(Alternative heading: 5 reasons why CRE will never “TripAdvisor” or “AirBnB”)
The Ford Edsel, Microsoft’s Zune, New Coke and Google Glass. What do they all have in common? They are all product flops. Similarly, it is our view and experience that any product aiming to remove agents from commercial real estate will end up in the same trash heap. But first some background.
Like most of the Southern Hemisphere’s CRE industry I have just been on holiday. During this time I used and became impressed with the power of TripAdvisor. If you haven’t heard of it, TripAdvisor uses crowd-sourced ratings and a lot of user-friendly slice and dice tooling, to replace the traditional travel agent completely. How? It empowers you as a traveler to “self-serve” and engage directly with the hotel or guest house.
In short: occupiers talking directly to a property through sophisticated technology…
Can you feel the dots connecting?
Think about it – TripAdvisor gives users a one stop shop where complete information around available stock is available, and allows users to transact. Seamlessly.
No agents needed!
Cue alarm bells. Panic. Doom and gloom. Tech is out to get us!
As the former shareholders of these businesses below will tell you, tech-driven disruption is fast and painful:
With our fear receptors on alert, let’s lean on the mighty TripAdvisor to ask the age old question. Will computers replace commercial property agents² (i.e. leasing consultants or executives / brokers / CRES providers)?
You can quote us on this emotive and much-debated topic: we say NO. Complicated commercial real estate is not residential property. And it is not the booking of hotel rooms. Here are our 5 reasons why:
Reason 1. Risk and reward
Booking a one night stay in a city hotel because you missed your connector is a relatively simple call to make. However committing to a 3 to 10 year lease for your business – well that’s a whole different decision.
The hotel decision involves small values and limited risk. But the CRE decision: big values that you will be reminded of on the first of every month, and have to live with for a very long time.
Consequently you want a professional on your side who you can trust to assist you in reducing your risk of a bad decision. (Reasons 2 to 4 below explain the risks around “going it alone”)
This image explains the different numbers:
Secondly… Reward, and incentives
“Never, ever, think about something else when you should be thinking about the power of incentives”
Agent / broker incentives
Commissions for hotels are small. While CRE deal commissions are relatively large. Therefore, because of the large values in play, CRE professionals are financially incentivised to move closer, earlier, to CRE customers.
Accordingly we see a trend of CRE professionals being less reactive, and more engaged. This means looking to
- engage and assist tenants long before they go looking for space on the web, and
- advise potential buyers on their options between leasing and owning months, and sometimes years, out.
In summary: given the value of deals, and power of incentives, CRE professionals will engage with potential customers long before they start browsing for options on the web.
The hotel industry provides a relatively simple product – that, further, is easily comparable. Accordingly, it’s a “price race to the bottom”. So customers can shop for, successfully evaluate and transact on “specials”. Direct-customer-to-property deals can see reduced pricing compared to agent deals.
Not so with CRE. CRE, as you will know is complex. Because of the a) low deal conversion rates / tire-kicking, and b) necessary human admin involved with a CRE deal, some skilled human needs to get a share of deal economics. In CRE these commissions do not appear to be paid from tenants’ pockets. Commissions are either weaved in to the property price, or amortised over the period of a lease (in effect, paid by the property owner, but added to the cost of rentals). Further, relative to deal value or the NPV of future rental cash flow, these commissions are negligible – low single digit percentages.
So, unlike browsing online for hotel deals, with CRE (adjusting for risk and value of customer time) a customer cannot save money by going directly to the property owner.
Reason 2. Complexity
With Trip Advisor the “where do I stay” decision is collapsed into a simple number. One value is handling 5 to 7 simple variables such location, cleanliness, value for money, facilities, service quality.
See example graphic below:
And the lowest price for the best rating wins. Further, with the high churn of travellers on a hotel, you can get lots of near-real-time, impartial, ratings data on these properties. Moreover these travellers are measuring properties on roughly the same criteria as you. This empowers you as decision-maker with high quality info to make fast decisions – with a high probability of them being good ones.
This is not so with CRE. In CRE, your cost or price decision (alone) is highly complex. Please ref this link.
Then you have to consider space occupancies, location characteristics, property characteristics, soft attributes, legal implications. In TripAdvisor you are evaluating relatively simple info on 4 axes. In CRE you are evaluating more than 10, very layered, non-comparable scores. Importantly it’s very tough for a layman to make sense of comparables, and disingenuous to convert these variables into one number.
Unlike a hotel customer, where needs are fairly homogenous, in CRE what is “one man’s meat can be another man’s poison”. The same property can see very high and very low ratings by two different businesses. Why? Because different businesses have different needs.
What explains this perfectly? Do yourself a favour and look at TripAdvisor’s restaurant advice. In my opinion, they are awful. BUT that’s because your restaurant experience, like CRE, is both very complex and subject to individual tastes¹.
Secondly, short and sweet: TripAdvisor gets high volumes of ratings – i.e. the benefit of “the wisdom of the crowd”. Conversely, CRE sees low churn among property users, so there simply isn’t enough data to provide high quality deal ratings.
Reason 3. CRE barriers to entry
Choosing a hotel on TripAdvisor is simple. You know the right questions to ask, and you know what to look for.
Choosing the right commercial property for you is not.
Let’s look at the insurance industry – insurers pay large commissions to brokers, and huge sums of money have been spent trying to get rid of agents. These remove-the-broker projects have been successful for simple insurance products, like life or car. But, despite the millions spent on them, these projects have failed when it comes to high risk, big ticket complex products like business insurance or medical malpractice.
Like TripAdvisor, price comparisons on simple / homogeneous products like car or life insurance can be done easily by an everyday person. You enter simple information that you understand, and then compare results. This doesn’t require a high level of skill.
However, as with business insurance, CRE lives on the other end of the spectrum. CRE is a big ticket, non-homogenous product. CRE options analysis and advisory work requires an expert with at least 3 years’ experience, supported by specialised tooling and data, to reduce decision-maker risk.
Firstly, you have to learn a whole new vocabulary – see here.
Then for something as a simple as a once-off leasing deal, you have to familiarise and upskill yourself with the knowledge to walk through the following minefield
In short, it is pointless for customers of CRE, who are too busy running their businesses, to invest energies specialising in a set of skills they will simply discard after the deal is done.
Reason 4. The pain of missed opportunities
TripAdvisor succeeds by giving you all options. In other words, information can be trusted to be complete.
Further, if you overpay for one night’s accommodation it’s not a “train smash”. (Unlike with property, this error is not multiplied over months and years, and then escalated)
In CRE there is a saying:
“the best deals are never in the general market”
Similarly, a tenant or buyer wants the decision-making comfort of knowing they can see all options. Not a subset, not a representative sample, but all. Because it’s the deal they don’t see that could be the right one for that particular business’s needs.
To clarify, this game is data-heavy. Over and above the general public stock, property experts have access to superior information like sub-leases and short-expiring lease info.
Moreover, the best deal makers also have access to
- analytical tools,
- experience / creativity, and
to put deals together.
Reason 5. Expense and human admin
Who eats the pain of the “tire-kickers”? And, to put it bluntly, who actually wants to eat the pain of the “tire-kickers”.
In travel, 80% of enquiries never translate into deals. There are a lot of “tire-kickers” out there.
In a simple game like travel, TripAdvisor has been able to automate the role of an agent. This means it can handle enormous volumes of “tire-kicking” searches and human enquiries, at a high level of service, at very low cost, comfortable in the knowledge that these will never translate into deals.
For the reasons in points 1 to 4 above, a skilled, correctly incentivised and efficient human being is required somewhere in a leasing deal. Either up front, at initial point of contact. Or in employing many skilled humans to sit behind a web solution like TripAdvisor to interpret, assist with and respond to a valid client’s requirements, it’s required. In addition, it’s enormously time-consuming and expensive for humans to run CRE deals at a high level of service – especially when they don’t translate into closed transactions.
TripAdvisor is a people light, tech-heavy service offering. CRE needs a tech-heavy and human-heavy service offering.
Simply put: add humans to TripAdvisor’s costs, and the TripAdvisor model breaks. Completely.
And this concludes why CRE’s disruption by tech is not going to come by swapping agents with the machine
So, if CRE professionals are not going to be displaced by the computer, what will disruptive innovation look like in CRE?
We believe the future looks like this:
Fewer, highly-skilled professionals using a combination of powerful tools and data to service the same number of customer industry transactions, better.
In summary, a far more likely scenario for CRE is not the replacement of an agent by technology, but the augmentation (over the medium to long term) of an agent with the use of machine learning, artificial intelligence and other software solutions. This competitive advantage will increase the ability of such agents to serve their clients more effectively. But it will not happen overnight.
¹ TripAdvisor being strong on accommodation, and weak on restaurants is completely understandable and instructive. A human’s different tastes for a complex offering like a dining experience can not be measured on 5 simple variables.
Food and the dining experience, a highly subjective and complex experience, is more akin to CRE.
² An agent can be defined as “a person that takes an active role or produces a specified effect”. Therefore, for purposes of convenience, whether employed and incentivised by a property fund, or engaging as an on-risk broker earning commissions from the property fund, or assisting as a CRES provider paid for by customer, all these parties fall into definition of agent.
Thank you to Dr Irfaan Khota and Pieter de Beer for agitating this long-overdue post. Thank you to Ronald Laxton for reading versions of this draft