By Natalie Hwang, founding managing partner of Apeira Capital Advisors
In the 1920s, President Calvin Coolidge made the saying famous that the business of America is business. Now, for the real estate sector in the age of COVID-19, the business of real estate is innovation. To build value in the pandemic economy, real estate companies need to find new modes of distribution, facilitated by technology, to connect with consumers, partners, tenants, investors and other key stakeholders.
Once upon a time, and not all that long ago, bricks and mortar were king. Today, the COVID crisis has sharply accelerated online shopping and upended our traditional dependence on physical real estate as an exclusive distribution point for content, goods and services. This trend is nothing new, as businesses reliant on public contact have been casualties of tech innovation for decades.
Natalie Hwang, Apeira Capital Advisors
Long before the pandemic hit, e-commerce was displacing retail, robots were replacing warehouse workers and an erosion of labor’s bargaining power was placing downward pressure on service-sector wages. COVID-19 has only expedited the trajectory of these market participants and revealed the weaknesses of businesses that depend mainly on in-person contact.
The urgency and suddenness of the lockdowns earlier this year demonstrated how far real estate has yet to go beyond its usual processes and procedures. On the residential side, brokers struggled to show properties that prospective buyers and renters could not visit.
Online closings were born of necessity, not convenience. Working from home has completely transformed our idea of the office, altering prospects for commercial properties. In New York alone, just a third of the city’s workforce will return to the office by the end of 2020, according to a report released in mid-August by the Partnership for New York City, a consortium of major employers.
On the other hand, businesses that have made productivity investments by leveraging technology to create further efficiencies in scale, as well evolved their value proposition, have been much better equipped to absorb the shock of minimal public contact and face-to-face work.
Amazon and Zoom are just two examples of companies that have flourished during the past nine months in our virtual, contact-less world. The pandemic disruption has made it even more clear that developers, owners and sponsors will need to innovate to support their current market position, as well as drive expansion and find new sources of value going forward.
The real estate sector pre-COVID was working to embrace technology, albeit more slowly than other industries.
According to data from research firm CREtech, venture investment in real estate tech startups totaled $12.9 billion in the first half of 2019, compared to $12.7 billion in proptech investment for all of 2017. In its report, the Pulse of Fintech — H1 2019, accounting firm KPMG predicted that, “depending on the proptech segment, it will likely be three or four years before the sector achieves the level of maturity seen in the broader fintech market.”
So far, real estate’s technology focus has mostly centered on investments in enabling technology, where the predominant interest has been to optimize for value in current portfolios rather than investing in new technologies or businesses that have the potential to create new sources of portfolio equity value creation.
According to the KPMG Global Proptech Survey, released in October 2019, investment in digital, IT and proptech has been driven by the need for greater efficiency (68 percent), cost savings (47 percent) and better decision-making (44 percent). Some key trends have included the use of data analytics, big data, AI and machine learning; leveraging the Internet of Things (IoT) for smart appliances and smarter buildings; rental management technology such as digital applications; and virtual reality for property viewings and walk-throughs.
In these times, real estate players need to look beyond their traditional asset bases to understand their fundamental role in the market, which has been to facilitate distribution.
They should review their portfolios to understand how best to leverage technology that can expand upon their value propositions, as technology has effectively diversified the distribution landscape to create compelling alternatives to physical distribution of goods, content, services and other
consumables.
These new mediums include online media, e-commerce, mobile commerce, video commerce, virtual reality and augmented reality, among other rapidly emerging channels.
Our new normal means that to stay relevant, real estate companies essentially need to develop
multi-faceted distribution capabilities to maintain and evolve their competitive positioning, or else risk declining market power. For example, real estate companies should be evolving as media companies, getting ahead of virtual reality, so that real estate can be an immersive experience to communicate and connect with consumers.
Steve Jobs said that the difference between a leader and a follower is innovation. Real estate companies can be leaders in embracing the present disruption and innovating in game-changing ways.
It is simply not enough just to maximize the value of current portfolios. For future growth, the real estate sector has to identify new sources of value creation that can complement or expand existing competencies. The sector can propel and capitalize on new and emerging technologies and channels of delivery to build upon a distribution infrastructure that elevates the art of connection in the future to come. ν
Natalie Hwang is founding managing partner of Apeira Capital Advisors LLC, an investment firm focused on disruptive distribution technology in real estate and other sectors. Apeira Capital manages a growth equity and tactical opportunities fund focused on market-neutral investing in private, technology-forward companies.