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Commercial Real Estate Disrupted

November 16, 2023

Commercial Real Estate Disrupted - Blog Image

Photo Credit Bloginnova.

When Worlds Collide: How the Internet Has Disrupted Real Estate.

While I was preparing a presentation to the San Antonio Executive Association, a club of 150 small business owners in San Antonio it hit me the tremendous extent that each real estate sector has been disrupted by the internet. Here’s what happened when worlds collide.

Retail

This disruption began 10 years ago when E-Commerce struck shopping. Now we can place orders for goods by computer or cell phone. Many bankruptcies ensued: Sears, Kmart, Toys Us, Borders Books, Circuit City, Pier One, Brooks Bros. and most recently Bed Bath and Beyond. Brick and Mortar became Bricks and Clicks and the “Death of Retail” was trumpeted. Well, it was evolution not mass destruction as retailers were forced to adapt and then, Covid sped up the process without doubt. Now the transition is in place and retail is doing fine. Maybe a shopping mall got turned into a hockey rink or distribution center. McCreless Mall became a super-HEB, Windsor Park Mall became Rackspace and now who knows what. Now, retailers have gone Omnichannel, so that the bricks and the clicks have become very interdependent. We will survive and thrive.

Industrial

Industrial began disruption for good and not evil at the beginning of Covid, when next-day delivery became very important. USAA Real Estate even built 100 Amazon distribution centers across the country. You can see new 200,000 SF plus distribution centers being built across San Antonio, especially on IH-10 East and IH-35 in Schertz. The “last mile” delivery system is fairly built out, but now comes logistical centers to support new supply chain demands. Industrial has a very bright future.

Office

Office buildings, on the other hand, are now undergoing disruption that appears very bad for that sector’s owners. The technology of Work-From-Home (WFH) society began with zoom calls replacing in-person meetings. Now, with Covid, occupancy in offices buildings has declined. In San Antonio rented area is only about 80%, versus the old standard of around 88%. But the physical occupancy may only be 50% or less. The new work week is WFH on Monday and Friday and in the office Tuesday, Wednesday and Thursday.

Hotels

Hotels are undergoing disruption, too, from the advent of Short-Term Rental websites like Airbnb and VRBO, and then the double whammy of Covid lockdowns. Now the “revenge travel” rebound is in full swing. Airbnb is growing strongly, with over 7-million homes for rent now, compared to 5.3-million hotel rooms in the U.S.! And, of course, on-line booking is the norm now for every operator. Computers have made dynamic pricing possible, so that your room rates may change within the matter of a few minutes based on the immediate demand for rooms in the market. This has also been adopted by the Self-storage industry.

Residential Real Estate

Residential Real Estate is a different world from commercial, but disruption knows no bounds. Sellers will check out neighboring properties to see what they should ask for their property, and they will find that information on realtor.com, Zillow.com and redfin.com to name a few sites that display price information. Buyers will check out listings on-line, drive neighborhoods by google street view and gather other information, all before they ever get into a car for a tour. They may even qualify themselves for a loan on-line, too.

However, this is all the past & present. What about the future? National Association of Realtors just lost a lawsuit for what was termed collusion. It is standard practice that residential realtors belong to a local board and that includes membership in the Multiple Listing Service. This requires the seller’s broker to offer compensation to the buyer’s broker, and the amounts or percentages are filled in by the seller’s broker.

The lawsuit turned on whether this created collusion for commission of the buyer’s rep, because there was no negotiation for his commission. This ruling doesn’t force the buyer to pay his broker instead of being paid by the Seller, but it does mean that the commission must be negotiated as part of the contract, rather than just be set by the seller rep. Many agents and brokers specialize in buyer rep, and this will change, very likely lowering their income. But in a Buyer’s market, like now, maybe Seller’s will have to increase the amount to buyer’s brokers in order to get more showings.

Commercial Brokerage

Commercial Brokerage will be greatly impacted in the future by opening up more access to listings through internet websites, like LoopNet along with greater AI enhancement.   If buyers and tenants can see all the available properties online and make their own lists of what they think will work, then the buyer/tenant rep is cut out of the business. Showings can be set up on-line, screening the prospect’s financial strength can be done through an on-line application and credit checks, access to the space or building can be controlled over the internet and I suppose the broker or even the owner himself could talk the buyer/tenant through the space on their cell phone. Contracts and leases can be filled out online and signed through your computer. Even closings can be done largely remotely using a mobile notary, since the old-fashioned blue ink wet signature is still required for final authorizations. This is called disintermediation, removing intermediaries from the transaction.

Will this reduce commissions paid by the parties to the transactions? Will the removal of the brokers expertise lead to tragic mistakes by the parties? I will say from personal experience, that the broker’s skills and knowledge developed over years of transactions are greatly devalued because they are “free” until the transaction is completed. No one has any concern about wasting large amounts of the broker’s time, because it is given away by the broker to try to land a deal and close it. Should the model become like an attorney or accountant who can bill by the hour and collect a retainer upfront? Doubt that will ever happen.

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