All of the blame for the archaic nature of the real estate industry is routinely put on landlords’ shoulders. No secret that they have been riding the bull wave for the past decade- which made them quite lazy when it came to innovating.  However, there is another group of actors, who contributed to this slow pace of technology adoption. It is the tech community itself, which has generally failed to understand the balance of powers on the market. The paradox is that, having formulated a value proposition around an occupier, they’ve been pitching it to owner side.  Naturally, there has been no major progress so far. But are we going to see things change? 

Pitching to the Wrong Agent

Startups, defined by an umbrella-term “proptech”, deal with a huge variety of solutions around real estate. In fact, the term “proptech” is so broad and so poorly conveys the nature of a product, that it seems to be fading away. More and more often it’s being replaced by more specific names like cretech (commercial real estate), contech (construction), retail tech, and there are definitely more to come.

The whole “proptech family” of startups was created by teams with a strong tech backgrounds, but they generally lacked people with hands-on industry expertise. As a result, entrepreneurs’ vision was disjointed form landlords’ perspective.

In landlords’ eyes, tech entrepreneurs were driven by a “tech for its own sake” attitude. They like to start with solution, and then look for the problem to solve. On the other side, the old-fashioned ways of doing things by property folks caused a smile on tech geek’s faces. Both camps didn’t seem to have genuine respect and appreciation for each other’s work – not a good ground for collaboration.

A great number of proptech ideas were spurred by entrepreneurs’ poor personal experiences with renting apartments or offices. Naturally, this seemed like a huge business opportunity, strangely overlooked by the market. There is nothing strange, however, when looking at things from a financial perspective: real estate has been sellers’ market, not buyers’, or, in the context of rent – landlords’ market, not tenants’. Therefore, entrepreneurs overlooked the interests of those who have the money, while building products for those who have been disadvantaged in this market equilibrium.

Proptech pitches have generally been built around poor user experience, ignoring real estate industry’s interests on a large scale. A rare pitch contained the crucial slide that landlords want to see – a solid ROI case.

Alignment of Interests and Metrics

Tech and property folks have stunningly different sets of criteria for measuring success. Tech world has been all about growth (ideally – exponential!); costs are called cashburn rate; business milestones are funding rounds. Revenue, let alone profitability, was perceived as an abstract concept of a far-away future and had little to do with today’s efforts. Real estate players see the world from almost the opposite perspective. They play in a very yield-sensitive industry, where it’s all about caprate, spending discipline, cashflow stability. While tech is about limitless scaling and overcoming geographical boundaries, real estate is defined by the famous “location, location, location” mantra. The two industries have been living and thriving on two different planets; each had much more interesting things to do and lower hanging fruit to pluck. The universe has been shaken, however.

The balance of power in the real estate market is experiencing a fundamental shift. We are in the middle of it, therefore it’s probably too early to draw conclusions and make decisive actions. But overall, it seems like tenants are going to take a more advantageous position than before and gain more bargaining power.

The retail sector happened to be ahead of the curve. We’ve been watching its response, which primarily revolved around adopting tech innovations, blending physical and digital. Offices are next to come, and retail’s playbook might be of great use for them.

Considering both factors – tenant’s growing strength, and technology proven to be the way to survive – things seem to have become more optimistic for proptech. Finally, those, who have been addressing occupiers’ concerns, might get a chance to receive more attention. Not all of them, though, as the landscape for them has fundamentally changed as well.

Proptech solutions fall into two major categories, first being “nice to have”, and second – “essential to survive.” Pre-COVID, the second category barely existed, and now it’s become the center of everyone’s attention. Its boundaries are still vague, however, no one really knows, what is going to be essential to survive. “Nice to have” has been shelved for an indefinite time.

The main differentiation between nice and essential lays in the startup’s ROI case: how fast investment in a certain technology is going to positively reflect on landlord’s P&Ls. Another angle of assessing a tech product is whether it lowers potential risks. The most value is to be found in products, hedging potential downside, rather than taking advantage of potential upside. Therefore, not only are landlords forced to come out of their comfort zone in order to make it to the other side. Proptech entrepreneurs would also have to go out of their way and adjust their thinking towards ideas that are highly practical and generating income as early as… now!

One last thing to keep in mind is that landlords and property managers have now two prime agents, whose interests they put as priority. Firstly – tenants. Secondly – investors. Tenants look at office space, including its technological component, in terms of boosting productivity, getting maximum value from the space they rent and cutting all costs that could be possibly cut.  Investors, on the other hand, now see technology adoption a new criteria of assets’ long term value. The earlier property managers start implementing tech solutions, the earlier they’ll be able to make sense out of them and take feasible advantage. Real-life success cases of leveraging technology in order to make a building more profitable is still a very rare story, but will definitely receive high appreciation from investors.

Photo by Mike Kononov on Unsplash