- Commercial real estate is seeing its own extinction because of PropTech.
- Industrial and residential real estate are seeing a lot of innovation in things like iBuyers, cloud kitchens and home offices.
- Hotels, theatres, and car lots are disrupted by Airbnb and real estate agents are bullied by the likes of OpenDoor, Redfin, Divvy, and Zillow.
- PropTech solves problems in transparency, affordability (access to financing) and liquidity.
Old school real estate, market failures
‘’Real estate’’ as we know it is seeing drastic transformation. Today, there are two sides to real estate. One side is ‘’bad’’, and the other shows signs of prosperity (despite the pandemic’s sucker punch on most entities in real estate). Old school real estate are business models that rely too heavily on how things were done ten years ago, models that cater to an audience that is slowly taking the exit route to the new wave of owning, operating, and capitalizing on real estate.
Business hotels are losing steam: think of the Marriott or Hilton chains, and ask yourself if you believe they will stay or disappear with the advent of Airbnb? Car dealerships are not only anxiety inducing, but on their way out. Ark Investment projected auto sales will decline by 40% as autonomous vehicles become relatively cheaper, and folks work more and more from home.
Do not despair, the list continues! Movie theatres have been on their way out since Netflix took out blockbuster in 2010. Ticket prices will keep falling, while rents will remain fixed or perhaps upwards moving. Today’s theatres could be subjected to the same word drive through theatres are compared to with now, vintage. School is next. If we can work from home, why not do school from home, and save our kids from experiencing middle school? Retail: done. E-commerce is making its way into our lives, and we all obviously like it. We like it so much that malls are becoming warehouses and eSports arena! Bank branches? Coming to an end. Offices? See you over video conference.
Opportunity for tech disruption
The flip side of the coin is what the ‘’bad’’ real estate will be replaced by. Hotels are on their way out: Airbnb’s business is scaling and according to Statista, overshadows traditional hotel guestrooms by 2.7 million units. Homeownership is a solid investment, with inflation on the rise and cheap money-making mortgages more affordable more folks are moving out of cities and into homes. With Property Technology (PropTech) paying for down payments is becoming more of a possibility with concepts like equity risk sharing becoming more popular. Cloud, or Ghost kitchens that we covered here, are joining forces with the rising home delivery space offering a substitute to brick-and-mortar kitchens. Industrial REITs are on the rise too, with more spaces converted to warehouse needs due to an e-commerce surge. Other ‘’good’’ real estate movements are in co-working spaces, retirement homes for an ageing population, and self-storage.
In America alone, $1.6 trillion of homes are bought and sold making up for $100 billion in fees for real estate agents. Of course, the whole process is filled with inefficiencies and those unanticipated fees that may leave a soar taste in a new homeowner’s mouth. Property Technology is attempts to capitalize on large price spreads, fees, and complicated processes to make the whole experience better. At the end of the day, they are glorified real estate agents, but they do make our lives easier. The three big picture themes are around transparency, affordability, and liquidity.
Online real estate is a large online portfolio of houses that you can visit through sites like Zillow.com. You can type in an address in the search bar and gain access to a lot of information about a property such as, when was it last sold, for how much, and the relative to what median price. Zillow makes money by charging property management companies for advertising their listings on their network, they also sell them leads. Transparency is all about diminishing information asymmetries in a market where before, agents had all the information, and you did not. This past year Zillow went from negative $111 million in net income to a positive $28 million after raising sales to $3.34 billion for a 21.8% rise since 2019. The last quarter also showed significant success with revenues up 33% YoY. The US residential real estate market grew by about 40% so while the growth is positive and upward slopping, it remains below the broader market. However, the macro backdrop for further growth is rising alongside expectations for more growth in 2021.
Becoming a homeowner is increasingly challenging, with some cities asking new buyers a minimum joint income of $230,000. The current landscape of cheap money and inflation is making clear winners and losers with sellers taking the lion’s share of the profits. Getting help on financing is therefore key which is why companies like Divvy have found success. There are millions of people who have low credit scores, perhaps because of 2008, who have improved their income positions but need support to re-build credit through mortgages. Divvy is a startup that helps folks go from renters to owners. The company helps you purchase the home by being a co-owner. They make money from the monthly payments and the house appreciating over time. The worse that can happen is Divvy ending up with a lot of houses on its balance sheet, which in an inflationary environment is not a terrible thing.
You have probably heard of OpenDoor? It eliminates the blurry process of negotiating with real estate agents, applying for a mortgage, and signing a mountain of papers only to wait weeks for the whole process to finalize. The short story for the business model is that seller with submit their property’s details on the website, and OpenDoor will bid a cash offer. The group then refurbishes the asset, relists it and makes money from the sale. In techy terms it is called an iBuyer. Other famous iBuyers include Redfin, who famously charges a 1% listing fee (it is all over San Franciscan billboards). iBuyers are disrupting a massive market and while Redfin has seen an incredible surge in growth, it remains behind OpenDoor. OpenDoor was hard hit by the pandemic and halted buying homes due to uncertainty. They remain un-profitable, and the competition became fiercer as they took a hit in transaction volumes in 2020 thus giving Zillow, Offerpad and Redfin leverage going into the next year.
Overall, commercial real estate is under fire, industrial real estate is getting a re-brand and residential real estate is seeing disruption from technology groups like Zillow, Redfin, Divvy, OpenDoor, and a flurry of other startups that we have no time to even brush on. Innovation is occurring in all facets of the industry whether we are talking about the origination process of mortgage loans (now happening on blockchains) or the sales process explored above. Businesses are realizing they do not need offices to keep workers productive and workers are making the most of their homes through renovation and moving out of rentals and expensive cities. This must all be odd news for WeWork who clearly is seeing more of its future threatened.