Topic Centers

Real Estate Horizons

Real Estate Horizons is a snapshot of key legal topics and market trends across the globe.

Real estate innovation: the future of real estate

By Michael E. Kaplan

While innovation in the real estate sector has historically been incremental, a new wave of property-based technology solutions, (PropTech), may disrupt the way stakeholders identify and solve problems. Through that disruption, those with a tech-savvy approach to real estate can better identify new opportunities and investment approaches than those who are reluctant to adopt PropTech solutions.

Previously, real estate has performed well in its historical core competencies, but has lagged in the adoption of technologies, as introducing flexibility into what was historically a fixed asset has always been difficult. New technology is providing building owners and managers with the tools to better understand and respond to what is happening in their spaces, the functionality of building systems, and, most importantly, user demands. These tools allow investments and strategies to be tailored to meet actual demands, as opposed to predicted demands.

We are increasingly seeing that tenants are less certain about the number of employees they are going to hire as businesses can expand at much faster rates than was historically common. However, real estate has been centered around long lease terms; landlords did not need to offer solutions related to the scalability of space. Now, new technology is allowing landlords to install more module physical installations, and software suites that are easily upgraded, providing tenants with the flexibility and scalability many require. Landlords who implement these solutions and provide flexibility are often in a better position to meet the ever-changing demands of tenants than those who can only offer classic 10-year lease terms with limited space flexibility.

The rise of co-working firms is a good example of some of these concepts. Co-working businesses seek to capitalize on their ability to fractionalize space offering greater flexibility and pricing that is more responsive and scalable. Indeed, many institutional owners are looking to offer their own dynamic pricing and flex space solutions to their tenants, often piggybacking off their classic offerings to provide flexible arrangements in the same buildings or complexes. Landlords are increasingly aware that they have a choice between riskier dynamic pricing models and less risky longer-term fixed lease arrangements and many are opting for flexibility. Both Landlords and Tenants have choices that fall on a spectrum between these two poles, and such optionality is likely to increase as the use of buildings and attendant income streams grow more segmented.

PropTech is also helping capital providers and real estate owners better identify and understand risk around tenants. Risk was (and largely is) usually looked at by evaluating the credit of a tenant based on how they have performed historically. However, PropTech can better model and predict risks through the aggregation of more comprehensive data, which can be analyzed in real time. This allows stakeholders to better analyze risk on a “going forward” basis, which better informs pricing, returns, and space demands.

These intersections between technology and real estate represent a new approach to the industry by providing new tools and new flexibility, and those who better understand the uses may have a strong competitive advantage in the near future.

Loading data