Managing Partner, Capital Markets at PIA Residential.
Countless businesses and models have been disrupted by technology and the speed of these disruptions is growing exponentially. The current pandemic has exacerbated this phenomenon as each disruption usually happens slowly over time as people get more comfortable with the tech. New realities are forcing the workforce to utilize and quickly iterate and adapt to new technology in order to have any semblance of productivity. Technology is quickly emerging and shaping the future of real estate, and our coping with the pandemic is fueling the mass adoption of many new technologies. Awareness and forward-thinking will be vital in strategy and the approach to certain aspects of the ever-evolving real estate environment.
This is very clear in the disruption of the taxi industry. The “Uber effect” shows how quickly an industry can be changed by technology that is quickly adopted. The taxi industry was upended by ride-sharing platforms as they could not compete due to the cost of taxi medallions. It was easy at first for taxi executives to ignore these ride-sharing apps as they strongly held the market share of this industry. But once ride-sharing took hold and was widely adopted, holding a taxi medallion had lost an immense amount of value.
The real estate sector has historically been stable as an investment class and many believe it is immune to the rapid adoptions of new technology. This thought process will create the allure of risk mitigation, but I caution you to inspect how technology will affect your real estate investment opportunities. Naturally, all real estate asset classes will be affected differently, and asset classes like multifamily are more insulated due to the defensive characteristics and the fact that shelter is a basic need.
There is a fundamental shift in the office sector as companies realize that productivity could be increased by eliminating commute times and that remote opportunities provide value for the employee and the employer. Employees are now able to take advantage of low-cost environments and companies could handpick employees and adjust pay rates based on the cost of living in these locations. Office space becomes a premium that many companies will no longer need as the working class embraces the new normal of Zoom calls, Slack channels and other mediums of communication and oversight. These technologies were not built to sustain this mass adoption, and as they iterate to account for demand the speed of adoption will multiply.
The current state of retail had already been disrupted by internet giants such as Amazon and others making shopping more streamlined and allowing for the elimination of in-person shopping. We are now witnessing the rapid iterations of contactless shopping and the transformation and framework for a shift in how we interact with retail. The retail markets will be affected in countless ways; shopping centers will utilize artificial intelligence, making SKU and inventory control more reliable. Technology advances in delivery systems and logistics, warehouse storage and 3D printing will all play major roles in the transformative shift in how we purchase products and how products are manufactured, stored and distributed.
Single and multifamily housing sectors won’t be immune to the rapid adoption of technologies. This shift was already in motion and the pandemic is expediting the mass acceptance of what people value in their homes. It is clear there will be a migration to tertiary cities where the cost of living is much more affordable as there will no longer be a premium on being close to the office. The reduction of individual-owned vehicles may eliminate the need for garages in homes, allowing them to be converted to home offices. As people spend more time in their homes, there may be an emphasis on having amenities to utilize when they have downtime from their remote work.
The ideal focal point when evaluating real estate opportunities is to maximize returns. While it may seem obvious, you can’t have a clear view of returns if you don’t understand how to identify and evaluate risk. Risk-adjusted returns that account for a detailed set of risk factors will provide a much clearer picture of actualized value. The world is evolving at an exponential pace. Technology is affecting all the asset classes, and if your business model is buying into an asset class, you must understand what technologies or business models provide the most risk-averse scenarios for wealth creation. Exponential technologies are colliding into each other, reinventing products, services and industries. Understanding how your asset could be devalued or adversely affected by advances in technology within a five- to 10-year time horizon will be crucial to your future success. My findings are that the typical real estate investor does not include technological risk in their evaluations of opportunities.
Technology has created an ecosystem for rapid advances, disruption and the elimination of previous methods and models. Technology has grown exponentially over the last century, and the speed at which reliable and stable industries are disrupted is indisputable. We would be remiss to ignore that all sectors, including real estate, are affected by technological risk. The thought leaders who are anticipating these disruptions and building technological risk mitigation into their current and future business models will inherently become more risk-averse, effectively creating opportunities by positioning their firms to adapt when this inevitably occurs.