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Impact of Technology on Real Estate


Morgan
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Recently I've been thinking about how changes in technology can affect (and destroy) various industries over time. Marc Andreessen wrote an article in 2011 called Why Software is Eating the World that basically says software is getting better and better and is able to do more and more. Combining that idea with the idea that computers can learn (inspired by this talk The wonderful and terrifying implications of computers that can learn), it makes me question the future of real estate, however unlikely that may seem now.

 

The obvious ideas from more powerful technology generally seem to be positives for RE; "smart" structures and supremely energy efficient structures. What will happen when machines can learn and are set free if you will and come up with new ways to build excellent living structures for virtually nothing? Will the old buildings that are too expensive to operate or pay the mortgage be forgotten? Are there ways that the deep thinking machines could enhance 3D printing so dramatically that everything else is obsolete? What else could they come up with that could destroy the real estate industry?

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less far-fetched then this...what is happening today in real estate?

 

technology is driving lower demand for RE

 

we can more efficiently use RE with use of technology

 

technology generally enhances productivity...enhancing productivity means generally doing more with less

 

productivity increases are deflationary

 

3 examples:

-Internet transformed the travel agency and booking business.  this is all done electronically now.  No longer do you have local travel agents across the country.  The aggregate demand for real estate from the likes of expedia is lower than the prior aggregate demand for real estate from travel agents.

-Electronic storage of documents is both cheaper and more efficient (can more easily search and more quickly recall documents).  One of the reasons it is cheaper is less use of real estate.  One of the implications of companies transitioning to electronic document retention policies is less use of real estate.

-Advances in communication have made it easier and cheaper for workers to telecommute.  It is now much more common than ever for individuals to work from home or occasionally use "shared space" in the office.  The aggregate result of this is less demand for real estate. 

 

The three above examples are examples that have happened in the real world that have reduced demand for real estate.  These are history...but the general trend of technology reducing demand for real estate will continue. 

 

Will this mean a long-term decline for real estate?  No...or this would have already happened.  Countering this trend above are increases in demand for real estate due to increases in population, and increases in the training/education levels of individuals, and increases in the demand for real estate in other areas (leisure).

 

 

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I think the impact that Amazon will have on retail real estate is unbelievable.  Amazon is becoming so easy to use, it is hard to justify going to the physical stores to buy the products.  While living in NYC, it was extremely expensive to buy basic consumables like soap, lotion, toothpaste etc from your local CVS, Duane Reade etc.  By housing the items in a cheap warehouse in NJ and then delivering the items to your door in Manhattan cuts out that really expensive NYC rent.  I consider this the low hanging fruit of technology disruption.  Why will people voluntarily go to the Duane Reade and buy these consumables when they can be deliver to your door at a cheaper price is beyond me.  Why didn't I do it 6-7 years ago, the technology and ease of use isn't what it is today.  Amazon prime was not available back then?  Soap.com, etc website isn't as big as it is today.  As Amazon grows, it achieves more scale and the warehouses are then places ever closer together.  Same day or next day delivery becomes the norm rather than the 2-5 days for delivery.  There will come a time when Amazon equals instant gratification or very close to it.  I think there are a ton of retail space that will go away and be replace by the digital store fronts on your phone or on the web.  The physical locations might devalue over time.  Airbnb poses great threats to the valuation of hotel assets.  There will always be a certain classes of travelers, i.e. business who will never stay at an Airbnb.  But Airbnb is certainly taking a bite out of the casual/family hospitality business.  In a way, RE is facing many head winds, all time low interest rates (rates can go up, but can't really go down anymore), technology eats away at the amount of space that are needed, etc.   

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Technology is also replacing real estate agents.  Years ago real estate agents owned the relationship with buyers and sellers where now sellers of real estate in increasing numbers are turning to the internet to sell their properties and pay little to no commission.

 

What are some examples of sites where sellers are eliminating brokers/agents? As a Z short, this is a very interesting topic :)

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Never mind Amazon...

Look at the effect technology is having, and will have, on city dwellers. Where I live, you can build a large brand new home on or close to a beach for about a quarter of the price of an older smaller home in say, Toronto, Calgary or Vancouver. We have high speed internet, fiber op,  and good cell coverage nearly everywhere. More and more people are moving away from those high coast major centers to low crime and laid back areas such as we have here on the East Coast.

 

Case in point. I recently met a couple who had moved here from Western Canada. They sold their expensive home out West and now primarily work from their newly restored home on a beachfront property here. He is in charge of staffing and equipment for a regional airline based in Western Canada. Between his computer and his cell phone (with a Western Canada area code) few people know that he is actually 3,000 miles away and not stuck in some downtown office in a major city. He spends about one week a month in his physical office out west. His wife also works from their home for another company that is located in a third province.

 

So the impact I see from this is that as people move to the friendlier, less expensive areas of the country, prices will tend to equalize throughout the country. This will also have other impacts such as reducing traffic congestion, parking, and other related problems. This will not happen overnight, but the change in lifestyle will appeal to many.

 

But to come back to Amazon, between Amazon and eBay, shopping is no longer limited in the smaller population centres such as we have here and that is just one more reason for a population shift.

 

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I should have been clearer, I'm asking about residential/multifamily RE. Everyone needs a place to live. Many of the reasons outlined above apply to commercial real estate. What about multifamily? Excluding reducing RE/leasing agents, do you think demand for residential real estate will change? The obvious answer is probably not much, but what about less obvious answers? Maybe it's all too far fetched?

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Technology is also replacing real estate agents.  Years ago real estate agents owned the relationship with buyers and sellers where now sellers of real estate in increasing numbers are turning to the internet to sell their properties and pay little to no commission.

 

What are some examples of sites where sellers are eliminating brokers/agents? As a Z short, this is a very interesting topic :)

 

I live in Toronto, and more and more I see companies like these:

http://comfree.com/

http://propertyguys.com/

 

These sites allow a seller to list their home for a flat fee for less than $1,000.  I compare it to someone who owns a $400,000 home and pays a 3% commission to an agent or $12,000.  If they choose one of the sites above and even hire their own real estate lawyer to make sure everything goes smoothly your looking at a $10,000 savings.  The average price in Toronto last I checked was over $500,000 so the sales increase the more your house is worth.  Having said all this I acknowledge not everyone is going to do this, but from talking to people in the industry and also real estate agents themselves technology forces them to either drop their commission as it's negotiable or to really enhance their offerings.

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Forgive the length of this post.  It is very rare that I have anything meaningful to add.

 

Our circle of competence is really only in the Apartment Industry.  Thats why I read this forum often.  I am greatly indebted to many of you for what I have learned from your comments here.  Also to Parsad for pulling a Ben Franklin and being responsible for what seems to be a modern day version of the Junto Club.

 

If interested in RE, I would strongly suggest getting your hands on the public REITs 10-Ks.  I compete with them daily and many (not all) of the largest risk's are outlined in their 10-Ks.  There is one topic I rarely see discussed except maybe by Dimon.  The week Gene (business partner & childhood friend) and I were born prime was 13.5%.  Less than 3 months later it was 21.5%.  When putting together bank packages for acquisitions, you will find bankers much more comfortable with the writings of Dr. Cresson Kearny than you asking what it was like back then and how would that effect cap rates today if prime was 50% of  1980..

 

The role technology has played in our experience has largely been positive.  In our early days, while Gene started to analyze an apartment deal I would have to spend several days cold calling and "scuttle butting" if you will conducting market studies and persuading potential competitors to give me their operating numbers.  All while trying to annualize P&L's that were penciled out on a cocktail napkin.  If the acquisition passed this cursory analysis (less than 1 out of 100 did) we would book flights, kill almost a week traveling back and forth for a site visit.  If all of that worked out, I would then proceed with an LOI.

 

Now, with about 5 mouse clicks, I can: get an accurate market study, view the property on google earth to learn if the asset is next to a Tiffany's or an "adult toy" store, conduct a title search to see if the LOI offer is even above their mortgage.  I can do this in St. Louis or on Green Turtle Cay while listening to Munger on youtube.  The problem is all of our competitors can too.

 

Quite often success in real estate is its own worst enemy.  Take Austin,TX for example.  It is one of the best markets in the country for apartments.  It has a high rent per square foot average vs cost per unit.  Vacancy is low and the percentage of renters vs. home owners is high.  That being said, this year over 17,000 apartment units are under construction in Austin.  One might expect that to have consequences for operating fundamentals for anything you own there.

 

In my judgement, RE is a poor industry to be in.  Almost no acquisition makes sense unless you include a shitload of debt (80% of purchase price).  On top of that you really never see any material fluctuation in asset values like common equites.  Owners have months when considering selling and even then they only have to find the dumbest buyer in a field perverse with them. 

 

A short example.  Around 2004, we were bidding on a 200 unit asset near Chicago.  There were only two buyers at the auction, us and another guy who looked like the biggest piker you ever saw.  We try pushing him around and bid very hard very fast.  He just goes right along with us like we are at a pie supper.  Very quickly we are at the limit of what we can pay and he wins.  I approach him after and try to learn a little about him and what he is doing.  Does he own any other apartments in his portfolio?  No, this is the first he and his family trust are buying.  I congratulate him for winning and ask where he saw the value that we missed, allowing him to pay more  (just over 10M in final bid).  He says "well you guys looked like you really know what your doing and I just figured we would make a little less that you."  Just a year or two earlier Gene was still in college double majoring in pschology and criminology.  I had dropped out and was working full time for Coca-Cola as a "merchandiser" stocking soda at gas stations and Walmarts in rural Missouri. 

 

Buffett mentioned a joke in his 85 letter.  Upon reading it I took a deep breath and sat in silence for quite a while.  The joke was about oil men and oil discovered in Hell.

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A short example.  Around 2004, we were bidding on a 200 unit asset near Chicago.  There were only two buyers at the auction, us and another guy who looked like the biggest piker you ever saw.  We try pushing him around and bid very hard very fast.  He just goes right along with us like we are at a pie supper.  Very quickly we are at the limit of what we can pay and he wins.  I approach him after and try to learn a little about him and what he is doing.  Does he own any other apartments in his portfolio?  No, this is the first he and his family trust are buying.  I congratulate him for winning and ask where he saw the value that we missed, allowing him to pay more  (just over 10M in final bid).  He says "well you guys looked like you really know what your doing and I just figured we would make a little less that you."  Just a year or two earlier Gene was still in college double majoring in pschology and criminology.  I had dropped out and was working full time for Coca-Cola as a "merchandiser" stocking soda at gas stations and Walmarts in rural Missouri. 

 

Lol, good story. I'm sure this guy now talks at CNBC every week.

 

BeerBaron

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Forgive the length of this post.  It is very rare that I have anything meaningful to add.

 

Our circle of competence is really only in the Apartment Industry.  Thats why I read this forum often.  I am greatly indebted to many of you for what I have learned from your comments here.  Also to Parsad for pulling a Ben Franklin and being responsible for what seems to be a modern day version of the Junto Club.

 

If interested in RE, I would strongly suggest getting your hands on the public REITs 10-Ks.  I compete with them daily and many (not all) of the largest risk's are outlined in their 10-Ks.  There is one topic I rarely see discussed except maybe by Dimon.  The week Gene (business partner & childhood friend) and I were born prime was 13.5%.  Less than 3 months later it was 21.5%.  When putting together bank packages for acquisitions, you will find bankers much more comfortable with the writings of Dr. Cresson Kearny than you asking what it was like back then and how would that effect cap rates today if prime was 50% of  1980..

 

The role technology has played in our experience has largely been positive.  In our early days, while Gene started to analyze an apartment deal I would have to spend several days cold calling and "scuttle butting" if you will conducting market studies and persuading potential competitors to give me their operating numbers.  All while trying to annualize P&L's that were penciled out on a cocktail napkin.  If the acquisition passed this cursory analysis (less than 1 out of 100 did) we would book flights, kill almost a week traveling back and forth for a site visit.  If all of that worked out, I would then proceed with an LOI.

 

Now, with about 5 mouse clicks, I can: get an accurate market study, view the property on google earth to learn if the asset is next to a Tiffany's or an "adult toy" store, conduct a title search to see if the LOI offer is even above their mortgage.  I can do this in St. Louis or on Green Turtle Cay while listening to Munger on youtube.  The problem is all of our competitors can too.

 

Quite often success in real estate is its own worst enemy.  Take Austin,TX for example.  It is one of the best markets in the country for apartments.  It has a high rent per square foot average vs cost per unit.  Vacancy is low and the percentage of renters vs. home owners is high.  That being said, this year over 17,000 apartment units are under construction in Austin.  One might expect that to have consequences for operating fundamentals for anything you own there.

 

In my judgement, RE is a poor industry to be in.  Almost no acquisition makes sense unless you include a shitload of debt (80% of purchase price).  On top of that you really never see any material fluctuation in asset values like common equites.  Owners have months when considering selling and even then they only have to find the dumbest buyer in a field perverse with them. 

 

A short example.  Around 2004, we were bidding on a 200 unit asset near Chicago.  There were only two buyers at the auction, us and another guy who looked like the biggest piker you ever saw.  We try pushing him around and bid very hard very fast.  He just goes right along with us like we are at a pie supper.  Very quickly we are at the limit of what we can pay and he wins.  I approach him after and try to learn a little about him and what he is doing.  Does he own any other apartments in his portfolio?  No, this is the first he and his family trust are buying.  I congratulate him for winning and ask where he saw the value that we missed, allowing him to pay more  (just over 10M in final bid).  He says "well you guys looked like you really know what your doing and I just figured we would make a little less that you."  Just a year or two earlier Gene was still in college double majoring in pschology and criminology.  I had dropped out and was working full time for Coca-Cola as a "merchandiser" stocking soda at gas stations and Walmarts in rural Missouri. 

 

Buffett mentioned a joke in his 85 letter.  Upon reading it I took a deep breath and sat in silence for quite a while.  The joke was about oil men and oil discovered in Hell.

 

Thank you for your reply reddog66. Very informative.

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Good insight reddog66. From what I see technology is certainly reducing the barriers to entry which creates more competition and reduces makes it harder to find deals. One of the things I find intriguing about this industry is most of the people in it (90+% in my opinion) have no clue what they are doing.  Interestingly technology has made it easy to distinguish between amateurs and professionals, if some is referencing Zillow pricing..They are more likely an amateur!

 

From a long term standpoint, I don't see technology destroying the industry, just breaking down the information barriers. Residential real estate (houses, apartments, multiplexes) is not going anywhere; everybody needs a place to live. I don't have an opinion on Malls, store front, office space segment.

 

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I don't really need to see for myself what Hawaii looks like before I book a $1,000 plane ticket and spend around $1,000 to stay in a hotel for a week.

 

On the other hand, I probably want to walk around my future home if I'm going to be spending upwards of $200k and living there every day for at least a few years.

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Residential Real Estate is a sales/relationship business, technology augments but can't replace these 1x1 interactions and relationships. When I have a property to rent, I can't just list it on sites like Zillow/Trulia/Craiglist for free, I still need an agent to

 

-- Show the property to prospective buyers/tenants - I don't have time to do this on my own

-- Screen the tenants to weed out garbage - Technology can provide data to help with this but no amount of technology can replace a competent agent that is good at screening tenants

 

I happily pay the agent's fee for these services!

 

Berkshire Hathaway also acquired auto dealership group recently. Is that Warren saying that Tesla's technology based direct sale model is not going to kill the local dealerships??

 

I am just surprised that we have not seen what has happened to travel agents happen to Realtors.

The network effect must be huge in this business, can't imagine Berkshire Hathaway venturing into realty without seeing that technology has not broken down this yet.

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