AI, PROPTECH, & BLOCKCHAIN

Technological innovation has consistently driven market upheavals since the 1980s, transforming not just investment strategies but the very fabric of how businesses operate. As a predominately brick-and-mortar industry, commercial real estate (CRE) is an undeniable laggard in adopting digital technology. However, more owners and operators are embracing change given the proliferation of digital service offerings for property maintenance, leasing, and deal sourcing aimed to drive efficiencies and pursue potential profits. The industry, it seems, has finally arrived.

This shift toward digital adoption has led to more streamlined and transparent processes, enabling developers, operators, and investors to make data-driven decisions with greater ease. Emerging technologies are enhancing CRE’s ability to analyze real-time demographic shifts and facilitate asset management, paving the way for more strategic investment opportunities as integration intensifies. Add in the emergence of generative Artificial Intelligence (AI) – which almost half (44%) of surveyed industry professionals believe is already making an impact on CRE – and the sector is now positioned to explore new opportunities for growth.

(National Association of Realtor’s 2023 Technology Survey)

Source: National Association of Realtor’s 2023 Technology Survey

Here are several ways digital innovation is impacting commercial real estate and improving investors’ methods for evaluating and financing deals:

Hospitality managers are turning to AI to recapture demand that bled out to Airbnb and alternative lodgings over the past decade. By leveraging AI, hotels can create a customized guest experience without incurring higher labor costs, dually addressing the recent challenges of labor cost inflation and as well as a high turnover in the workforce. And the guests are on board. A recent survey by HotelTechReport found that guests particularly appreciate chatbots to answer simple questions. Perhaps the most high-profile example is “Connie,” Hilton’s robot concierge launched in 2016. Connie is powered by an IBM-designed AI and sits at her own desk making restaurant recommendations, directing guests around the hotel, and providing information about local attractions. Additionally, Marriott is experimenting with smart room voice control systems that allow guests to adjust room temperature, lighting, and entertainment systems on verbal command. AI-driven technology is also set to streamline hotel operations like housekeeping schedules and inventory control, potentially creating a stronger bottom line and healthier asset profiles overall.

POTENTIAL AI IMPACT ON THE HOSPITALITY INDUSTRY

Source: HotelTech Report

For the better part of two decades, e-commerce has threatened to erode traditional brick-and-mortar retail centers. By 2023, e-commerce accounted for 20% of all retail sales according to the research firm Forrester, which predicts that global e-commerce retail sales will hit $6.8 trillion by 2028. This has raised concerns among industry analysts about shifting consumer shopping habits and the relevance of the in-store experience.

And yet, ingenuity has prevailed, making way for the novel “buy online, pick up in-store” (BOPIS) model that has actually increased overall retail sales by blending online and in-person shopping experience, per a 2021 study by Harvard Business Review. In fact, $21.9 trillion of the projected retail sales in 2028 are anticipated to occur in physical stores.

Reaching beyond BOPIS, “a surprising wave of optimism” underscores Deloitte’s Global Retail Outlook for 2024 which projects, “AI streamlining operations, boosting productivity, and creating more captivating customer experiences – all contributing to both financial growth and lasting success.”

AN OVERVIEW OF THE BOPIS INDUSTRY

Sources: Fit Small Business. Global Buy Online Pick Up in Store (BOPIS) Market Forecast, Research and Markets, February 2022. US Click and Collect Forecast 2022, Insider Intelligence. 2023 Global Digital Shopping Index: U.S. Edition, PYMNTS.com. BOPIS and curbside pickup grain ground, Digital Commerce 360.

Proptech, short for property technology, is an expanding support industry for CRE professionals. As analyzed by Precedence Research, in 2022, the Proptech market size stood at $30 billion and is projected to reach $133 billion by 2032.

(USD Billions)

Source: Precedence Research

For multifamily in particular, Proptech is transforming the leasing process. Software like YieldStar uses data analytics and market intelligence to adjust rental pricing in real-time, assisting property managers with revenue management.

Analytic tools can help compile and analyze market data to inform marketing campaigns and pricing for available units, offering more opportunities to pursue potential profits. AI chatbots also can assist with scheduling in-person tours and answering inquiries from prospective tenants, allowing properties to capture leads early in the funnel. According to J.P Morgan Chase & Co.’s May 2023 publication, How Property Technology is Changing Commercial Real Estate, features like virtual tours and 3D renderings enable property managers to sign tenants while the property is still under construction, and digital signatures have streamlined the application process, allowing new tenants to sign documents from home.

Beyond attracting tenants, smart home technology boosts energy efficiency and enhances security, encouraging residents to pay higher rents for added luxury. Multifamily has consistently been a favored CRE sector, and as property managers adopt new technologies that further enhance both the property appeal to renters and NOI potential for investors, these assets are likely to remain a preferred asset class.

Technology has not only enhanced operations, it has also created new entry points for individual investors to participate in CRE vehicles once dominated by institutional players. For example, blockchain technology and tokenization enable the digital division of an asset into fractional shares, allowing investors to participate in ownership with much lower minimum investments compared to traditional methods. However, as Andres Zunino, founder of Zircon Tech, recently warned, “The tokenization of real estate is not without its challenges. One of the primary concerns is the lack of a consistent regulatory framework that governs the market.” More heavily regulated platforms are continuing to evolve to meet the demand.

Crowdfunding platforms, which are online marketplaces often utilizing Regulation A offerings—an SEC exemption that allows companies to raise capital from accredited and non-accredited investors with fewer regulatory requirements—are attracting new investors, including those who previously thought CRE investments were out of reach.

While traditionally targeted to high-net-worth investors, these new platforms and offerings are changing the paradigm, now providing access points for everyday investors who can meet the requirements. With sufficient adoption, Regulation A offerings could transform the landscape of real estate ownership in America.

Beyond strengthening potential profitability, marketing outreach, and investor access, technology also has the potential to enhance deal sourcing and due diligence in commercial real estate. AI can instantly analyze and synthesize vast volumes of data to generate dynamic forecasts, and machine learning algorithms are identifying patterns and insights that were previously almost undetectable. These technologies, still in their nascent phases of development, may be poised to give rise to more robust underwriting software and enhanced appraisal tools, as well as predictive analysis for migration trends, climate change, and behavioral shifts. This data-driven approach has the potential to enhance decision-making, enabling sponsors to further support buy, sell, and hold investment decisions.

By finding ways to integrate emerging digital tools, CRE’s brick-and-mortar mainstays – retail, hospitality, and multifamily – can continue to innovate and attract fresh interest from consumers, tenants, and investors alike. CRE’s embrace of AI and machine learning has the potential to generate greater efficiency and transparency, while offering new ways to drive the industry forward for owners, operators, and investors alike.

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Investments in commercial real estate (CRE) involve significant risks, including market risks, interest rate risks, and liquidity risks, and may not be suitable for all investors. The integration of artificial intelligence (AI) and other digital tools in CRE is an emerging area, and there is no guarantee that these technologies will achieve the anticipated outcomes or improve investment performance.

Securities transactions conducted through Signet Securities, LLC. Member: FINRA/SIPC.  Signet Securities is not affiliated with any entities identified in this communication.

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