(Today’s guest column is authored by Anthony Luna, CEO of Coastline Equity, a commercial real estate advisory and property management firm based in Southern California. He can be reached at [email protected] or through www.coastlineequity.net.)
Over the last several years, numerous forces have converged to upend the real estate market. It seems the industry will remain tumultuous in the years to come with more than the usual share of economic cycles.
While that might sound like bad news, as the saying goes, “Amid chaos, there is also opportunity.” Real estate professionals, investors, and property managers don’t need to be passive in the face of these forces of chaos. Instead, examining them closely can help industry professionals leverage the chaos and the resulting opportunities to their advantage.
Covid’s impact on the real estate market
The Covid-19 pandemic left chaos in its wake in almost every facet of the real estate industry. Lockdowns emptied downtown commercial buildings and decimated small businesses. Today, there are main business corridors, major malls, and smaller shopping centers that lost most of their tenants during the pandemic. Those tenants aren’t returning. With the subsequent wave of financial stress, there has been a rise in commercial mortgage-backed securities (CMBS) loan defaults and years of unpaid rent.
Yet, opportunity and creativity can be seen as real estate professionals explore how to renovate space to meet post-pandemic needs or convert properties from one product type to another entirely. As the hybrid work model grows, businesses and their employees will start returning to office space.
The difference is some will require less square footage and will seek designs that differ from the traditional office plan. The open-plan workspace is likely gone forever as employees seek more physical distance from their co-workers. For those organizations that support rotating in-office days, employees won’t need their own dedicated desks.
Office space isn’t the only area expected to see changes in usage and design. In response to the affordable housing crisis, proposed changes in zoning regulations will provide developers with the opportunity and even incentives to convert empty commercial spaces or mega-malls into multi-family residential properties.
The opportunities, while not without risk, are available to real estate investors and can better diversify their holdings. Those with a high-risk tolerance and cash on hand could discover interesting renovation and conversion opportunities. Brokers and leasing agents may find new inventory in their markets.
One attractive property type that has done well in the Covid environment is industrial and flex space. Heightened demand for e-commerce increased the need for small offices or storefronts backed by larger warehouses. The at-home Etsy shop that blew up during Covid now needs scalable work and storage space.
New regulations introduced into the real estate market by all levels of government brought additional risks. This created an increasingly difficult environment for mom-and-pop landlords with only one or two units. The growing regulatory environment also shed more light on renters’ rights, inspiring the possibility of a federal Renters Bill of Rights. Similar to the push for an airline passenger’s bill of rights, these calls for increased regulation of the industry are based on the premise that those in the industry are taking advantage of their consumers, whether tenants or passengers. Unfortunately, there is truth to this when unethical actors in the industry mistreat prospective or existing tenants. Property management companies that look for pretexts to deny Section 8 applicants illegally are one such case.
The opportunity here, at least to mitigate the risk of over-regulation that undermines the real estate industry, is for real estate professionals to take on greater leadership roles to promote responsible, ethical behaviors in the industry and root out the bad actors. If the real estate industry does a better job of regulating itself, it will reduce the risk of over-regulation by all levels of government.
Property technology is changing how everyone operates
The property technology (proptech) sector is experiencing considerable growth, and this boon is expected to continue. Valued at $18.2 billion in 2022, the U.S. proptech market is projected to expand to $86.5 billion by 2032, growing at a compound annual growth rate of 16.8%. The constant innovation in the types of proptech coming to the market will affect every role in the industry. Some real estate professionals and property managers are ahead of the curve already, regularly improving their operations with new technologies.
Regrettably, others are as much as a decade behind. They’re still using simple document and spreadsheet software to put together anything from owner statements, tenant packages, and transaction documentation. Real estate firms that lag in their strategic use of technology fall behind in quality and efficiency. For example, any property management company not using property management software is providing a lower level of service at a higher cost and lower margin than more tech-savvy competitors.
The key technologies pushing the proptech revolution forward are:
- Cloud-based computing enables property managers, real estate investors, and industry professionals to use and share information regardless of location. Cloud infrastructure undergirds the new real estate marketplaces and the platforms for property and investment management.
- Artificial intelligence (AI) is rapidly accelerating and likely to change the way many people, in nearly all industries, do their jobs. Real estate will be no exception. Chatbots are being used to improve the tenant experience. AI real estate market analysis will inform better investment and pricing decisions.
- The Internet of Things (IoT) continues to connect more infrastructure within a property. It will no longer be the norm for only Class A office buildings to have sophisticated, smart infrastructure that operates security, climate control, and other connected resources on the property. People will start expecting both residential and commercial properties to feature smart sensors and connected applications that let residents, tenants, property owners, and managers to better control their environment.
The risk and opportunities of the proptech revolution are doing too little or too much in the course of modernizing properties and operations. Those who feel overwhelmed by proptech and are too hesitant will be crushed by those moving ahead. Those who are distracted by every shiny new tech object won’t be using technology in a strategic or effective manner. They also may waste considerable time and effort, creating internal chaos, through the constant onboarding of new technology tools.
Increased cybersecurity risks
As proptech usage increases, the risk of cyberattack also climbs. According to a recent study on cybersecurity, over 75 percent of respondents in the real estate industry said they had experienced a cyber incident in the past 12 to 15 months. An incident can cover a wide range of events, from minor to major. Because organizations in the real estate industry maintain private information of clients, tenants, or investment products, they have a duty to protect this data against cybercriminals.
The most common types of cybersecurity risks for real estate professionals are:
- Wire fraud. A property owner, real estate investor, or broker might receive instructions that look legitimate from what appears to be an escrow company. Once someone in the office wires that money, those funds are gone forever.
- Phishing. With all the emails and text links real estate agents and others send and receive, it’s easy to click through an infected link. It can be difficult to quickly identify the fraud in the multitude of DocuSign emails. Once someone clicks the link, hackers can access an organization’s entire network.
- Ransomware. When hackers gain access to an organization’s network, they’re able to take it over. Ransomware is big business. Small and mid-sized businesses are popular targets because cybercriminals assume their cybersecurity is low, making them easier targets that will deliver a faster payout.
The underlying danger with these common cybersecurity issues is maintaining business continuity. With more complex real estate documents and contracts executed and stored electronically, there’s a significant risk that a serious cyber event could halt an organization’s operations until it’s resolved.
There is an opportunity to strengthen a company’s cybersecurity by reviewing the business continuity plan or creating one if it doesn’t exist. These technology tools, particularly backup and recovery solutions, can keep an organization operational during a cyberattack.
Waning property manager expertise
Practically no one grows up dreaming of becoming a property manager. It’s a profession people fall into and then discover they’re good at it and enjoy it. Unfortunately, the pool of experienced property managers is aging, and younger generations are not interested in the role. The consequence is that property management firms are at risk of losing the institutional knowledge of how to manage properties in general, and for their portfolio of properties specifically.
Advances in property technology provide opportunities to hedge against this risk. Many property managers’ routine daily tasks can be turned over to automation and AI. Already, automated emails and chatbots help prospective tenants explore new properties and help current tenants address common needs.
Applications also automate the generation and management of tenant documentation, including contracts and ledgers. Using advanced proptech tools helps to fill the skills gap for property managers, reducing the ratio of low- and mid-level property managers needed per property. Requiring fewer property managers per property also has the potential to improve the profit margins of property management firms.
The latest types of property technology that can train new and advancing property managers will also help conserve institutional knowledge and develop the next generation. For example, augmented reality technology can train new property managers on how to handle a crisis event, such as a fire or flood. Those emergencies represent the 2:00 a.m. phone calls that can terrify even an experienced professional. Through exposure to a crisis event in a controlled environment, new property managers can start developing the skills needed to manage properties successfully while receiving feedback on their responses from experienced managers.
It’s impossible to get ahead of all the chaos, identify opportunities, and take advantage of them without help. In fact, it’s critical to have a trusted circle of professionals with varied expertise, both inside and outside of the real estate industry.
Whether it’s the property manager who needs advice on proptech to modernize operations or a real estate broker or leasing agent looking for more insight on what type of property conversions may be in demand in the market, having an experienced, diverse network of resources who can offer good counsel is the best hedge against the chaos.
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