Technological disruption: the end of the lease?

Antony-SlumbersAfter attending last month’s FUTURE:PropTech, Antony Slumbers explains why the real estate industry is equally cursed and blessed

Real estate is blessed because nothing much is changing in terms of how the industry works, but cursed because something much bigger is coming down the tracks.

First, the upside. Residential, for all the talk of “disruption”, is largely the same as it was a decade ago. The vast majority of people use a traditional estate agent and list their properties on the portals. The online – or call centre, as I have heard them disparagingly called – agents have spent a lot of money, but not got very far.

Truth be told, most people are more bothered about getting the very best price for their homes than saving a small percentage in fees, and that fear of losing out – a primal human instinct – is hard to counter.

Yes, there are new marketing tools. Virtual reality will be big, though perhaps niche until smartphones become our VR devices. It is imperative for every agent to offer first-rate technology at every touchpoint of the consumer journey, but is the residential market being disrupted? An emphatic no.

The commercial sector is changing even less. Public datasets are only slowly becoming available, the agents guard their own data, and even now there is no good search system available for Joe Public.

On top of that, it is estimated that a third of the world’s real estate assets are still managed via spreadsheets. And judging from many of the comments at FUTURE:PropTech, surveying firms are adamant that this is how they want things to stay.

The industry mindset is still very protectionist, and any notions of free and open markets growing faster than closed ones is dismissed, often angrily. In this world, the primacy of the lease is everything and the thinking goes that if data surrounding leases is closely guarded, then the industry has little to fear from disruption.

So an industry truly blessed; the mechanics of the market are stacked in favour of the incumbents. Let the good times continue.

Ah, but life is not fair. Most successful companies do not fade or die because someone comes along and does what they do dramatically better.

Once powerful and on a sustaining path, incumbents are very hard to shift. “Weebles wobble, but they don’t fall down,” as the saying goes. The real threat is always from something coming along that changes the value of exactly the thing these companies do. The danger is that the market changes and you are stuck producing a product or service which, while brilliant and efficient, is no longer desirable.

The PC killed the mainframe and mini computer (DEC, Wang), the smartphone killed the mobile phone (Nokia)
and the compact camera (Jessops), and Uber is killing the traditional taxi business.

This is what will happen to the commercial real estate business. It is not that lease data – and all that sits atop it – will suddenly become open source and publicly available, and in doing so open up the industry to a wave of competition that will destroy margins, or empower customers to route around the advisory services they are currently lavishly charged for.

No, the point is that the lease itself will go the way of the dodo and become something that is simply no longer fit for purpose. Not entirely, of course, because a decent chunk of the market (top end, large corporates) will still require large amounts of space on secure long-term leases. But the business landscape is becoming ever more barbell-shaped – large numbers of big and small companies, with a diminishing number of mid-sized firms. About 80% of City of London-based businesses have fewer than 10 employees. As this trend develops, can long leases remain relevant?

Serviced office space has quadrupled in the past 20 years. Factor in the growth of co-working and it is not hard to envisage a majority of space being occupied as a service. All of which means that many traditionally minded commercial real estate players are protecting a dying market.

The seeming normality of the industry today very much flatters to deceive. The curse that has yet to be felt is merely sotto voce. But there is another blessing out there, which is that the entire technology landscape is moving from hardware and software to services, and the death of the lease fits in with this trend. The smartphone may be only nine years old, but essentially it has been perfected – witness the moaning that the iPhone 7 is likely to look almost identical to the iPhone 6.

What has this to do with commercial real estate? Everything. We all have a supercomputer in our pocket and the world’s knowledge available on demand. Increasingly, we crave experiences, not ownership, and what we will spend our money on is wrapped up in one word: services. Technology changes behaviour, not the other way round, and it is becoming invisible.

Great spaces have a rich, but hidden, digital layer that enlivens them and makes them much more appealing places to be. Technology is allowing us to become more human, with far fewer restraints. The big restraint that we no longer want is the lease.

Once the industry figures out a new financing and investment model for this world, it will explode. Freed by technology, the real estate industry will enter a golden age: different, but much better.