still rely upon the protections afforded by securities laws, without exposing investors to the additional risk of using ‘innovative’ technologies.

Smart Contracts

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City Center

Buying real estate like Bitcoin sounds fancy, but the real game-changer hidden in the blockchain is far more mundane. To understand the impact, you need to understand what a blockchain is. It consists of a block (digitized information) stored on a chain (a public, 100% encrypted database).

That digitized data doesn’t have to be the serial number of a crypto coin. It could also be details of a real estate contract. Suddenly, escrow companies and banks are out of a job. We don’t need the fingers of potentially-fraudulent middlemen all over our real estate transactions, because no verification is needed. The data is right there on the chain, publicly available across thousands of computers, almost impossible to hack or defraud.

At least that’s the theory.  Again, there are significant reasons to be skeptical of smart contracts without, necessarily, being completely dismissive. Better to wait until the tech has been proven and let others take the arrows of the pioneer. The opportunity to utilize proven technology, like digital signatures offered through companies like Docusign, or regulation compliant financial transaction sites like IMS or CrowdStreet that employ the highest in digital security systems can make investing in real estate efficient without being needlessly risky.

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Artificial Intelligence

When we think of Artificial Intelligence (AI) we tend to think of the Terminator, HAL9000, or other denizens of a scary dystopian future.

We’re not there yet. What we do have at our fingertips is the power of Machine Learning (ML).

Ordinary computers must be programmed to perform a specific task. The task can be incredibly complex, but once programmed the computer can reproduce that task on demand, often in a tiny fraction of the time it would take a human to perform the same task. That’s why digital underwriting (deal analysis) software has the promise to be a game-changer.

An even bigger game-changer would be a computer than can analyze data and learn from it. Rather than doing what it is told without deviation, it can process information and plot a course of action based on that information.

Companies already use machine learning to make smarter business decisions. What if a computer could examine past and current trends in localized economic indicators — the employment data, demographics, and economic health of a state … a city … a zip code — and discover what trends predict a rapid increase or decrease in property value for a specific property class? What if that computer could then tell you which state, which city, which zip code was early in the process and what percentage chance the region was on the verge of a boom or a bust? Whether commercial, multifamily, or industrial was the better investment for that place and that time? All by using past data to predict the future.

The fact is, however, such tech does not yet exist in a way that the prudent investor can rely upon. Real estate investing is still very much an artform.  Consider, for example, the psychography of a building – the feeling that one has when one enters a building.  There’s nothing artificial about that. It’s a real feeling of security, of elegance, of sophistication and only owners and operators with decades of experience renting to thousands of tenants can understand how to maximize tenant satisfaction through design and ambiance in a building.

Technology is, however, used by sophisticated office building operators to enhance the workspace. For example, at Feldman we incorporate high speed wi-fi in common areas of our buildings, huge digital art-screens in the lobbies, state-of-the-art elevator systems that reduce wait times and enhance productivity.

Machine learning and artificial intelligence are not yet ready to re-invent the office building completely; but at Feldman, we tap into what is available to add value to the buildings we own and to provide some of the most advanced work environments in the country.

Virtual Reality

Everyone likes to try before they buy. In commercial real estate, few investors restrict themselves to their own backyard. Investors in an office building in Poughkeepsie could be located in Portland or even Pakistan. Mobile and cloud computing make distances between countries and currencies even smaller.

What mobile and cloud technology have not made easier, however, is actually walking the grounds. Observing the building from all sides. Inspecting the electrical system up close. Walk the surrounding neighborhood.

Until now.

Drone footage and street-views offered by companies like Google Maps already let you put down virtual feet in the vicinity of a distant investment opportunity. VR ups the ante with 360-degree videography and high-quality photography. Sellers, brokers, and deal sponsors can immerse distant investors in properties like never before.

VR also offers the advantage of virtual planning, which allows you to visualize a distressed building post-renovation and even furnish it or add amenities. This helps sell your vision to buyers, investors, and tenants alike.

Internet of Things (IoT)

First Central Tower

First Central Tower

“Internet of Things” is tech bro speak for everyday devices that get adapted to serve technological needs. We may have never thought of doors, lights, or HVACs as being part of an “internet” … until we remember that it is now possible to lock a door, dim the lights, or adjust the temperature of a room from a mobile device while thousands of miles away.

“SmartHomes” or “SmartOffices” responsive to mobile control is just the beginning. Modern offices can be equipped with sensors that utilize Machine Learning (see above) to optimize the tenant experience. Centralized office controllers can learn what areas get the most foot traffic and when, adjusting lighting and temperature accordingly. They can learn when an executive arrives at his or her office and adjust the lighting or temperature accordingly and seasonally. They can even detect when many people are in a room and adjust the temperature to account for their breathing and body heat!

IoT security controls make a big difference in the safety of commercial buildings. Automatic locks and smart authentication of authorized personnel help maintain the integrity of sensitive areas and data.

As technology advances, more and more of your high-end office tenants—many of them tech companies themselves—will expect “SmartOffice” technology. Gain a competitive advantage by staying ahead of the pitch.

Data Analytics

Ever wonder how Amazon knows just what products to recommend to you? How Netflix knows what movies and shows to propose to you?

Everything we do on the internet, on our phones, becomes a data point that these companies can use to evaluate our buying behavior through a practice called “predictive analytics.”

Remember Machine Intelligence from above? This technology only works because the internet is awash with data. Commercial real estate investors and developers do not need to hire expensive analysts to gather data from buried reports. Cities, counties, and states publish reams of data online for easy public access, including employment data, migration data, demographics, and other statistics very relevant to commercial real estate investing.

Deeper data is available through Software as a Service (SaaS) monthly fees for investors who have the means and the will to make even more data-driven investing decisions.

Related: What are Typical Commercial Property Real Estate Management Fees?

Technology is Changing Commercial Real Estate for the Better

We asked earlier if the looming disruption to the commercial real estate industry, represented by these tech trends, was a good thing or a bad thing. Reasonable people can disagree, but we’re on team “Good Thing.” Consider …

  • PropTech enables more commercial real estate investors to recognize opportunities that they may have previously overlooked. This allows more properties to find the right buyer, and more buyers to be successful in their investment.
  • With real estate investing more accessible, seasoned investors will have to up their game. Unable to rest on their laurels, they will rise to the occasion of the new challenge, improving investor relations and tenant services for everyone.
  • The sales cycle will be shortened, with fewer middlemen and fewer fingers in the pie. This reduces expenses, the chance for fraud, and the number of hurdles that slow deals down. Money will be able to move faster, with greater transparency and understanding.
  • Buyers will leverage data to make better investment decisions. Investors will discover en masse that they don’t have to take anybody’s word for anything; all the data they need to make the right decision will be at their fingertips, with the aid of powerful databases and learning computers.
  • The tenant experience will keep getting better and better, with technology improving the properties and the delivery of services from their landlords.
  • Real estate wealth will be available to more and more people … and they will have access to the data and education to handle it.

Conclusion

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Technology leads the way in every industry. Commercial real estate is no exception.

Sometimes this is easy to forget. In real estate, we tend to adopt a “some things never change” attitude. After all, the land we’re building on has been there for millions or even billions of years. The buildings we buy have stood for decades or even centuries; we hope the new ones we build will stand for centuries more.

Technology may not change the nature of the deals, but it very much stands to change how the deals get done, in any number of ways. This includes:

  • How we find deals.
  • How we evaluate deals.
  • How we close deals.
  • How we market those deals.
  • How we cater to the expectations of our partners and our tenants.

The real estate industry dates back to the Agricultural Era, but every subsequent era has built on it. The Industrial Age offered revolutions in human resources and the rise of the office and industrial property. The Information Age added data. Now the innovation age stands to make our real estate transactions faster, more secure, more accessible, and more tech-forward than we ever thought possible.

Related: The Story of Feldman Equities – 100 Years in Real Estate

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