Commercial real estate executives are less concerned about disruption caused by technological innovation than CEOs in other industries, according to new research, and in a market with an “over-supply” of inventory, building owners and executives will either have to adapt to technological innovation or face obsolescence.
Only 10% of real estate executives said they were worried about the speed of technology change compared to a 38% global average in other industries, according to a new survey conducted by the Urban Land Institute and PwC.
The survey also found that real estate executives reported being far less concerned about changes in consumer behavior, cyber threats, and new entrants, compared with their counterparts in other industries.
Shift to occupier services from portfolio management
However, now more than ever, changes in occupier needs and greater information transparency is squeezing these legacy assets and how they are used. Workplace shift towards greater mobility, digitized workplaces, shrinking employee space requirements are making real estate assets less about ownership and more about services and outcomes- forcing investors to find creative and cost-effective ways of innovating.
Real estate executives harness technology to prepare for the downturn
The survey found that both investors and executives believe the industry is at an evolutionary cross-section between technology and the provision of space, companies which are unwilling to embrace these changes risk being left behind.
There are two main factors are propelling this transition.
First, the amounts of capital investment into the sector is likely to flow to those companies that are willing to adapt and use technology and second with the real estate late in the cycle, investors and owners will need to utilize any means necessary to improve and maintain the performance of assets – especially during a downturn.
“Increased liquidity, combined with improvements in data that bring greater transparency to the sector make it harder to find alpha. In the 1980s there was very little competition, and institutional investors were not sophisticated, so it was pretty easy to make money from them. Not anymore,” said interviewees in the report.
Raising and making money in an increasingly crowded playing field will require greater sophistication.
“Being at the forefront of change and capturing some of this new inflow will give companies an outsize advantage. If you look at Blackstone and Brookfield, they are maybe 5 to 10 percent better than their peers, and they are hoovering up capital. Technology creates outsized winners, and that is what will happen in real estate, too” said another interview in the report. Technology improves return on investment when its need most
Creating real value in real estate sector lies in the ability to use technology to achieve operational efficiencies that can improve the bottom-line return on investment- especially in the wake of a late-stage cycle which is putting pressure on ROI.
“Cap rates can’t go down any further, the only way is up, so you have to improve the efficiency of your property and your company,” one interviewee said. “Software is one way of doing this, as are things like energy efficiency and the internet of things, things that make buildings run more efficiently. On the management side, anything replacing spreadsheets and allowing greater analytical capability has a big return on investment.”
Technology shifts values in the CRE sector
The value in the sector will shift towards players who can effectively leverage the use of Big Data, predictive analytics, and blockchain to their advantage.
“Where value resides in the real estate sector, it will shift to new or hybrid models of existing and new players who manage to harness data as a competitive operational advantage and create entirely new revenue opportunities that leverage the scale of their portfolios, according to one real estate technology executive.