The Future is H[app]ening
Ready or not, the rise of disintermediating technology platforms and solutions are having a major impact on the CRE industry.
The biggest challenge when assessing the impact of property technology or “PropTech” on commercial real estate (CRE) is establishing a working definition. For our purposes we start by limiting PropTech to the impacts of the digital revolution. Historically, by the mid-1980s the first application of computers to data and analytics emerged with such performance management tools as Argus’ valuation and asset management software. By the 1990s, the internet introduced real estate portals and by 2007 improved “searchability” using digital technology, such as PropertyGuru, ensured listing and analyzing of real estate assets that allowed property agents, developers and owners to showcase their listings on a single portal. CBRE Group subsequently started citing PropTech start-up numbers in 2012, marking the transition from importing and adapting existing technologies towards specifically tailored real estate solutions.
A narrow definition associates PropTech with CRE digital start-ups. A broader definition, however, seems more appropriate, given the developing range of real estate legacy firms integrating digital-based solutions, often increasingly as venture capital sources.
This leads Scott Addison, president of Brokerage Services for Colliers International, to provide a much more expansive definition. “We look at PropTech as anything that touches buildings and real estate. You have all the sales tools, you have all the things that are driving building efficiencies and how tenants interact with buildings.” Lorne Burns, partner and National Industry Leader for Real Estate at KPMG, goes even broader, “We consider it anything that utilizes a digital or technological innovation or application in the real estate industry.”
Calgary-based Matthew Boukall is the VP of Altus Group, an international firm that uses technology & data to provide actionable CRE analysis and advice. He initially places emphasis on transactional efficiencies, “about enabling the digital workflow from a property management perspective, about automating or at least streamlining the existing paperwork flow.” But captured data also becomes a support tool that enables other participants in the market to gain more knowledge. PropTech includes multiple types of data-gathering sensors operationalized using automation processes that increasingly will use artificial intelligence (AI) and machine learning (ML) to limit human monitoring and permit automatic issue resolution. Improving client/customer services is also a key issue. Finally, PropTech also encompasses outside digital influences such as autonomous cars, the gig economy and potentially disruptive alternative business models.
Organizing the PropTech Universe
Some suggest using basic categories like software, hardware (sensors, smart phones, drones) and the distributive ledger Blockchain. Alternatively, Yael Geffen, CEO of Lew Geffen Sotheby’s International Realty, identifies seven linked organizational elements: big data; machine learning; IoT sensors; Blockchain; 3-D printing and modular construction; autonomous vehicles and drones. Big data, used across the board for development potential assessment, asset management, valuation, marketing and client/customer services, is optimized through automation with AI and ML. Hardware, like dedicated sensors, IoT sensors, drones and even satellites provide the big data. Blockchain will dramatically simplify real estate’s regulatory and paper flow burden. Tangentially, 3-D printing and modular construction may significantly transform the construction sector affecting brokerage timelines while autonomous cars will radically alter urban form and real estate development. Challenges from new competing business models and the impact of lingering out-of-date government regulations and new regulations, especially for sustainability and smart city infrastructure, are additional “verticals.”
In a February podcast for RealCrowd, Minta Kay and Salil Gandhi isolated 10 similar forces driving PropTech. To the above they added a more “curated” tenant experience (including responding to tenants’ increasing demands for greater environmental sustainability), repurposing retail and using data and AI to plan future urban development. The fear-of-missing-out (FOMO), they suggest, will lead to increased urgency generating a change in traditionally conservative real estate attitudes. Finally, PropTech start-ups will undergo a wave of consolidation.
Digital technology is often portrayed as disruptive, even transformative to legacy business models, and while both are certainly on display, ProTech’s most significant impact is probably more as an enabler that provides multiple tools for improving efficiency and service in existing business models.
PropTech as Enabler
A consensus suggests the penetration of enabling tools has been slower than in other sectors, but a report by the Altus Group released earlier this year titled The Innovation Opportunity in Commercial Real Estate: A Shift in PropTech Adoption and Investment found a significant percentage of CRE firms are now targeting process and analytical efficiency tools. This means improving business intelligence is core, achieved through digitally-based data collection to which enhanced analytics is then applied. Increasingly, firms are also applying process automation and, slowly, AI and ML to automate both decision making and responding. April’s Real Estate Capital Markets Conference in Vancouver agreed that innovation, with AI/ML predictive analytics will be the coming focus. Still, while the Altus report found automation by function ranged from 25 to 41 per cent of those surveyed, the average adoption of AI/ML only averaged approximately 11 per cent.
Nik Sudhakar and Jonathan Hills at CBRE Asia Pacific define analytic tools as those that transform data into useful guidance through “immense data processing, presentation, and analytics, and include reporting and querying software, online analytical processing, data mining and digital dashboards.” CBRE’s own offering, for example, permits users to “measure properties and leases against benchmarks based on current market costs and local efficiency standards, while highlighting and prioritizing portfolio cost saving opportunities, potential implementation costs and the complexity/achievability of savings options.” Automatically, algorithmic logic identifies optimization potential bypassing the need for months of manual assessment.
When asked if PropTech is really more about being an enabler than a disrupter, Addison has no doubts. “Yes, definitely,” he answers. “It’s allowing us to use all this data that is floating around to bring it into reports more quickly and efficiently.” Burn’s agrees, adding that data management and analytics “is where most of the money has gone,” with robotic processes and automation representing the future.
The potential range of functional applications is extensive. It starts with the use of digital mapping services, start-ups that provide deep intelligence on a site’s potential (ownership, zoning, etc.) and flows into design and construction (becoming known as ConTech). In terms of the latter, Addison cites the potential use of sensors embedded in poured concrete that use WiFi to indicate the concrete has cured in 10 days rather than the industry standard of 25 days. “If you can make occupancy times a lot faster,” he says, “it really helps clarify things for a brokerage.” But, he laments, changing construction industry traditions and regulatory norms will not be easy. Deal sourcing, use pricing and location-based marketing are also significantly impacted by big data availability and analytics. In terms of marketing, increasingly sophisticated portals, virtual reality, and response programming improve sales and leasing performance.
Focus on PropTech’s ability to improve tenant experience, whether a commercial business leaser, condo management board or residential renter is a core concern. Smart buildings are key, although a recent Globe and Mail report suggests builders may be plagued with a dearth of required skilled workers. While implanted sensors play a role, the internet of things will play a major role in generating big data to facilitate service provisions. Tenants’ control of their environment, including remotely through smart phones, improved services such as automatic programming of elevators based on usage patterns, responsive energy usage, and predicting potential failures are but a few areas.
PropTech as Disruptor
While enabling may be ProTech’s core outcome, disruption is also baked into the digital revolution, which broadly clusters into three categories: related digital trends; alternate business models; and public policy impacts, the first of which includes digital innovations not directly focused on real estate but has significant implications. Most frequently cited is autonomous/electric vehicles. With up to 60 per cent of urban space currently car-dedicated and the high cost of below grade parking, the implications for CRE will be enormous. Although Addison believes the industry views this technology as 10 to 12 years down the road, he, as well as Burns and Boukall already see increased ceiling heights and flat rather than slanted decks to facilitate adaptive re-use. Perhaps the best Canadian example is Calgary’s new East Village garage designed to be converted to other uses as parking demand declines.
Second, alternate business models like Airbnb and Sonder have disrupted the hotel sector. Recent studies found noticeable impacts on room revenues, average daily rates and occupancy rates in the mainstream hotel sector attributable to the former. Yet while Airbnb has been profitable since 2017, it faces issues of trust and loyalty. Perhaps most importantly, significant regulatory action by many municipalities may both cut into its cost advantages as well as limit available units. The latter will be encouraged by evidence that Airbnb kept 31,000 residential units out of Canada’s long term rental market last year. While the model is disrupting the hotel industry, it is probably more an irritant than a threat and, as is so often the case, has spurred innovation within legacy firms.
Canada’s e-commerce penetration was nine per cent of retail sales in 2018 according to Statista, consistent with recent U.S. figures from YCharts but much lower than the U.K.’s 20 per cent rate and rising. While e-commerce has and will impact bricks and mortar retail, Boukall posits a new relationship with “smaller retail spaces, which are all about ‘experiencing the goods’ while also integrating with online delivery [creating] seamless interaction between the bricks and mortar retail and the online shopping model.”
Similarly, co-working offerings have “certainly been disruptive to the commercial real estate space,” says Boukall, “But the impact on more traditional leases may be a bit overstated.” Additionally, legacy brokerage companies are increasingly working with, rather than competing against, co-working firms. Colliers, explains Addison, collaborates with Upsuite and Regis. “This originally helped our brokers identify spaces… [but it is also] helping landlords analyze whether to change a floor into co-working and can they advertise and market it directly themselves.” Brookfield, Canada’s flagship developer and institutional landlord similarly works with Convene.
Finally, public policy disruption around PropTech takes place in two ways. First, slow changes in regulations around such things as Blockchain and construction standards can inhibit innovation. Second, new sustainability, smart growth and new urban form standards will stimulate digital-based solutions.
PropTech as Transformer
Legacy CRE firms are unlikely to go the way of Blockbuster. These existing companies will themselves transform markedly as the digital data revolution takes hold. Within some occupational professions, however, there may be significant casualties. Blockchain, and what Altus calls disintermediating technology, may eliminate conveyancing and other legal and regulatory professions. Sales and marketing platforms like Habiteo may replace traditional marketing operations.
One transformative possibility, too broad to address here, is suggested by Alphabet’s controversial Sidewalk Labs project on the shores of the Toronto waterfront. Already the giant firm is proposing radical new urban form and talking about building cutting edge infrastructure. Is the next step to become the new, all-inclusive data-based developer in partnership with municipalities?
Laggard or Leader
PropTech is growing exponentially with start-ups and unicorns proliferating rapidly. According to Bisnow’s Mike Phillips, investment in 2018 reached $20 billion worldwide, representing a 38 per cent increase over 2017. The consensus on acceptance, however, is clearly that the CRE sector has been a laggard not a leader. As CBRE Canada vice chairman Paul Morassutti said early this year, “I do not see a lot of tech experience in the C-suite. In fact I see almost none.” A sentiment echoed by PwC’s 2019 trend analysis, which reports only 10 per cent of real estate CEOs are concerned about the speed of technological change compared with 38 per cent in all other industries.
As KPMG points out in their 2018 report titled The Road to Opportunity: An annual review of the real estate industry’s journey into the digital age, while 43 per cent of European real estate firms surveyed answered “yes” to having a clear digital and technological innovation vision strategy, only 23 per cent concurred in North America. “The property industry,” the report concludes, “is notoriously slow moving and the vast majority of organizations are followers rather than trailblazers, waiting for others to pave the way.” A sentiment echoed in both the Altus and PwC reports.
Optimistically, however, the glass may now be half full and filling up. FOMO (fear-of-missing-out), particularly by large legacy firms, is being driven not by the threat of alternative business models but by the cautionary tale of Blackberry, a once-mighty sector leader that just stopped adapting and paid the price. If the Altus Report starts with the observation that many are still watching and waiting with their spreadsheets in hand, there is a tipping point emerging where “CRE firms are, for the most part, fully engaged in PropTech advancement and adoption.”
Perhaps this is nowhere more evident than in the number of firms developing their own internal PropTech capacities, partnering with new service providers or investing directly in start-ups. “We are going to see a lot of job growth in real estate globally through hiring of tech people to adopt and implement a lot of these technologies,” is one key prediction from the 2019 Real Estate Capital Markets Conference, a conclusion supported by the PwC report and by Addison.
The third trend, direct PropTech investment, is well-along in Canada. According to Altus, 53 per cent of CRE firms are directly investing in at least one start-up. Colliers, says Addison, is both developing its own proprietary apps around areas like valuation while partnering with tech-stars to operate Colliers PropTech Accelerator. Last September, 10 start-ups where “graduated,” including MapYourProperty which, says Addison, provides searches, maps, and due diligence reports as well as providing analytics with regulatory data sets. With the Accelerator, “we get to be an early adaptor; [we] get our people on it a little faster.”
In April 2108, Brookfield funded its Brookfield Ventures with $300 million. Initial investments included BuildingConnected, a networking and pre-construction management platform and, last May, VTS’s platform for commercial real estate landlords, brokers, and tenants. November 2018 saw DREAM Unlimited, whose business includes condominium, mixed-use and renewable energy infrastructure development as well as asset, REIT, and commercial property management, launched Alate Partners jointly with Relay Ventures. The $40 million fund is directed at PropTech companies with initial investments in Lane, a tenant experience and communication platform, and Park Whiz, a smart parking solution. Similarly, Cadillac Fairview announced a $50 million investment in PropTech venture capitalist firm Framework Venture Partners. Many also see start-ups now undergoing necessary consolidation that will lead to more relevant and seamless integration with services and products that respond more directly to specific CRE “pain points.” With Realtor Magazine declaring Toronto one of four fastest-growing PropTech hubs globally, Canada should be on track to become a leading CRE innovator.