The world’s residential and commercial real estate is worth worth around $200 trillion. Real estate is, by far, the world largest asset class. But when it comes to real estate development, the industry is extremely fragmented, does not develop “products” per se, spends close to nothing on R&D, and its customer focus usually boils down to “one size fits most”.
A typical commercial real estate project is built on land owned by one party, in partnership with a another, with equity capital from a third, debt from a fourth, architectural design from a fifth, actual construction work by a sixth, and is then leased or sold by a seventh, and operated by an eight. In between, dozen of other parties contribute to the development process. This makes real estate the most “imperfect asset class”, with high transaction fees and severe information asymmetries. It also means real estate developers are at a disadvantage responding to changes driven by technology.
Those that succeed will define what it means to be a real estate company in the 21st Century. What is clear is that “building and filling boxes” is no longer a viable model and that successful real estate companies will have to combine the development of quality assets with a firm grasp of technology and some proprietary tools and a solid understanding of their end-users’ specific needs.
Venture funds are not just facilitating the flow of new technology and capabilities into the industry. In some cases, money invested by these funds is used to finance real estate inventory — as equity for new developments or as a downpayment on long-term leases. This seems perplexing as venture money is “expensive”, expecting higher returns than money traditionally allocated to real estate. But new business models and the promise of becoming a key player in a multi-trillion dollar industry are pushing investors to keep an open mind.