Reasonable people disagree on whether inflation is transitory (it is). They disagree on whether a transition to SOFR is really just exchanging manipulation by 20 banks for just one bank (the central bank). Whether NYC will rebound (of course it will). But we can all agree that commercial and multifamily real estate have been painfully slow to adopt technology that eases the pain such as debt management software or software that organizes loan data. Here are 3 reasons why CRE has been so slow to adopt technology.
#1 - Commercial Real Estate Is A Zero Sum Game
Because for all its talk about relationships, real estate is really a zero sum game.
Every transaction has a winner and a loser.
Sweeping technology adoption typically occurs when nearly everyone benefits simultaneously. Social media is the obvious example, but others come to mind as well. Netflix. Uber. Zoom. DoorDash.
Are there “losers” as the result of these innovations? Of course. Most of us miss our neighborhood Blockbuster…right up until you click a movie from your recliner. But choosing to watch Tiger King doesn’t prevent your neighbor from watching it, too. You don’t win at their expense.
On every real estate transaction, there are clear winners and losers. Countless buyers bidding. Brokers vying for the engagement. Lenders offering term sheets. All the third parties involved in a closing.
If a real estate firm discovers an amazing technology, there is very little incentive to share it. Your competitors are probably using tools they haven’t told you about because they might be bidding against you on the next deal.
We all go to the same conferences, speeches, and fundraising events. But how often will we voluntarily share the amazing new technology we discovered? Your friendly competitors are probably using software tools they aren’t telling you about at the cocktail party.
#2 - Imperfect Information Protects The Status Quo
Technology increases transparency in the commercial real estate world, which sounds good on the surface. But many of the players in a transaction secretly prefer imperfect information. Their value, and therefore their financial incentive, is directly correlated to the information they have.
Imagine a world where all sales flowed through a clearinghouse. Or if debt didn’t have any nuances and was publicly available 24/7? What if all loan docs were fully standardized and required no legal wrangling? What if you didn’t conduct a site visit because you already had all the information you needed?
Many players in a transaction rely upon imperfect information. Their value lies in controlling that information, sharing it when it benefits them or their clients, withholding it for the same reason. How many times has an offline discussion involving a wink and a nod about pricing color resulted in a deal?
Complete transparency sounds great unless it takes food off your table.
#3 - People/Firms Have Been Quite Successful Without It
Let’s be honest, most CRE firms and professionals at those firms have been pretty successful without much more than a phone, computer, Excel, and a lot of hard work.
In his book, Flash Boys, Michael Lewis recounts the 2009 Spread Networks project that involved laying 827 miles of fiber-optic cable from Chicago to New Jersey to reduce transmission time from 17 milliseconds to 13 milliseconds. Four milliseconds was enough of a difference to justify spending $300mm on the construction of this line. High frequency trading and front running dramatically shifted the landscape for traders.
This is no direct corollary in real estate, which deals with hard assets. Due diligence is done over the period of weeks, not milliseconds. There’s a reason deals can be made on the golf course. And most of us prefer the human element of the real estate industry to the heads down mentality of a trader. We like talking deals over lunch.
In his book, Zero to One , legendary investor Peter Thiel believes that a software product must be at least 10x better than its next best competitor in order for it to experience universal adoption. In an industry built on handshakes and spreadsheets, that’s a tall order. Why should someone that has been very successful doing it one way experiment with a new way if it’s not at least 10x better?
Technology adoption in the Commercial Real Estate Industry Is A Matter Of When, Not If
Despite all of that, we know there’s a tsunami of technological developments rapidly moving towards our industry. But adoption will likely move at a slower pace.
You’ve probably heard of the term Early Adopters. But did you know it’s been around for almost 60 years? It was popularized in Everett Rogers’ 1962 book, Diffusion of Innovations. Rogers actually synthesized his findings from over 500 existing research pieces, so the concept has been around for much longer.
We are in the Early Adopters life cycle of real estate technology. Most firms will adopt technology in the coming years as the result of seeing someone else use it first. But some have already done so. The wave of adoption is approaching.
There might be some as-yet-to-be invented technology or software that will truly disrupt the industry in the way Uber flipped over the taxi industry. But more likely, technology that enhances our current workflow will slowly take over in the coming years.
Are you ready to adopt some new tech? Email us at email@example.com to see if LoanBoss is right for you.
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