IllinoisCRE Innovation is the key to longevity for real estate companies Serena Wolfe and Todd Novak July 23, 2018 Share on Facebook Share on Twitter Share on LinkedIn Share via email Traditionally, real estate companies have taken a linear, in-house approach to innovation. While that may have worked in the past, innovations are happening so quickly that companies must do more to remain competitive. Gaining an understanding of tech’s growing role in real estate is now a job responsibility, whether you’re an executive, property manager, contractor or developer. In the latest EY Capital Confidence Barometer involving the real estate, hospitality and construction industries, 36 percent of respondents said that during a recent portfolio review, they identified businesses at risk of disruption. It’s not surprising, then, that 69 percent of respondents listed buying and selling businesses to reshape the portfolio as the most prominent boardroom issue. Additionally, 59 percent said they plan to increase the pace of acquisitions. A company builds a digital ecosystem by integrating in-house capabilities with acquisitions, joint ventures and alliances. A recent EY cross-industry report titled the “Digital Deal Economy Study” indicates that CEOs appear to be well aware that a “buy or build” strategy will require capital. Asked, however, whether their company has a coherent and aligned “buy” and “build” approach to digital, only 48 percent of CEOs answered in the affirmative. Venture capital dollars are increasingly flowing into the real estate sector, from inside as well as outside. Pair this with the industry’s tendency to be slow to adopt technology, and it’s easy to see how progressive companies will have an opportunity to shape the sector while the rest watch and wait. And there has been plenty to watch, particularly in construction, where billion-dollar investments continue to astound. Venture capital investments in the space have increased more than 169 percent, with corporate heavyweights making strategic investments. Additionally, startups continue to crop up, in a race to develop industry-disrupting products. Drones, for example, provide aerial views of job sites while mixed-reality “X-ray vision” helps construction teams determine what’s beneath a jobsite. Autonomous equipment, such as self-driving vehicles, do hazardous jobs, lowering fatality rates. Tech giants are also starting to drive innovation in the real estate industry with partnerships, paid projects and developments. Disruption is flowing in both directions—real estate to tech and tech to real estate. As tech companies see the value in optimizing real estate, it’s critical that real estate also see the value and begin disrupting the industry from the inside out. Tech giants are partnering with home builders to incorporate devices in new construction to build “smart” homes, building their own mixed-use communities for employees and others and even experimenting with digitizing the urban infrastructure. We are seeing some forward-thinking real estate companies already investing in technology to implement in their properties, as well as creating their own funds to participate more broadly in real estate tech. For example, a global real estate firm recently formed a venture-capital unit to invest in real estate tech startups. Possible investments include co-working and distribution facilities in e-commerce supply chains. Another company that turns buildings into co-working spaces is backed by more than $6 billion in venture funding; it’s using people-tracking beacons to design its buildings more efficiently. A tech-focused office services firm has raised $119.2 million in venture funding since 2009 to offer a growing network of meeting and event spaces, flexible workspaces and hospitality services. Technologies that remain on the sector’s radar are energy management, which is always easy to quantify, and cyber, which is a necessity. But what about technologies that concern customer experience? One major real estate service provider follows a “3-30-300” rule to show the relative impact of annual expenditures per square foot on utilities ($3), rent ($30) and employee costs such as salaries and benefits ($300). From this perspective, it makes perfect sense for companies to want to focus on the area with the biggest impact—increasing the productivity of occupants to realize greater savings. Yes, optimizing that $300 is the biggest bet—but it’s also potentially the biggest win. One approach is for companies to “green” the workplace in such a way that it improves employees’ experience by, for example, the smart use of space and increased acoustic and visual comfort. This changes the way facility managers are viewed and can facilitate buy-in for a project. And many employees believe that the Internet of Things (IoT) will enhance the workplace, with 69 percent saying that office automation will give them more time to carry out their primary duties and 86 percent predicting that automation will enable them to think of work in new and innovative ways, according to Workfront’s 2017 State of Enterprise Work Report. An EY study on the future of work determined that technology will re-humanize work, handling the tedious tasks so that people can turn their attention to more engaging work. The EY Lease Reviewer is a fitting example. It’s a tech solution that can quickly “read” lease contracts and detect problems. Still, future-proofing a workforce is about more than innovating with technology. “To be successful, organizations need to embrace the concepts of empowerment, and design the ‘interface’ between technology and the individual,” said Chris Mazzei, EY global innovation technologies leader. Clearly, changes that affect human capital have a greater impact than those that improve only physical capital. And, surely, most of us agree that in the future, IoT will be in every company. But right now, for real estate companies, a unique opportunity is theirs to seize. The question is, do those within the sector want to be part of the change or do they watch the change happen? About the authors Serena Wolfe runs the real estate practice for the Central region of Ernst & Young (EY). Her clients include public equity and mortgage real estate investment trusts, domestic and international real estate opportunity funds and construction companies whose portfolios total about $20 billion in real estate assets. A certified public accountant who began her career with EY in Australia before moving to work in San Francisco, New York and now Chicago, she was the first real estate sector resident in EY’s Global Real Estate Center and is currently EY’s Global Real Estate Assurance Leader. Todd Novak works with EY clients and EY professionals in connection with clients’ growth strategies, transformational events and accounting and tax needs, leveraging the capabilities of EY’s global Technology, Media and Telecommunications network. A partner in EY’s Transaction Advisory Service practice, he specializes in financial due diligence and supports clients in connection with all aspects of the transaction lifecycle.