Why Is Automation So Hard in Commercial Real Estate?
In 2016, Harvard Business Review released a study ranking how digitally advanced the different sectors of industry were.
Real estate ranked below mining and just above agriculture and hunting.
In the three years since, we have witnessed the rise of proptech, which is applying a modern approach to many of the individual functions carried out as people interact with the built environment. But, to truly enable digitization of the real estate industry, it’s my view that there needs to be a greater fundamental change in how the industry works.
The entertainment industry (which ranked very highly in HBR’s 2016 analysis) has completely undergone a digital transformation. Prior to this, it saw many novel and gimmicky technologies that were not focused on the end user’s experience but were focused on protecting the interests of the oligopolies that own the assets. For instance, Sony owned DRM, the technology that could be used to protect their copyrighted materials — but DRM didn’t have a robust platform for distribution and so got completely disrupted by apple iTunes Store. A lot of travel agencies invested a lot in online portals, but they didn’t automate and thus got their lunch handed to them by Expedia.
When disruption comes, it may not even come by somebody with the best product or technology, they may just have a better story. The two best examples that I can think of are Global Crossing, the telecommunications services company, and Napster, the music file-sharing company.
Both of these companies had a proposition that excited the customers of telecommunications and media companies, respectively—and neither company lived up to their wild potential.
Even though they did not have a robust business model or appropriate infrastructure to survive, they were the harbinger for things to come for those two industries. The result was established players set-up, paid attention, and fundamentally adjusted their business models, realizing that digitization would, in fact, unlock greater value. Those that did not perished. WeWork is that harbinger for the property industry.
The marketplace has decided that it wants flexibility, services, amenities, and quite possibly, community. This demand will only grow with the millennial workforce. This new stream of demand presents great opportunity for revenue generation but brings additional complexity to an already complex business. To tackle this complexity, landlords outsourced the problem to WeWork and their copycats. Now with the real possibility that WeWork will go the way of Global Crossing and Napster, landlords must acquire their own capability to manage what their customers want.
There are landlords attempting this with “innovation teams,” “new flexible business units,” and “tenant engagement portals,” but these things are still run as silos, not as part of the core property offering. In most cases, the innovation teams have no power in the business to implement the innovations they come up with. Until there is a native frictionless way to engage with the market, the real benefits will not be seen as they have been in other industries that have been digitized and automated. Without rules to protect the rights of the landlord and the other community members, the digitization of the real estate industry will comprise nothing more than a collection of limited disconnected applications, as it is now.
There are three issues that are roadblocks for the property industry to solve these problems.
The first is that everything in property is siloed; there are many disparate systems that don’t communicate with each other — and that is an obvious problem.
The second is asset managers have never been focused on customer experience (I know this because I was a professional tenant for 21 years), rather they are focused on a 20 percent return for the asset. If they are meeting that benchmark, then good enough is good enough. I believe there is a lot more value to be unlocked.
The third is that technology people and property people do not speak the same language. There are very few people who manage to cross this chasm. Most prop-tech solutions are designed by technical people with very little property experience and sometimes the result is a beautiful technical solution that doesn’t solve the real property problem.
Global Crossing was not the end of the internet; Napster was not the end of the entertainment industry or digital rights management. WeWork is not the end of commercial real estate or flexible workspace. I think, after a rough patch, if landlords take a root and branch approach to how they manage their portfolios and get rid of their inertia against change, then it’s probably the start of a long-term boom.
Marcus Moufarrige is the former COO of Servcorp and founder of ility, a tech platform to offer flexibility for landlords through automation.