Will change in commercial real estate be driven from outside or inside the industry?
The current state of the global commercial real estate industry, ignoring recent political and financial market volatility, has been one of strengths. Real estate companies including brokers, investors, developers and lenders, having recovered to levels of activity last witnessed almost a decade earlier, have had reason to feel upbeat about recent performance. It is at this point in the property cycle that risks to current market activity can command a higher degree of weight, and analysing competitive threats in the most entrepreneurial of asset classes carries a different meaning for the wide range of real estate market participants. However, there is no doubt that for the majority of industry players the greatest driver of change is coming from advances in technology, together with the opportunities and threats that brings to existing business models.
The most obvious technology advances in recent years have been targeted towards traditional brokerage services: simply bringing offline networks, tasks and data online. Online brokerage, listing portals, asset and lease event management, data collection, analytics, and automated valuation all have an impact on traditional brokerage in some way. The impact thus far has been limited, as revenues, albeit with the help of acquisitions and resurgent market activity, have never been greater amongst the largest brokerage players. Moving forward, larger transactions should provide more insulation from online disruption, but it will be an increasingly competitive space. Rather than viewing them as a threat those in a position to leverage these new services and heavily integrate them with internal processes will be in a much stronger position to compete for high value advisory services.
Other players in the commercial property market are not immune to disruption either. Competition for investors to acquire assets and attract sustainable tenants is always a challenge. However, with increasing amounts of data available to all market participants, the ability to consume, interpret and act on information has never been more important. The addition of crowd-funding platforms providing a new level of flexibility, transparency, and access for investors are building strong momentum. Initially targeted at retail and high net worth investors, capital from family offices and institutions will be attracted once significant scale and liquidity is achieved. In a personal pension marketplace, if crowd-funding platforms can create suitable products, then existing pension providers could struggle to match the benefits offered by crowd-funding firms. On the opposite side of the same coin, the addition of crowd-lending platforms targeting real estate is creating a powerful alternative to traditional sources of finance. Lending and investing without banks is now possible, and while principally aimed at residential property, clearly could help fund commercial assets.
Increasing data provision and transparency has applications for the entire market. Improved risk monitoring, opportunity sourcing, valuation, and transaction underwriting capabilities assists all industry participants. Lower information hurdles increases transaction speed, creates greater liquidity, and goes some way to removing information asymmetry still very present in commercial real estate transactions. Differences clearly exist in data availability and transparency across international markets, and those differences need to be clearly managed in developing global data platforms. In an increasingly open data market, companies currently producing data and analytics for the industry are prone to disruption just as much as those that consume data.
Those that embrace and adapt to change will be in the best position to benefit from it. The arrival of accelerators and incubators specifically targeted at real estate is a move in a right direction, however it is still only scratching the surface of the industry. Venture capitalists and corporates, not previously active in the space, have now recognised the opportunity to disrupt traditional real estate business models. With increasing amounts of external capital investing in innovation, those in dominant positions in areas affected by change will need to accelerate their own investment to protect against disruption. This goes beyond a shorter term view of immediate merger and acquisition benefits and moves toward a longer term venture capital approach. Current corporate venture capital (CVC) investment from real estate corporations is almost non-existent in a world of rapidly accelerating CVC activity from other industries. When real estate corporate venture capital has occurred in recent times it has been widely admired and should prove very rewarding for the parties concerned. The big question then to be answered over the coming five years is, will change in commercial real estate be driven from outside or inside the industry?