Proptech Promises to Revolutionize How Commercial Real Estate is Bought, Sold, and Valued — But Should You Believe the Hype?

Proptech Promises to Revolutionize How Commercial Real Estate is Bought, Sold, and Valued — But Should You Believe the Hype?

Mark Lowery

11/11/2019

Over the past decade, new products and services coming out of Silicon Valley have profoundly altered — and often improved — how we live, work, and play. But commercial real estate (CRE) is one area in which widespread adoption of advanced technology has lagged. Until recently, industry players have focused almost exclusively on refining the efficiency of already existing processes. In doing so, they have given short shrift to the digital disruptions rippling through residential real estate, from Zillow’s serving of aggregated housing data through its freely accessible website to Opendoor’s cutting multiple middlemen out of the home buying and selling processes.

But a group of up-and-coming startups is aggressively targeting CRE. Their aim is to dismantle existing infrastructure — the policies, procedures, ownership models, and basic materials that have made CRE a prohibitively expensive, illiquid, and relatively opaque asset class for many investors — and replace it with entirely new systems geared toward speed, scalability, and peak profitability. Collectively, these new systems constitute what is known as proptech, a unique and ever-shifting amalgamation of commercial real estate expertise and technological innovation.

What are those innovations, and how are they significantly changing how CRE is bought (or leased), at what price, and from whom?

Big Data

In its original context, the “big” in “big data” meant “astronomical.” That’s because the term was first coined by NASA scientists in 1997 as a way to describe collections of information so vast and dense that they can only be manipulated with machine assistance. “Big data” has since come to refer to the quantification of even the most everyday activities and interactions. If you’ve ever found yourself structuring your daily routine around breaking the 10,000-step threshold, then you’ve experienced “big data” firsthand.

In today’s CRE market, big data is producing unprecedented insights into building utilization. Landlords are monitoring and gathering data about everything happening in (and, in some cases, around) their properties. Once subjected to analysis, such real-time data on how people interact with buildings can inform systems that facilitate predictive maintenance, track energy consumption, manage vacancies, and bolster tenant retention using true customer relationship management (CRM) functionality.

With respect to valuation, big CRE data could be mined to reveal hidden portfolio risks and empower more proactive market strategies. It might also guide decisions regarding renovation and redevelopment, hypothetically increasing the revenue potential of any given property. Does more foot traffic pass through your clothing boutique on an east-west or north-south axis? Using people counters as well as indoor mapping and location services, retail property managers could conceivably optimize individual floor plans to achieve the highest possible sales volume per cash register — and thereby maximize the space’s rental value.

The Internet of Things (IoT)

The next (or fourth) industrial revolution is underway. On its front line are devices that aren’t robots per se but which come equipped with sophisticated computerized components. Thanks to inexpensive yet powerful processors and 5G wireless networks, practically any physical object can now be made “smart” — capable of independently transmitting streams of data about its status and the environment in which it is situated on an Internet of Things (IoT). Such devices currently outnumber the human residents of our planet, and their population is expected to climb to a staggering 20.4 billion by 2020.

Smart elevators. Smart HVAC systems. Smart building security systems that incorporate biometric recognition. Even smart plumbing systems whose pipes can alert property managers before they freeze and burst. These solutions are all currently available and, as they attain greater market penetration, will cease to be seen as premium. (Longtime CRE observers have seen this pattern before with green buildings.) Yet, whatever cool features these tools have to show off, can they pay for themselves? Can they even boost any given property’s market value?

The short answer is that it may be too soon to tell. However, according to a recent report issued by Memoori, “the combined global market for the Internet of Things in Buildings (BIoT) will grow significantly over the forecast period, rising from $26.65 billion in 2015 to $75.5 billion by 2021, at a CAGR [Compund Annual Growth Rate] of 20.7 percent.” Meanwhile, owners of multifamily properties should be aware that more than 75 percent of respondents to a survey conducted by Coldwell Banker and T3 Sixty indicated that they would be willing to pay more to live in a smart home. Property type considerations and tenant preferences aside, landlords may still realize significant cost savings by making smart, efficiency-generating upgrades and renovations.

Blockchain

Although synonymous with headline-grabbing cryptocurrencies such as Bitcoin, Ethereum, and Libra, blockchain technology has applications and implications far beyond the transactional. A comprehensive overview of the blockchain and how it works is beyond the scope of this article, but suffice it to say that virtually any CRE process that has traditionally relied upon a paper trail may ultimately be migrated to this automated and hacker-proof digital space. That’s because, unlike other forms of digital data, the “blocks” in any given blockchain can be distributed but not duplicated.

Smart CRE contracts that utilize the blockchain are already in use. These contracts are replacing customary lease agreements as well as transfers of title. In fact, title management may stand to benefit the most from the blockchain. The American Land Title Association estimates that fully one-quarter of all title records contain erroneous information, resulting in costly title resolution proceedings. Smart contracts could also be the key to eliminating title fraud.

From an appraiser’s perspective, the blockchain could combine with big data to make the verification of all property details both faster and more accurate. Everything from ownership history to repair records could be collocated in a centralized, blockchain-secured repository. And, as the blockchain propels CRE toward a future of fractional or tokenized ownership, valuation experts will likely have to rely more and more upon such repositories.

Of course, any investor who has ridden the Bitcoin rollercoaster might view the blockchain with healthy skepticism. Many unanswered questions about the technology and the consequences of its widespread adoption remain. As Data Nerds and Estated CEO Joshua Fraser writes in Forbes, the blockchain may “get rid of the need for banks, lawyers and other intermediary figures and instead validate transactions purely using digital encryption.” Whether that is a desirable state of affairs for investors, lenders, developers, contractors, property attorneys, appraisers, and the communities that rely upon a thriving CRE marketplace remains to be determined.

The Best of the Rest

Artificial Intelligence (AI). The Age of AI may still be dawning, but machine learning is already being profitably leveraged by CRE professionals. Computer programs that perform tasks that typically require human intelligence are already being used to normalize data (e.g., leases, nondisclosures, available inventory), locate key clauses or phrases in CRE-related documentation, identify incomplete or missing data, and simplify fiscal reporting. By automating and optimizing specific tasks that can be redundant and prone to error when handled by a human operator, AI is also providing a better foundation for decision-making. In the long term, software-based “robots” may indeed replace these human operators outright. In the short term, however, the process augmentation AI-powered systems provide is one factor in CRE’s recovery from the financial crisis of 2009.

Virtual Reality (VR). Despite the failure of the ‘90s-era VR products, VR’s time may have finally arrived courtesy of the CRE market. (VR sales are expected to reach $40.26 billion by 2020.) VR is a natural fit for the industry, as it enables investors to tour properties without time-consuming, expensive, and environmentally unsustainable travel between distant locations. Moreover, recent innovations in VR promise to make the technology more accessible to smaller, less high-end CRE developments.

Drone Technology. The extraordinary aerial imagery we enjoy today has been made possible through the use of drones. These remotely piloted devices can photograph everything from high-rise office buildings to coastal properties to sports stadiums. Visually impressive flyover videos can be instrumental in closing CRE sales, but they can also communicate valuable information — for example, surrounding due diligence.

At LPA, we’re excited by the transformational potential of proptech, especially as it applies to crafting accurate, timely valuation reports full of actionable business intelligence. To learn more about our core values, including our unwavering commitment to technological innovation, and to explore the reasons why LPA should be your CRE valuation provider of choice, connect with us today.