Has anyone really ever disrupted CRE?
Disruption. That term is thrown around often in business, particularly by technology startup companies. What does it really mean? Wikipedia defines disruption as follows:
“Disruption in the context of radical change due to the introduction of a new idea driving a different way of doing things is a revolutionary change as opposed to an evolutionary change …”
So, before I even address the concept of disruption in the commercial real estate industry, let’s talk about a company that is currently in the process of disrupting an industry.
Uber … Now that’s disruption
I am a big fan of Uber. Not everyone is, as some have issues with their business practices. The taxi industry certainly isn’t a big fan of Uber. Why? Because Uber is bringing serious disruption to its industry – yes, the introduction of a new idea that is driving (pun intended) a different way of doing things. It is hard to argue that point, as the taxi industry has pretty much waged an all-out war on Uber, mostly through the legal system and lobbying efforts.
Now, let’s discuss a key point that I will elaborate on later in this post. One of the reasons Uber has disrupted the taxi industry is that it has had some degree of success in changing consumer behavior in the markets it serves. Ironically, the first time I used Uber, I was in San Francisco attending the inaugural CRE Tech Intersect Conference.
So what about CRE? Who’s disrupting?
The quick and 100 percent correct answer is absolutely nobody. While many CRE technology startups talk about it often and even name conferences around it, the reality is nobody has ever really gotten even within a sniff of significantly changing the way things are fundamentally done in the commercial real estate industry. Nobody is significantly changing the behavior of the commercial real estate consumer.
Why do so many complain about CoStar?
So what about CoStar Group? Did it bring disruption to the commercial real estate industry? CoStar is without question the biggest technology startup success story of all time in the commercial real estate industry. And for that very reason, some in our industry have a negative view of the company. I will take you back to the Wikepedia definition of disruption again.
“Other examples are the Google search engine, Sony Walkman, the Apple iPod, Apple Mac, Apple iPhone, etc. Businesses thrive on Disruptive innovation, because it gives them a competitive advantage in their market, which in turn assures greater margins and the opportunity to increase profits.”
You see that the commercial real estate industry for the most part doesn’t have a viable alternative — at least a high-quality one to most of the services CoStar provides. CoStar does a great job of aggregating the data the CRE industry provides (i.e. the competitive advantage in markets, which in turn assures greater margins and the opportunity to increase profits). Within reason, CoStar can charge the CRE industry whatever it wants for its core services, and that seems to be the crux of the unpopularity of CoStar among commercial real estate professionals — particularly upper management of commercial real estate brokerage firms, who manage the operating budget.
So, why not hire people to collect and manage you own data? Well, some tried and figured out they could not do it as efficiently as CoStar. It’s cheaper to pay CoStar, and the end result is better quality data, even though it isn’t perfect. The real angst with CoStar among the commercial real estate service providers is that there is no viable competitor to create competition and keep costs down.
I should mention that I am not a CoStar basher. I remember what it was like to identify property options and present them to my clients, as well as market office space, before CoStar existed. I should disclose that CoStar invited me up to Washington, D.C., to tour its headquarters and observe its operations. I had the opportunity to sit down and visit with CoStar CEO Andy Florance as well as most of its senior executive team. It’s an impressive operation, and I gained a new appreciation for the massive human capital investment it takes to do what CoStar does. The reality is CoStar’s service makes my job easier and brings efficiency to the process of serving my clients.
In my opinion, the CRE industry should stop complaining about CoStar, because the industry itself is part of the problem. Just look at the residential real estate sector and the MLS system. Residential agents and brokerage firms keep their listing data up-to-date on their own. CoStar has to employ hundreds of researchers to do that for all us, because we fail to do it on our own. Why shouldn’t CoStar charge what it do for its services?
So, did CoStar disrupt the CRE Industry? I would argue technically no, but CoStar did make a huge impact by recognizing an opportunity at the onset of the Internet’s integration into the business world to create a competitive advantage, capture dominant market share in CRE data services and become the industry’s biggest technology success story — so much so it ultimately acquired the industry’s second-most successful startup, LoopNet.
Is disruption in CRE possible? Willl a new tech star emerge?
The process of transferring or transacting commercial real estate is a relatively complex one, much more so than booking an airplane flight or hotel (through travel agents) or hailing a taxi. A commercial real estate transaction involves hundreds of thousands to millions of dollars, requires the expertise of multiple participants and disciplines (brokers, attorneys, architects, contractors, engineers, title companies, environmental consultants, land planners, etc.). It isn’t a business-to-consumer (B2C) business.
The complexity of valuing and transacting commercial real estate makes the prospect of disruption a challenging obstacle. Chances are you booked many hotels rooms, plane flights and hailed many taxes in your lifetime. It’s a relatively simple straightforward process. Even Corporate Tenants and CRE Investors transact only so much real estate in a lifetime. There is a need for expertise from professionals who do it daily. One of my favorite sayings is that “you can’t really effectively Google your way through a transaction.”
A trip down Recent Memory Lane for the CRE newbies
I can remember back to the dawn of the Internet age (yes, I was in the business), and it really wasn’t that long ago. There was a lot of discussion about tenants, buyers and their ability to go directly to property owners. The thing is, that ability didn’t transfer to willingness. Does anyone remember Peter Pike? There were several failed startups. Major property owners invested significant capital into some of these new ventures to achieve this so called disruption. This was the late ’90 and early 2000s, often referred to as the dot-com era. We all know how that turned out. Only two real winners survived and ultimately thrived, and today those companies are one. The reality is the nature and complexity of the commercial real estate market makes it very difficult to disrupt.
Disruption isn’t really about technology anymore
Now for the second question: Will a new CRE tech star emerge? One that makes and significant impact on the industry? Yes, I am talking about a significant competitor to CoStar, some company with a better mouse trap — that can alter to any degree the behavior of the commercial real estate consumer, property owners or service providers and create a competitive advantage, or at least level the playing field. That is a significant possibility. A couple of the current CRE startups are venturing into this playground. I haven’t seen any evidence of any real incremental success, yet. The thing is, it isn’t about technology anymore. It’s about changing behaviors.
I walk into an office of 60 commercial real estate brokers nearly every day, and the way we do business now is pretty much the same as I did in 2000. Sure, we have quite a few new tools that bring a higher level of sophistication and new efficiency to the process of serving our clients. But not much has changed otherwise. There is a reason for that. The industry has evolved, but there’s an absence of true disruption. I never say never, but I don’t expect to see any real disruption in the lifetime of my remaining professional career. I am 52. So, I feel pretty confident my job is safe.
Exciting times in the evolution of CRE
Today, the number of new CRE tech startups is unprecedented. Most of the new ventures that I see that appear viable over the long term with the potential for a success are bringing new tools and efficiency to some part of the process of managing, marketing or transacting commercial real estate. And we use these applications with our smartphones, tablets and laptops we carry around in our pockets and briefcases. That’s not disruption. That’s evolution of an industry sector to capture the latest business tools. I welcome that. More power to the VTS, Compstak and Hightowers of the CRE tech vertical. I hope their founders and investors find their big payday, but we are not talking about services that will fundamentally disrupt the CRE industry. However, we are talking about many tools that advance our industry and help us do our jobs better and from anywhere. That is exciting!