Real Estate Technology: New Applications for Organizational and Portfolio Strategies
We recently looked at the technological impact on real estate investing, various applications of machine learning in real estate, and how these new technologies might affect organizational structures.
We argue that real estate companies of the future will be technologically oriented and focused, as opposed to real estate focused. This is a Flipped Model. Most real estate companies are functional and mechanistic at the top and the real estate portfolio and assets at the bottom. This is a top down organizational structure. Most technology companies are product focused and utilize their functional lines as support. Future real estate companies will look like technology companies that are focused on product innovation and product development at the top, and real estate focused at the bottom, with functional lines to support both.
The technological revolution in real estate will not come from adoption of individual technologies, but from adoption of radical thought, – Dr. Lawrence Souza, 2018
Below we propose a roadmap for real estate operating companies to transform themselves into tech-centric enterprises. Over the years due to rapid technological, social and cultural change, the real estate industry will have to make radical changes to its management style, organizational structure and technology applications. The goal of the industry is to ride the digital revolution by creating a global network of innovation, products and solutions. By adopting the virtual-technological organizational structures and advanced technologies (AL/ML, blockchain, etc.), real estate organizations will be able to confront change and uncertainty, leverage ideas and techniques, create value webs, and move toward mass customization. The unique technology for the real estate industry is not the technology itself, but the technological innovation in organizational design and behavior, as well as the creation of integrative-open global systems of communication and management.
Over the last 20 years, the real estate industry has been affected by the introduction of new technologies; however, over the last 5 years, and the last 5 months due to COVID-19, has seen a massive transformation in the use and utilization of space. New technologies are rapidly changing how investors, tenants and managers use, invest, and finance property. The introduction of Artificial Intelligence/Machine Learning, blockchain, virtual reality, tablets, cell phones, apps, 5G, etc. is putting pressure on real estate organizations to change. These changes are long overdue and the future, modern real estate company, will take a hybrid proptech form.
Due to the current state of the economy, effects of the pandemic, and rapid adoption of new technologies will radically change the way real estate companies are organized, how they add value and innovate, and how they are led by management. The revolution in real estate technologization will not come from the application of these technologies but the rapid form of ideological thought and management leadership style and culture. The latest tech innovations demand new organizational structures that would reinvest capital into R&D (not distribute all as REITs do). The CTOs must become an integral part of the organizational structure. All employees should be familiar with tools that impact companies globally (universal accountability for enterprise-level tech). There must be an open environment for collaboration to foster innovation.
This shows that real estate portfolio managers must integrate technologies to improve investment decision making, risk management strategies, and organizational and operational efficiencies.
The introduction of new technologies has gone through six phases of evolution over the past seventy years. According to Marchand and Horton (1986), the evolution of strategic information management functions, have go through six phases:
- Paperwork management, physical control of information (1950s)
- Management of corporate automated technology (1960s/1970s)
- Management of information resources (1970s/1980s)
- Business-competitor analysis and intelligence (1980s)
- Strategic information management (1990s)
- Technologicalization (2000s): agile-virtual, neural-telecommunication-social networks, Machine-Learning/Artificial Intelligence (ML/AI), robotics/automation, 3-D printing, etc.
According to Conway and Columbus (2018), Forrester predicts the Predictive Analytics & Machine Learning (PAML) market will grow at a 21% Compound Annual Growth Rate (CAGR); machine learning patents grew 34% CAGR from 2013 to 2017, the third–fastest category of all patents granted; and research done by McKinsey, shows real estate applications based on machine-learning models predict changes in rents at a 90% accuracy rate, and other property metrics at 60%.
In addition, the worldwide blockchain sector is expected to grow from $3.0 billion in 2020 to $39.7 billion by 2025; and according to IOT Analytics, the global Internet of Things (IoT) sector was worth $150 billion in 2018, and is poised to exceed $1.5 trillion by year 2025.
Organizational Structure of Real Estate Companies vs. Technology Companies:
Real estate companies have very different organizational structures than technology companies. Where technology companies are focused on functional lines and geographic locations for concentration and diversification, most real property companies are focused on a specific property sector (office, industrial, retail, apartments, storage, life science, data centers, etc) and property types (Class A/B/C, core, value- add, and opportunistic).
Depending on capital availability and scale, real estate operating companies will diversify by geographic location. Some companies may offer ancillary and complementary property types with the property sector. Most companies do not diversify across property sectors and property types.
Where technology companies are focused on product lines, functional lines as support, and individual stand alone company acquisitions to add to their portfolio. Technology companies are focused on specific product lines diversified across product attributes.
Technology companies are constantly looking to exploit new markets, disrupt old markets, to drive free cash-flow growth rates and acquire market share. This is done rapidly in a highly competitive market environment with short product adoption curves. This is why technology companies are comfortable adjusting and restructuring their organization on an ongoing basis.
What is unique for technology companies is severely lacking for real estate companies. For example, most technology companies are focused on individual hardware and software product service lines, with functional lines as a support. Real estate companies over the decades have been limited in their ability and capability to develop hardware and software technology processes and products. This is exacerbated by the physical nature of real estate assets — the miopic, mechanistic and inorganic functional organizational forms; and internal culture, psychology and politics.
Most real estate operating companies are limited in their ability to respond to market dynamics due to the capital intensity (CapX) of plow back and reinvestment in the physical assets. This leaves little retained earnings and capital available for redeployment and technology initiatives, as most of the net proceeds are paid out to investors as a Return On and Return of Capital (ROC). For example, in the future Real Estate Investments Trusts (REITs) may want to look at expanding into hardware and software technologies utilizing the REIT Modernization Act; or de REITing to become Real Estate Operating Companies (REOCs), thereby allowing them to retain more earnings, limit their payouts, increase internal capital plow-back, and grow at a faster rate. The trade off will be lower income returns, higher capital appreciation rates, and more volatility of their cash flows and stock prices.
Most institutional real estate operating companies are focused on one property sector (office, industrial, retail, and residential). The larger operators are diversified across geographic regions (domestic U.S.), and some are diversified globally across major geographies. Most companies organizationally focus on functional lines, with very little product diversification, technology product innovation or distribution, and individual company lines through acquisition outside of their core real estate competencies. Hines, Prologis, and Boston Properties are good examples of traditional real estate companies.
Hines Interest is a global mixed-use development company. Its focus is mainly on high quality large mixed-use developments (office, retail, and residential) on a global basis. Its organizational structure provides mainly functional support due to the capital intensity of its projects. Its core competencies from a technology standpoint are in its applications of construction, infrastructure, and design engineering; along with applications of state-of-the-art construction materials and design build technologies. Recently the focus has been on sustainability efforts to work towards renewable energy applications and sustainability efforts.
ProLogis is a global industrial and logistics real estate company (REIT). It is mainly focused on high quality large-scale logistics, industrial and low rise office facilities, on a global basis. Their focus is to be diversified globally, but focused geographically, with facilities on-site at ports, airports, and intermodal trucking terminals. Its organizational structure is flat and mainly functional in its support due to capital intensity of its projects. Its core organizational competencies from a technology standpoint is its flat organizational structure, and secondarily the utilization of high throughput state-of-the-art construction materials and design. Recently the focus has been on sustainability efforts, to work towards renewable energy applications.
Boston Properties is a U.S. domestic office real estate company (REIT). It is mainly focused on Class A high quality office facilities. Their focus is to be diversified in the top U.S. major metro areas (Central Business Districts-CBD). The organizational structure is mainly mechanistic and functional in form. Its organizational structure is mainly functional due to the capital intensity or size of the buildings. Its core organizational competencies from a technology standpoint is its application to building facilities technologies: automated lighting systems (LEED), HVAC systems, elevator systems, and other environmental and security control systems. Recently the company has been focused on sustainability efforts, working towards energy efficiency applications.
Organizational Response:
Real estate companies need to focus on technological innovation, development and delivery. They need to start thinking like technology companies in their approach to market demand, problems-solutions, and product development. Real estate companies need to focus more on hardware and software development, and utilize their existing functional lines as support.
Real estate companies are decades behind in their ability to respond to the marketplace. On an ongoing basis they will need to restructure their organizations and create new internal cultures, becoming more virtual and organic, and changing their internal psychology and politics to adapt. Companies may consider de-REITing, to become Real Estate Operating Companies (REOCs) to gain access to capital markets, retain more earnings, increase plow-back and grow rapidly.
Real estate companies will need to look towards developing proprietary hardware and software technologies to diversify across physical and intangible asset classes, and globally. This will allow the company to diversify across product lines and technologies, leverage their core real estate competencies and assets.
Due to external technological pressures on organization change, companies have set strategic goals for IT/IS departments: enhancing operational efficiencies, promoting business creativity and innovations, and designing strategic information systems to support business-unit objectives.
However, real estate operating companies have not fully adopted technology product or process innovation as the new operating business paradigm. This is reflected in the lack of Chief Technology Officers (CTOs), as the leader of major real estate organizations.
Strategic information systems goals for real estate operating companies should be able to:
- Improve customer relations
- Develop new products and services
- Develop reliable databases for strategic information
- Enhance organizational and interorganizational cooperation and collaboration
- Identify and develop potential markets (physical-intangible products-services).
Real Estate-Technology Hybrid Organizational Structure:
Real estate companies of the future will be technologically oriented and focused, as opposed to real estate focused. This is a Flipped Model. Most real estate companies are functional and mechanistic at the top and the real estate portfolio and assets at the bottom. This is a top down organizational structure. Most technology companies are product focused and utilize their functional lines as support. Future real estate companies will look like technology companies that are focused on product innovation and product development at the top, and real estate focused at the bottom, with functional lines to support both.
The actual real estate will be looked at as the physical foundation, infrastructure, and incubator of new rapid Property Technology (PropTech) process and product development. These products and services to be hardware and software, and tangible and intangible assets. The ideal organizational structure for future technology focused real estate operating companies is as follows:
Potential Product Lines:
- Product Research and Development (R&D)
- Industrial Design, Manufacturing and Engineering
- Physical Products (Tablets, Phones, Entertainment Content, etc)
- Social Media, Marketing, Marketplaces (B-to-B/B-to-C) Platforms
- Networking, Advertising Platforms, Interactive Media, Gaming, Education and Health (Cloud)
- Virtual Reality (Hardware/Software)
- Specific Property Sectors and Property Types (Office/Industrial/Retail/Apartments/etc.)
- Mechanical Products (Elevator Equipment/HVAC Systems/Water Reclamation/Energy Efficiency)
- Building/Construction Material Products (Roofing/Siding/Doors/Windows)
- Property Management and Accounting Systems (Software Applications)
- Hardware Technology Development (Components/Telecom/Networks)
Functional Lines:
- Chief Technology Officer (CTO)/CEO/Chairman – Board of Directors
- Chief Operating/Engineering Officer (COO), Chief Financial/Capital Markets Officer (CFO), Chief Marketing/Sales Officer (CMO), Chief Innovations/AI-ML/Security Officer (CIO)
- Artificial Intelligence and Machine Learning (AI/ML)
- Information Systems (IS)/Information Technology (IT) – Security
- Business Development, Marketing, Sales, and Investor-Tenant Relations
- Portfolio and Property Management (Products, Services and Real Estate Assets)
- Acquisitions and Development (Companies and Real Estate)
- Finance, Capital Markets and Accounting (Investment/Risk Management/Tax Strategy)
- Maintenance and Capital Budgeting (Engineering, Sustainability and Energy Efficiency)
- Human Resources and Legal
- Government Relations
Company Lines:
- Individual Real Estate Company Acquisitions (Private/Public/Funds)
- Individual Technology Company Acquisitions (Hardware/Software/Other)
Geographic Lines:
- North America
- Asia (Southeast)
- Europe
- Middle Asia (Middle East)
- Latin America
- Africa
The blog section outlined the ideal organizational structure for a tech driven real estate company.
Photo by Ramón Salinero on Unsplash
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