Real estate tech: Risks & opportunities for REITs

Technology is reshaping the real estate industry. Directly, it introduces new ways to build, finance, operate, and transact assets. Indirectly, it powers social and cultural changes that impact the way individuals use retail, office, residential and hospitality spaces.

Dror Poleg

Dror Poleg is the founder of Rethinking.RE, where he advises real estate and technology clients on strategy and innovation. His clients include multibillion dollar companies such as British Land, Polimeks, Lend Lease, Kardan, and Cushman & Wakefield as well as VC-backed ventures such as Breather, Carson, Kasita, BumbleBee, and BuildingLink.

These developments undermine real estate’s traditional role as a source of stable income, risk-adjusted returns, moderate volatility and low correlation with equities and operating businesses. On the positive side, they provide an opportunity for REITs to tap into new revenue channels, capitalise on their scale and increase their importance as specialised stewards of both retail and institutional capital.
In this short piece, we provide an overview of the challenges and opportunities ahead.

Technology’s Impact

New technologies are affecting every aspect of real estate value.
On-demand transportation, virtual reality and the changing nature of work are redefining location and accessibility. Online marketing gives new meaning to visibility –  with more and more tenants operating digital businesses that acquire customers through digital channels and deliver their services or goods away from traditional stores or offices.
Start-ups such as Uber and Airbnb get away with flaunting regulation and zoning laws by leveraging their popularity for political support. Crowdfunding and Blockchain start-ups create new ways to raise equity and debt –  by introducing new legislation such as the JOBS Act or by pushing the boundaries of existing regulation with ‘utility tokens’ that are arguably not securities.
Know-how that was previously restricted to experienced operators is now available on YouTube, Udemy and dozens of quality podcasts and blogs. Market data that was previously hard to obtain is now accessible to anyone on platforms such as CompStak, Reonomy and Zoopla.
Alternative equity, debt and investment opportunities are available on online platforms such as RealtyShares, Fundrise and even ‘start-up’ REITs such as Bricklane.com. Platforms such as Rezi, Rentify and OpenDoor use data and venture capital to bring liquidity into real estate sales and rental markets.
New construction methods, including 3D printing, land reclamation, CLT and advanced prefabrication, make it possible to unlock new locations on sea, land and above the existing skyline. A variety of on-demand food, storage, mobility and clothing companies reduce the need for on-premise kitchens, cabinets and parking.
Companies such as WeWork, Common and Airbnb make it easier and more pleasant for more people to share and use less space. Stability itself is no longer a virtue, as real estate users demand solutions that live, breath and evolve with their lifestyles and work-styles – and are available on-demand, anytime, anywhere.
And that’s only the beginning. A host of emerging innovations including autonomous vehicles, delivery drones and Artificial Intelligence are about to change the industry even more.

The implications for REITs

As a result of the above, the battle for added value shifts away from the quality of location, construction and property management towards new dimensions such as user experience, community, wellness, flexibility and symbolic value.
This, in turn, means that the value of assets is no longer an inherent thing. It is increasingly dependent on the operator. To remain competitive, operators will have to build meaningful relationships with their customers. This will require ongoing use of data, digital tools, branding and human touch to deliver exceptional service.
The dynamics that govern hospitality and retail portfolios are making their way to the office and residential world. Demand for flexible space, even among large occupiers, means that income will be less stable and less predictable. And new spending on technology and services increases exposure to inflation and broader business cycles.
The investment required to develop branded concepts and proprietary systems means that returns are more likely to flow along a J-Curve. Consider, for example, on WeWork’s willingness to suffer losses while it pours cash into hardware, software and brand-building. Arguably, these new dynamics will favour private equity funds who can create long-term value without the expectation of regular dividends, and with a mandate that allows them to invest in technology and operating businesses in addition to the assets themselves.

A silver lining

The challenges are real and profound. But REITs also face a unique opportunity to grow and build new competitive advantages.
As operators of large portfolios, REITs are in a great position to leverage technology to improve their underwriting, mitigate risk and – most importantly – get a better understanding of the needs of occupiers and end-users. Such data can be leveraged to tap into new revenue channels – consider, for example, WeWork’s partnership with third-party vendors to offer anything from office software to health insurance to its ‘members’.
Scale makes it possible to spread the cost of developing and acquiring new branded concepts and technologies across a large number of assets. Deploying new tools can help reduce operational costs and reduce tenant or guest churn. New office and residential products can also increase density and usage and push up rents. And software makes it possible to create an offering around a network of assets – providing tenants of one building with preferential access to amenities or services across the whole portfolio, for example.
Meanwhile, retail investors might find it even more difficult to invest and operate assets on their own. Institutional Investors have scale, but their mandates will limit their ability to build the operating platforms and branded concepts that are required to unlock the full value of commercial and residential assets. As a result, REITs will be in a great position to manage more capital and consolidate additional assets under their umbrella.