[A Spanish version of this article is available here.]
It is common knowledge that demography plays a central role in the development of the property industry. Population rise, either by birth growth or migrant inflow, fuels demand for dwellings and other real estate assets (commercial, office, industrial…). But population growth alone is not enough. The emergence of a middle class able to save money, together with a healthy financial sector, is essential.
Moreover, economic, cultural and social changes lead to a reduction in the average number of people per household, which stimulates demand for new dwellings and other related goods and services. Supply and demand shocks may also happen as a result of unexpected social or economic events.
Apart from these traditional drivers of the property business, there is a new one that is changing the world all around us: technology. It is a rising tide that is already reaching the real estate sector. As a consequence we can expect significant changes on the business model of the industry (products, processes, customers, margins…), and eventually on the real estate investment market.
It is safe to say that, somehow, most technologies impact the property business:
- Some, such as new building materials and construction automation are clearly targeted to the property sector. In fact, following the steps of Fintech, Insurtech and the like, there is a new word to refer to the ecosystem of startups developing solutions and new technologies for the property business: Proptech. Many smart people think there is a huge opportunity to make money here, and funding, either afraid of losing its competitive edge or looking for higher returns, is starting to back them up.
- Others, like solar power and distributed generation, although not directly related to the real estate industry, could end up having serious effects on the dynamics of population and urbanism by allowing people to disconnect from the grid. Economies of scale certainly favor cities, but we will see how this plays out.
- Finally, some of them affect all industries across the board, increasing their efficiency, disintermediating, etc. Most real estate companies are focused here, as examples and best practices from other sectors are readily available and changes seem closer and easier to anticipate and manage.
The following is a reflection on the role that several technologies may play in the future of the property and building industry. While some changes are already happening, this is mainly a medium to long term exercise. Things won’t change overnight, and although some of these predictions might not materialize at all, it seems likely most of them will come true to a certain degree, which will be good enough to alter the current scenario considerably.
- Artificial intelligence, machine learning and basic income.
- Construction automation and new building materials.
- Autonomous transportation.
- Ecommerce and AI Product Recommendation.
- Telecommuting and Virtual Reality.
- New opportunities.
- Real estate investing.
- Wrapping up.
Artificial intelligence, machine learning and basic income
Pretty soon humans started using tools and animals to increase their productivity and make their lives easier. This never was a problem, since for every heavy task left to beasts and machines we could find better ways to take advantage of our intellectual capabilities.
Lately though, a very fast development of digital technology and its offspring (artificial intelligence, machine learning, robotics…) is threatening cognitive tasks which, until now, were the sole dominion of humans .
Increased automation of tasks previously performed by people will lead to a growing share of capital in wealth distribution and, provided no new jobs are created to offset those disappearing, to a general lack of jobs. An alternative to unemployment would be significant pay cuts. Yet, this can only happen up to a point, since the cost of computing power will likely keep on falling. Even for tasks that cannot be performed by machines, competition among workers would ultimately make salaries drop to a minimum. Alternatives include moving to places with lower levels of unemployment, but protectionism and cultural differences (language, mainly) would prevent that for most people. And technology will get everywhere eventually.
In the end we may need to devise a solution for people to meet ends, basic income being the most prominent. In fact, economists have been toying with this idea for quite some time: a fixed amount given to everybody irrespective of whether they work or not. Some people would keep on working to earn extra money, have fun, etc.; while others would completely rely on basic income (either because they wish so or can’t find a job). Does this strike you as communist? Prominent capitalists such as Bill Gross or Mohamed A. El-Erian think the idea is worth considering, and there are several experiments on basic income being carried out now.
A radical proposal like basic income raises many questions. Some that seem relevant are:
- How do we finance it?
- Which is the right amount for an individual?
- How would that transform the current economic system, based in increasing consumption and savings/debt as source of investments and financing?
The real estate industry could benefit from this scheme, since people with a guaranteed income would be able to allocate some money to buy or rent property. Moreover, financing would get easier, as living wages would come with some implicit government guarantee. However, as more people end up depending on basic income for their sustenance this would set a limit to the price of housing. That could affect investment in real estate by progressively devaluing current property and making new investments less profitable.
Indirectly, living on a fixed guaranteed budget means people can adjust expenses more carefully. As a result we could expect a higher propensity to consume that could benefit the commercial real estate sector by spurring consumption.
Were basic income to become a reality, it seems safe to say that some people would decide to work less hours or abandon the job market altogether. This would certainly impact the office market.
Basic income could bring more flexibility for living arrangements. Having more freedom to move, people could choose to go in search of better job opportunities, nicer weather, lower price levels, etc. And fortunately for the industry, everybody would still need a place to live. While initially putting stress on infrastructure and provision of private and public services for popular destinations, in the long term market dynamics and regulation could help balancing things out.
As a matter of fact, regulation is a fundamental piece in the real estate business that might change on account of the introduction of guaranteed income. Regulation imposes relevant costs to investors and developers (taxes, permitting, licensing, intermediary fees…) and may differ extremely even among regions within the same country.
Basic income would help in this regard by implicitly imposing tighter limits on the price of housing. A ceiling on prices would in turn push down costs in order to free as much margin as possible. But the truth is, this may only happen up to a point regarding hard costs (construction) and some soft costs influenced by technological-driven innovation (design, marketing, sales…). At some point we should expect regulation to become less complex.
Zoning restrictions in particular have a large impact on the cost of land. If those were to be relaxed that would help reduce land prices, by allowing a quicker adjustment between supply and demand. Total freedom shouldn’t be expected, though (no one wants a gas station in their backyard). Same goes for approval and changing processes, which introduce a lot of needless red tape and uncertainty and are a source of corruption (another transaction cost) in too many countries.
One important question to address is the impact of living income policies on the ownership of property. If machine substitution grows and basic income-like schemes come true, we are in for a change in people’s preferences. For example, guaranteed wages might affect private saving in two significant ways:
- A lower incentive to save in the short term. As pointed out earlier a higher marginal propensity to consume would eventually benefit commercial real estate.
- A lower incentive to save in the long term. Inheritance would not matter that much, given that descendants would receive a subsidy as well. That should lead people to increase their present consumption.
Buying a house is arguably the single most important economic decision in someone’s life (some will say marriage holds that honor). Generally speaking a living wage guarantee would change the prevalent paradigm from buying/having to renting/using. That is, it would reinforce the current sharing economy model, based on the use of existing resources as opposed to the purchase of new goods.
Following this, local and national governments could decide to encourage rentals by imposing extra taxes or fines on empty properties. Vancouver is doing this now, in an effort to increase supply and make housing more affordable.
Soon enough companies would start buying big stocks of existing housing and building new units, and a massive market for basic dwellings would be established. Once old apartments and new ones were rented to subsidy beneficiaries, the [perceived] lower risk would attract big institutional investors. Pension and sovereign funds from countries where basic income schemes do not yet exist might very well end up having a large chunk of this market (actually, the future of private pension funds would be a matter worth discussing).
In this scenario opportunity investors may start looking for plots suitable for residential projects that have held other kind of assets so far. Plots in downtowns and locations favored by the affluent segment will be particularly sought-after. Risk-takers with a long-term investment strategy may start buying assets some time in advance.
Basic dwellings would, most probably, be sold or rented by private companies subject to government requirements and scrutiny. Companies would fight to secure big contracts from governments to build those units or would build and sell them themselves. Since there is an upper-bound limit for prices (explicit or not), firms would focus on reducing costs to maximize profits. Heavy use of technology would establish high barriers to entry, and firms able to build with lower costs and scalable technology would tend to dominate the business. Those may also opt for licensing the technology to try to make it a standard.
Being true that guaranteed wages provide comfort to landlords, a worth-noting risk would arise from the increased flexibility for living arrangements brought by basic income: tenant turnover. Vacancy rate would rise as a building’s condition worsens, better dwellings are built or a new destiny becomes popular.
Companies would try to mitigate this by:
- Imposing long-term contracts. This might need some lobbying to go through.
- Offering better conditions to long-term tenants.
- Building easier to update dwellings.
At the same time, basic units’ sellers and landlords will try to increase their margins by offering customization options and additional paid services.
In the end we cannot avoid an inescapable truth of this industry: there are not two identical property assets, since they will always be placed in different locations in space. As a result they will be priced differently (within a constrained range in the case of basic income segment). People will allocate more or less money to housing depending on their preferences and personal needs.
Demography could also be affected by basic income policies. People may decide to have more children or just the opposite, with huge implications for the property business in any case.
Finally, we must take into account that providing a guaranteed income for a substantial part of the population is a very expensive proposal. Such policy will probably need of some breakthrough in energy generation and storage to come true, and that may take time . Besides, it is a policy that would surely generate incentives that would change our economy and our society, many of them we cannot anticipate.
As we delve into this fascinating topic we discover more economic and social implications that can’t be addressed here. Some will think we should start preparing our kids and grandkids for a leisure economy. In a world with time to spare there would be plenty of opportunities for research and innovation, art and culture, education and socializing. Organized religion and spiritual searching might increase its allure for some. A lot of talent might get lost in such a world (this is a problem we are already facing), but I’m confident that the final outcome will be good.
Construction automation and new building materials
If you’ve had the chance to visit a medieval town or even a Roman site you will have noticed that construction has not changed so much in the last millennia. Some basic techniques and materials are still widely used, while all around us the world has changed quite a bit. Building continues to be a lengthy and costly process, where manual work is still pretty important. As a matter of fact hard costs (namely, construction) amount to 65%-70% for a standard residential project.
Things, however, are changing. The latest trend in building projects is the use of BIM, a mix of methodology and software that the U.S. National Building Information Model Standard Project Committee defines as follows:
Building Information Modeling (BIM) is a digital representation of physical and functional characteristics of a facility. A BIM is a shared knowledge resource for information about a facility forming a reliable basis for decisions during its life-cycle; defined as existing from earliest conception to demolition.
BIM allows all players involved in the life-cycle of a project to incorporate information (on design, specifications, etc.), make simulations (of construction, changes, power consumption…), prevent loss of information or facilitate repairs and maintenance. Focusing on the construction stage BIM helps minimize stocks and waste, control costs, coordinate works and allow overlapping, optimize use of manpower and logistics and avoid reprocessing. In short, meeting deadlines and budgets.
BIM seems the right platform to advance in the automation of construction. The use of machines in the building industry has grown in the last decades, and is expected to get a boost with the introduction of robots and 3d printing technology. Automating a construction site may seem a daunting task for someone who works in the industry, let alone for the layman, but one that’ll take place nonetheless.
Indeed, the application of BIM together with robots and other machines is a powerful combination that shows a lot of promise. The use of robots in the building sector (already commonplace in industries such as auto making) may seem odd to us now, but together with 3d printing will surely change the way we build. Projects initially being built using this combination will be small in size and have simple designs and layouts, but it is a matter of time to be applied to bigger and more complex projects with the ability to introduce customization.
It is worth noting that BIM works with objects, which can loosely be seen as Lego pieces containing part of a facility or system that interact with other objects and get together to build the intended project. By favoring assembly of these objects or modules this work approach facilitates automation (robots) and further optimization of construction processes.
Companies such as Skanska have been researching this area for quite some time. In fact, almost every big engineering and consulting firm you can think of is looking for profiles in these areas. At the time of writing this post a search of job postings on LinkedIn rendered 1,974 results for BIM and 6,476 for robotics.
Automation would bring many potential advantages to add to those of BIM as they reinforce one another:
- Speed-up of construction. 3d printers and sufficiently optimized robots are faster than humans and can work 24x7, in dire conditions and without use of light. They neither get sick or tired, nor go on holidays. They do need maintenance, though and minimizing idle time will be fundamental.
- Reliability. Because machines make fewer mistakes less rework is needed.
- Replicability. Since tasks are performed always the same way, quality levels may be guaranteed. This reduces complaints, after-sales expenses and maintenance costs.
- Scalability. Broader operating ranges will let machines meet changing requirements and work at different project sizes. Training doesn’t take time once a task has been properly programmed and tested. Easy reconfigurable hardware would allow execution of different tasks updating the machine programming.
- Better control and monitoring of works, timing and costs (real-time control or control as you build). Generation of information for on-site or later review.
- More flexibility. For example: last minute changes with immediate recalculation of timing, costs and prices.
- Safer working environment for humans, by reducing riskier and more physically demanding tasks.
- Reduction of waste and debris during construction.
- Besides, machines will help bring down other construction related costs, like security, safety or insurance.
It looks like construction workers won’t be losing their jobs anytime soon, but their role in a construction project will decline gradually until most works are carried out by machines. Some tasks will require skilled humans for quite some time (carpentry, electrical works, plumbing…) until better modular construction is implemented and/or robots with equal or better-than-human motor skills are designed. In the end only a few people in charge of supervising and maintenance would be working on site. Renovation works on old buildings will be more suitable to human work given the difficulty of automation.
Given its advantages construction companies will encourage automation. As a result compromises and adjustments will be made to address limitations of existing technologies and to adapt sites to machines. Restrictions may include design simplifications and a lack of customization options and may be compounded by the difficulty of meeting local building codes and regulations. These constraints will be lifted as technology evolves and time passes, but in the meantime they will have an effect on project design.
Ultimately, we shouldn’t expect a future of robots doing the same job human workers perform today but faster. Automation will deeply change construction, with an increasing part of the construction being done off-site.
Widespread use of BIM has also big implications for urban planning. If a project’s BIM file is sent to the relevant building authority, the latter can automatically verify compliance with technical parameters, local building codes and regulations. This speeds up the approval process, reduces costs for investors and taxpayers and deters corruption.
Apart from improving our building techniques and processes there is another area where future technology advances may render big payoffs: construction materials. Research on this field is growing and a revolution driven by increased simulation capabilities and nanotechnology is expected.
Last year IBM started offering quantum computing service to its clients. Part marketing stunt, part reality, IBM’s move is telling of what’s coming. Quantum computers, which are still in the labs, will be orders of magnitude faster than the prosaic binary systems we have today, opening the way to endless possibilities.
Chemistry simulations, for instance, are very computing demanding and could benefit enormously from these future quantum machines. As a result R+D times and costs would shrink dramatically.
Focusing on the construction industry the potential benefits become apparent:
- Increased rate of discovery of new materials.
- Design of materials with new properties in terms of flexibility, insulation, energy efficiency, weight, coloring, smoothness, appearance, feel, etc.
- Enhanced versions of current materials.
- Cheaper materials: more abundant, easier and/or less costly to extract, manufacture, transport and assembly.
All of the above would help develop new construction techniques and improve current ones. It would also bring a reduction in times and costs, which is something to be considered, since materials are the single most important cost in a typical construction project.
One defining characteristic of the construction process is that it takes quite a long time from start to completion. And, since there is a time mismatch between cash inflows and outflows external funding is needed to cover any shortfalls. Financing is very expensive, so any shortening of the construction stage has a big effect on the return of an investment.
Construction projects will continue to require large amounts of capital, making them too expensive to be financed solely with equity. Therefore leverage will still/ remain to be important and could even increase its current levels if risk is reduced, resulting in an increase on the ROE of the project. Remains to be seen who will be the main funding providers in the future: banks, crowdfunding platforms or some other agents.
Automation, improvements in building techniques and processes and new materials, will help speed up construction. As a consequence financial expenses and other costs will reduce as well. Shortening of the construction stage together with lower costs should result, ceteris paribus, in higher returns for building projects.
Additionally, new materials and more efficient techniques aided by automation will increase uniformity and standardization in the construction process. This should benefit large companies, which enjoy economies of scale, as well as more sophisticated competitors. Meanwhile businesses that cannot adapt and small competitors will be pushed out of the market.
Bigger developments with higher density may be possible because of advances in building techniques and materials. This again will probably benefit large companies which can muster the resources and technical skills required to undertake these projects.
In the future we may expect the construction business to become more factory-like, where solutions based on pre-built and modular construction would be preferred. In this scenario technology-induced standardization and commoditization of construction would lead to fierce competition on costs. On the other hand, companies able to develop superior proprietary technology may enjoy higher margins in the market. They may also opt for licensing the technology and see the show from the sidelines.
Blokable, an American company offering modular housing, may be a good example of what’s coming. According to their website: “Blokable projects can be completed faster and more affordably than traditional construction projects. Bloks are plug-and-play, with power, lighting and smart home capabilities built-in”.
The final result could be for the building business to resemble auto making. Constructions sites would become temporary assembly lines, where off-site built [by robots] modules and parts coming just-in-time are put together by robots under human supervision. In the words of Sam Stacey, a Skanska executive, the company “sees it as fairly inevitable that we will be doing more construction off site, and in doing that work we will be using an increasing amount of robotics.” Job descriptions for the remaining construction workers would surely change.
In this scenario design will be affected too. An initial lack of alternatives may be seen as a limitation, but it might actually foster creativity. Later on, automation improvements and discovery of new materials will pave the way to a sea of possibilities.
In the meantime architects could face further competition from engineers until they adapt to the new situation. This will require a rethinking of necessary skills and changes in undergraduate and graduate programs. A bigger threat could come from DIY offerings, based on providing basic structures and layouts and easy-to-use apps for people to play with and come up with their own designs.
Infrastructure projects would also benefit from future changes. McKinsey Global Inst estimates that $400 billion could be saved every year by streamlining delivery on those projects, including “the application of lean manufacturing to construction and the adoption of advanced construction techniques such as prefabrication and modularization.”
Autonomous transportation and electric vehicles
You only need to read a newspaper or news site to realize that there is a revolution in the making related to autonomous cars. They promise to change the way we understand transportation, how we manage time and, yes, how we build our houses and cities.
If you think about it, a car is one of the most underutilized devices we own. Someone who commutes for two hours a day and drives for another three hours in the weekend makes use of her car for a whopping 13/(7*24) x 100 = 8% of the available time. That is, 92% of the time the car is idle. What if that person could put part of that unused capacity to good use? What if she could pay only for the time she drives? Autonomous vehicles change the paradigm from product to service, from having a car to buying transportation services.
Our cities are to a great extent built around the concept of car ownership, so we can imagine that owning no cars may have an impact on construction and property values. Not having a car means, for instance:
- No need for individual parking spaces in new buildings (not as many as now at least). This would make construction cheaper and faster, by simplifying foundations. Likewise, allocation of below ground areas to other uses could result in an increase of selling surface in new and old buildings.
- Freeing of lots and areas already devoted to parking. This would affect land prices, by making available new plots in city centers and other sought-after urban areas. However, some think that usage of transportation services will rise, so that more parking may actually be needed. Demand will certainly grow given the lower price, but it is also true that vehicles will spend less time idle (up until the cost of driving is higher than that of being parked). Besides, parking location does matter, and fleets would rather store their cars on cheap lands on the outskirts of cities.
Autonomous transportation may cause more disturbances to the residential, retail and office markets. We will bring those up later when discussing ecommerce and telecommuting.
You will have noticed that autonomous cars are coming hand in hand with electric engine technology, thanks to companies like Tesla. Goes without saying that an autonomous vehicle does not have to be electric, but apart from some other advantages electric cars are less prone to malfunction and less costly to maintain, and those are big advantages for the future huge fleets.
Electric vehicles are quieter and do not emit pollution . This would increase the appeal (and value) of street-level floors and decrease noise insulation costs. At high speed traffic noise comes mostly from tires and pavements, so electric cars show no advantage (except for acceleration sounds) and improvements will come again from new materials research. This in turn might ease setback requirements, increasing the availability of buildable land. All in all, lower levels of noise and pollution should increase the attractiveness of cities for most people.
Ecommerce and AI product recommendation software
Today we can buy online almost any kind of product or service. The rise of ecommerce is heavily pressuring brick and mortar businesses, and some stores (electronics, books…), are becoming unintended showrooms, used by clients to check the product they are interested in before finalizing its purchase online (in too many cases from a different merchant).
This has serious consequences for the shopping mall model, based on the presence of anchors (businesses that attract customers to commercial areas). Examples of traditional anchors are big department stores (a model in decline) or cinemas (hit by the availability of home cinema systems and VoD platforms). Other anchors like supermarkets or big fashion stores are still strong, but there are signs of alarm looming ahead.
For supermarkets take the case of Amazon, which is already offering two-hour delivery times for groceries and other products in large urban areas. Moreover, the company offers a selection of fresh products in Amazon Fresh, a grocery delivery service operating in cities across the U.S. and UK.
Department stores such as Macy’s and Nordstrom or clothing retailers like Zara, are experimenting with technology equipped fitting rooms at some stores. These are still very rudimentary, but one can imagine the advantages for both customers and companies of future fitting rooms featuring fully immersive virtual reality:
- Clients can complete a purchase in a fraction of the time and decide to try more/different products or visit the store more often.
- Fewer product exchanges and returns from customers, as people need less trial and error to get their size right. Especially significant for online orders when this technology hit home.
- Better stock management: no need to exhibit so many references and sizes in the store. Products can be stored already packed to be carried home by the client or sent later via courier.
- Improved feedback from the customer.
- Possibility of testing new products.
- A better layout of offline stores, less chaotic and focused on presenting the products.
The question is when this virtual technology will be available at home, preventing customers from ever setting foot on the shopping center.
Some of you may be thinking: sure, online shopping is great, but it is also very time consuming. And you are right, the offering is so vast and heterogeneous that it makes impossible to filter all the info we get. This is when artificial intelligence (AI) shows up again.
Product recommendation systems based on AI (shopbots) will filter the available offer and present us with a selection of products/services that meet our personal preferences and restrictions (budget, time…). Both preferences and constraints will be fed into the system or inferred on the basis of our browsing and purchasing history, our credit score, bank statements, consumption patterns, etc. The software will evolve and get better as more feedback is available and with time we can expect some purchases being made automatically without our saying so. These in advance or preemptive acquisitions might response to an almost depleted food supply, our favorite band playing nearby, an upcoming birthday, etc.
Product recommendation software can have a big impact in the way we buy and sell. As its use becomes widespread it would lead to:
- A likely decrease of/in margins for most retailers and producers, as brands lose value and bargaining power for consumers increases. Commoditization is the main threat (ask automakers).
- A refining of our consumption patterns, as the software recommends us to try new products and sellers.
- Further standardization of information on products and services.
- A simplification of terms of contracts that will eventually be signed by the software on our behalf.
- A shake-up of the advertising industry, as people increasingly rely on software to analyze the objective value of a product and make more informed buying decisions.
The emergence of AI product recommendation as a new middleman between brands/companies and consumers (final or other companies) would pose a major challenge for businesses, and concerned executives and strategy managers should start looking at it.
Of course the property business would be no exception to the disruption caused by shopbots. There are several ways the industry and some of its players could be affected.
Commercial properties are the first that come to mind. If people start leaving their shopping decisions on the hands of software, less physical space will be required, depressing rents and selling values of retail properties.
Bear in mind it is not necessary for shopbots to manage the whole shopping process. Just by doing an initial product filtering they could prevent some people from walking to the mall.
In this scenario retailers should provide additional advantages to get consumers to go offline and visit the store. This seems particularly troubling given the economies of scale enjoyed by online retailers.
Property related services would be hit too. Think how shopbots could affect the future relevance of real estate agents.
While we have real estate sites on the internet that help us filter the vast offering out there, at some point we will likely have to deal with a real estate agent.
Let’s say we want to buy a house. Sites like Zillow in the U.S. or Idealista in Spain present a big offering of real estate listings. Once we have a small selection of houses we need to contact their owners (or brokers in many cases), get more information and arrange a visit to the property. Later, for those houses we liked the most, we will have to allocate time for bargaining and close the transaction.
AI product recommendation could help us on every step:
- Selection. Say that we want to buy or rent an apartment. Based on our preferences and budget the software will be able to collect information on different variables: average prices (asking prices or even latest closing prices if available), construction dates, school rankings, climate reports, criminal records, travel times to the office, school, amenities and social and commercial spaces, online forums, etc. This could also help us if our intention is to sell or rent our house.
- Negotiation. Shopbots could provide negotiation tips such as price ranges or suggest changes of clauses in contracts. Eventually our software would be dealing with someone else’s.
- Transaction. AI software could perform background checks on intending buyers, sellers, tenants, etc. based on public or proprietary information available and alert us of coming deadlines, regulatory changes or defaults.
- Financing. Similarly, shopbots could get info from financial institutions, go through scoring processes and present us with available deals.
Finally, online sale of physical products will benefit from the development of autonomous transportation (cars, trucks, drones), that will both cheapen logistics and increase their capabilities (schedules, ranges). By boosting ecommerce, self-driving vehicles may further harm brick-and-mortar retailers and consequently commercial properties.
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You may be wondering who will profit from this kind of service apart from customers. There are tons of money to be made, and part of the surplus to be earned will probably come out of the pockets of manufacturers and merchants. I have addressed more deeply this issue together with some potential opportunities in an article in Spanish in case you are interested.
Telecommuting and Virtual Reality
Many people in developed countries have access to the technology required to work from their homes: internet, broadband, smartphones, computers… Yet, telecommuting is not as widespread as could be expected, in part due to some cultural and organizational barriers:
- A certain distrust or misunderstanding of technology from top management who comes from previous generations.
- Failure to set objective, measurable, attainable goals.
Too often these barriers force people to be in the office, as being in the workplace becomes a proxy for doing one’s job.
This is supposed to change as technology improves, managers more familiar with technology get in charge and increased competition forces companies to measure people’s work. And as telecommuting grows it will change the way we use workplaces and consequently the office market.
The use of virtual reality (VR) would further promote telecommuting, by improving the effectiveness and productivity of conferences and video calls. Magic Leap, a startup working on mixed reality (imagine VR on top of the physical environment), foresees a world with virtual screens.
As we saw when we talked about ecommerce, virtual reality has many potential uses. Nobody knows for sure what the killer applications will be, but apart from fostering telecommuting, we can throw some ideas:
- Health services. Computers have already proved they are better at diagnosis than human doctors. VR could alleviate congestion by preventing people from going to the hospital
- Training and education. VR may facilitate online learning (not sure about testing) by allowing people to attend live lectures and seminars, join study groups, share information, make experiments, train, etc. The traditional model of explanations at school and working at home could reverse in the future.
- Live shows: sport events, concerts, etc. could increase their audience by providing VR tickets or holding VR events.
- Physical exercise. Some companies are starting to sell gear for VR videogames. Therapy and physical exercise routines could benefit a lot from this. Think of virtual personal trainers, exercise gammification…
- Tourism. What if you could visit the main attractions in the planet without leaving your house? How could this affect the selection of a hotel or place to stay (product recommendation would help here as well)?
- Public offices and other facilities: VR could reduce our need to meet with public officials and visit government facilities.
VR has a distinctive feature that impacts substantially the real estate industry: it is a substitute for physical locations or facilities. It may increase their capacity to serve visitors, preventing construction of new developments, free space no longer necessary or even render some obsolete. Augmented reality, which roughly speaking consists of imbuing information on top of our real surroundings (think of Pokemon Go), may have an even bigger effect.
On the other hand, property related services are starting to benefit from the application of VR as a sales and marketing tool:
- VR simulations are a great way to show customers an unbuilt apartment or an existing one from their own homes, and help speed up sales for those assets. At some point all listings in the market will include VR features, and homeowners will make their own VR simulations using their smartphones and/or drones.
- Interior designs and renovations proposals can be better visualized with the help of VR, increasing client satisfaction.
As you can see VR is another threat to traditional real estate agents, who will find increasingly harder to justify their fees.
I would like here to go back to autonomous transportation, which may have big implications for the residential and office markets. Self-driving vehicles, for instance, will enable us to work as we go, and that could get some people to choose to live farther from work. This in turn would increase the appeal of suburbs, where land is cheaper. Then again, urban settings are ideal for the deployment of autonomous cars, are better served by logistics operators (ecommerce) and display a more varied offering of general services and social life by taking advantage of their economies of scale. Less noise pollution from electric cars will add to that to make densely populated areas more attractive. We’ll have to wait and see what happens.
Moving our focus to the office market, increased flexibility provided by self-driving vehicles could bring about a change of current work routines. Visits to clients and other business partners need some follow-up job (reports, internal meetings) that could be done in their way back without needing to step into the office. This could result in an actual increase of the commercial effort, making sales teams more efficient. The same could be applied to project management, control of suppliers, etc.
This consulting-like work style would reduce demand for office space, since less people will be at the workplace at any given time.
Furthermore, the use of cars as mobile offices could change people’s allocation of time. Some examples:
- Changes in peak hours as some people take advantage of working on the car to sleep-in or leave earlier, spending less time at the office. Other will go home to eat or take a nap.
- Use of travels to holiday or weekend destinations as office time.
Even if new ‘office’ jobs are created in the future, let alone if that’s not the case, it seems there is a non-trivial probability that the demand for office space will diminish. This could lead to general rent stagnation or depression, as lower prices for subprime offices propagate up to the prime market. That is, until inventories adapt to new demand levels.
There is more, of course. The use of voice as user interface, present in almost every science fiction movie you can think of, might have an effect on the workplace. Speaking to our computers sounds cool (and exhausting, right?), but some ground rules would need to be agreed to stop the ensuing cacophony. Either we end up using headphones all the time, office density parameters are tightened or telecommuting is further encouraged.
This is not by any means a pessimistic scenario for the property sector. There are threats, no doubt, but future changes will open the door to new business opportunities (inside and outside the industry). To name just a few:
- On the building side of the business there will be a need for development of machinery, robots and factories, as pre-built construction and modular solutions become prevalent. Industrial property could see a surge as a result. Last year, during Tesla’s shareholders meeting, Elon Musk reflected on the efficiency gains to be made by rethinking “the machine that makes the machine” (the factory).
- New building methods will bring opportunities in the world of design. A company like Lego could be an inspiration for many. Actually, it is already happening, as we see in the case of EverBlock Systems, which is offering “a modular building system of oversized plastic blocks that facilitates the construction of all types of objects.” DIY building solutions will probably increase their niche.
- As construction techniques and materials advance, people will have the opportunity to tinker/play with the look and feel of their homes as they please. Think of bespoke construction to mimic personal designs, historic sites or media depictions. George Lucas heirs could make a fortune selling licenses for Star Wars designs. Perhaps not a good prospect for good taste and tradition advocates.
- People may move more frequently, as their circumstances or preferences evolve. For instance, as the family grows basic income should too, allowing for a bigger apartment (unless policies aiming at birth control are put in place).
- Temporary housing solutions could be demanded by people who want to spend different seasons in different places. Shorter term lease contracts or long term seasonal ones could become popular as well. Time-sharing and fractional ownership schemes may make sense for more people in the future.
- A rethinking of home layouts may be necessary if people start spending more time at home, either because of basic income or telecommuting. If we look at how homes are now compared with 50 years ago they have not changed that much. Kitchens are underutilized (we cook less and less). Same goes for master bedrooms, a waste of space being seldom used at daytime. Workspaces at home will be a must.
- More flexible layouts. New materials, partitions and furniture could allow better customization and even changes on the spot (there may be a time when people living on basic income are given basic housing units and offered customization options by different sellers). Companies like Ikea should aim to seize part of this cake. In fact, together with Skanska, Ikea has developed affordable housing solutions at Boklok.
- More renovation opportunities: basic income beneficiaries who own a house may choose to maintain it as long as possible to make the most of their living wages. This will fade away as ownership is gradually transferred to companies.
- House automation will grow as basic systems are installed as default equipment and technology becomes transparent for the final user. With time they will be managed by our AI software.
- Facility management will gain ground in the residential area, as people demand on site services and the ownership model evolves towards rental.
- Development of solutions for self-driving and electric vehicles in new and existing buildings: charge platforms, loading and unloading, etc.
- Mixed reality technologies could end up influencing how we decorate our homes, the use of spaces and layouts.
- Sustainability is an emerging trend, and energy saving technologies and materials will be increasingly demanded.
- Refurbishing of old buildings in order to reposition them to compete against new projects.
- Demolition of old facilities, abandoned as companies go out of business. Some of these plots may prove to be good investment opportunities.
- Training of building and design specialists, including retraining of current workers or design of new degrees (e.g. BIM+robotics).
- Generally speaking there may be a huge opportunity in the customization and remodeling business: layouts, decoration, etc.
- Last but not least, we cannot forget there will always be a premium segment, who will demand a different kind of services. Gentrification of downtowns will most probably go on, with lower income citizens moving out to surrounding areas and suburbs.
Real estate investing
According to Arthur Segel, a Professor at HBS, real estate is the most imperfect of all asset classes. Among the imperfections he cites transaction costs, asymmetric information or property rights issues. All these introduce risks, fuels corruption, favor insiders and prevent real competition from happening.
Good news is some of the technologies and ensuing economic changes previously mentioned may help mitigate those market imperfections:
- Basic income or similar schemes might drive a simplification of regulation. This would bring about shorter development times and lower transaction and financing costs.
- Automation and new building techniques and practices in the construction business would make quality more uniform and reduce information asymmetry.
- AI product recommendation systems could help lowering brokerage costs and push for standardization of asset information.
As a general rule lessened market imperfections will mean lower risks for real estate investors. And while lower risk can lead to higher leverage, this would be countered by a shortening of construction stages and a reduction of building costs. Moreover, in the case of residential developments, guaranteed wages will reduce uncertainty and hence, risk.
Property is the largest asset class in the world, with an estimated value at 217 trillion USD (Savills,2016). Residential property in particular has been the greatest source of wealth for most families, and it will likely remain to be so for a long time.
From what we’ve seen so far, some changes in the residential market may be expected:
- Lower market volume ($), as the average price of housing falls because of the reduction in income levels.
- No significant change in volume (units).
- Less upside (speculation) for basic units’ developers, arising from less information asymmetry, simpler regulation and an implicit cap on prices. Upside may come from buying well located plots with other uses, especially for the premium market.
- Higher preference for renting in basic income scenarios.
- Lower business risk as a whole as a result of shorter project times and lower building and financing costs. Provided basic income policies are put in place, that should bring additional comfort to investors.
- Growing trends like telecommuting and online shopping may drive people to spend more time at home, and that should have an impact on home design. Guaranteed wages would produce a similar effect.
Office and commercial markets are expected to shrink, as telecommuting and ecommerce take off definitely, aided by autonomous transportation, virtual and augmented reality and AI product recommendation. Basic income will also affect demand of office space, as some people may decide not to work. Improved automation of cognitive abilities wouldn’t help either.
Industrial and logistics markets will thrive due to the need of new factories, warehouses and server farms to deal with the increase use of automation, ecommerce and transportation services. The logistic market may still have a big way to go as ecommerce continues to grow and its scope broadens. We can imagine that middle storage will be needed, as direct delivery for small items would be uneconomical (that is, unless energy price drops to zero, another interesting scenario we should start considering). Big autonomous fleets, for example, are expected to demand big, well-enough located plots to park their vehicles.
Finally, low cost offerings to basic income beneficiaries could instill new life in the hotel business, and time-sharing and fractional solutions may see a revival. In any case the sharing economy is here to stay and future developments (basic income, lower average salaries, autonomous transportation, etc.) will only deepen this trend.
Generally, a gradual reduction on land prices is to be expected as a result of:
- Reduced demand for office and commercial projets.
- An increase of average distance to work (blame autonomous transportation).
- Simpler regulation.
- Improved construction techniques, allowing to build on all kinds of terrain.
Profits in the construction industry will continue to be low for the foreseeable future. Only technology leaders will be able to get superior returns. In fact, it is quite likely that new technology be developed outside of the building sector. Industrial leaders in automated and assembly businesses may profit directly or indirectly applying their experience in the building industry.
Sophisticated real estate developers and home builders try to organize their activity in an industrial fashion, in order to get economies of scale and stabilize their business metrics. This in turn would help them grow in size and get access to less costly funding, resulting in a lower cost of capital. However, companies face big hurdles such as a strong exposure to the economic cycle, big financing requirements and very long land development and construction periods.
As we’ve seen, technology might help firms accomplish these goals by shortening land development and construction stages and reducing hard and soft costs. Best-in-class companies should be able to take advantage of these opportunities to:
- Streamline their operations.
- Get cheaper funding: going public, improving corporate credit rating, getting investment grade…
- Maximize shareholder’s returns.
Cities, arguably the main real estate markets, will continue to prosper. It is true technologies like distributed energy and autonomous transportation might challenge that, but there are limits to scattering and social opportunities and economics of scale will continue to favor cities (logistics, infrastructure, provision of public services…).
A general reduction of risks in the property sector may trigger a change in the profile of investors:
- Lower risks may cause an inflow of funds from conservative investors. While this could temporarily heat the market, in the long term it would improve its transparency and stability.
- On the other hand investors looking for higher yields may reallocate funds from property to other asset classes. This could lead to both the appearance of bubbles in some markets and to a general compression of yields in the long term in other industries. It could also accelerate the rate of innovation in underinvested markets in the search for the elusive returns. That could be good news for all of us.
Apart from the market imperfections previously discussed, investing in real estate requires a considerable amount of capital. Most people cannot afford to pay the full price of an apartment, a plot or even a parking space, so they must resort to some kind of financing. Then again, using the very asset we are buying as a security allows us to multiply our investment capacity (leverage).
Alternative ways to invest smaller amounts in this market include buying stock or bonds from real estate companies. This approach has disadvantages, since buyers cannot easily choose or check the underlying assets and have a low priority as creditors in case of default. They are also exposed to the instability of the stock market and to the decisions of the executives (agency problem).
Recently, real estate crowdfunding platforms are offering investors to enter the market by buying small shares of property (although through a limited company). In doing so, these investors become owners from the start and supposedly get to choose the real estate asset they want to invest in. All in all, this would make easier and less costly investing in real estate, and lead to a fund inflow in the market, but also to a flattening of returns as new investors become property savvy and technology helps us get rid of market imperfections. These platforms are quite new and we’ll have to wait to see if they manage to gain traction.
It looks human machine substitution will go on. If no new jobs are created to offset this trend, unemployment might rise to very high levels. Resulting social discontent would lead to severe distortions in the real estate market and other industries, unless powerful mitigating policies (such as basic income) are put in place.
Even if new jobs are created so no guaranteed wage solution is necessary, technology will still affect the property industry and many of the changes discussed will still take place.
There are more things to consider, since every transformation in the real estate sector will prompt changes in other related industries. For instance, a higher preference for rental would mean a smaller mortgage market. This is particularly important for banks, which use mortgages loans to retain customers and make more efficient cross-selling. Likewise, price reductions will result in smaller mortgage amounts, hence lower bank fees and revenues.
Finally, the end of cash would bring important changes to the industry. Real estate transactions are an established method of money laundering and too many times involves tax evasion. This may distort market information by reporting lower prices in deals: part of the real price is paid under the table to evade taxes or conceal criminal proceeds and the buyer sells the property later on. Not being able to pay in cash would improve price information for all participants and prevent illicit funds from entering the market.
Following this path, Blockchain may help the real estate industry by improving registry systems, preventing fraud and facilitating the spread of smart contracts, all in all further reducing transaction costs.
We have seen there are several technologies in the making that promise to transform the property business. As a result, products, processes and business models will be profoundly changed. Some agents in the industry, such as brokers, may soon become irrelevant.
This post is centered on developed markets. Things may go slower in developing markets, particularly for technologies that require big investments on infrastructure, such as autonomous transportation. Lower availability of skilled professionals and inadequate enforcement of the rule of law may slow the diffusion of certain technologies and social changes and allow for market imperfections to reign.
Discussion is focused on the middle and lower classes. Future upper class, with a growing share in this more capital-intensive economy, will demand different services and play a decisive role as investors.
There are many ideas scattered all over the article. Here are some of them:
- Technology will transform the industry. It won’t happen overnight, but as technologies mature and killer applications are discovered changes will unfold at an accelerating pace.
- Basic income, if happening, is a game changer, having by far the largest effect on the industry: implicit cap on housing prices; emergence of a big market for basic housing units; simplification of regulation; higher preference for rent vs purchase, etc.
- Building costs will go down, impacted by automation. Economies of scale will be more important as the building industry becomes more factory-like. A degree of commoditization is to be expected, higher if basic income or similar schemes turns out to be prevalent. Soft costs should also diminish as AI improves.
- Land prices will gradually fall as technology-induced market changes increase the availability of buildable land, reduce development and transaction costs and affect consumer preferences.
- Design will be affected, for the better. As time passes initial restrictions will be overcome and new technologies and materials will open new possibilities for artists. If you think about it, today’s kids are playing sandbox games like Minecraft, a breeding ground for future designers to practice and hone their skills.
- Demand for office and commercial markets will shrink on account of upcoming changes. On the other hand demand for industrial and logistics will benefit from automation, product recommendation and autonomous transportation.
- Development of killer applications in virtual reality may pose a significant threat to the property industry, by reducing demand for floor space.
- The affluent segment will demand premium services.
- Technology should help alleviate market imperfections, leading to a general reduction of risk. That may attract more risk-adverse investors to the industry.
- Location, location, location. This won’t change as real estate assets are by definition placed in different locations in space.
Investors are always on the lookout for new opportunities, something that’s proving hard lately. Analyzing how emerging technologies may disrupt real estate seems to be a good idea, and investors should definitely look at emerging Proptech startups.
 Not only cognitive tasks. If we think about it craftsmanship is in part about small imperfections (trademark of manual labor), which could be replicated by introducing randomness in the industrial process. In the future we might find vintage robots (more prone to error) becoming the new artisans, at least for the mainstream market. By the way, if you haven’t you should read ‘The second machine age’ by Erik Brynjolfsson and Andrew McAfee.
 Something the pharmaceutical industry needs dearly now that it seems we have run out of the low-hanging fruit.
 I’m aware there is pollution in the manufacturing and energy production processes.
 Actually, technology could impact reproductive decisions via substantial increases in life expectancy, ectogenesis, etc. Economic policies such as basic income could also contribute to those decisions.
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