April 19, 2014

The Most Disruptive CRE Platform You Never Heard (or Forgot) About

creoutsider zethusBack in 2000 a company name Zethus tried to disrupt the CRE industry.  Developed by a former lawyer/real estate executive, the company started out as an online discount broker.  The intention was to create a real esstate online marketplace with electronically managed transactions – a real alternative to, and competition for, the current broker model.

Zethus caught the eye of Cushman & Wakefield who believed that electronic transactions were a logical progression for the industry and would be a huge efficiency booster.  At the time, many of the national brokerages had separate technology investment groups so C&W put their money on Zethus.

Perhaps due to the blow-back C&W experienced and some subsequent arm twisting, Zethus altered its model to court brokerages instead of trying to compete against them.  But even with backing from Goldman Sachs, Zethus was unable to attract brokers or skittish owners and ultimately failed.

A few years later, the national brokerages got out of technology investing altogether.  They were, after all, not in the technology business.  Back to Sales 101.

There are two types of innovation – incremental (AKA sustaining) and disruptive.  Incremental innovation improves on or adds value to core processes for the company’s “value network”, i.e., their clients, their employees and the company’s investors.

Disruptive innovation creates new criteria by which performance is judged – in other words, a new and different way of doing business that’s typically simpler, cheaper and more convenient than what currently exists.

For CRE, standardized electronic transactions are the big disruptor.  Why?  Those championing electronic transactions believe they will lead to electronic markets that would displace the agent’s role in the supply and demand proposition: agents would not be needed to pair buyers/tenants with sellers/landlords.   Those displaced agents would convert to real estate consultants much like the way stockbrokers operate now.  Anyone who got in at the bottom would be in the best position to pivot and survive.

But postmortems of  Zethus pointed to the involvement of larger brokerages as a contributing factor in its failure.  Disruptive innovation doesn’t start at the top.  It is borne or purposely tested in under-served, ignored or emerging markets where people can’t afford, can’t use or don’t have access to whatever product or service other people normally use. It enters the mainstream when it’s deemed useful, different and in demand.

What if Zethus had gone it alone, hovering around the fringe working out the bugs and building demand?  What if Cushman and Wakefield had slowly nurtured the system on its own without the need for industry buy-in?  At the time, most critics of the electronic transaction felt it would at least be suitable for small space leasing.  What if it had been set up that way? After a decade, wouldn’t the process be perfected and scalable to large transactions?

Since the demise of Zethus, online apartment rental companies cropped up.  Companies have automated their own lease transactions.  Youthful start-ups eschew traditional office space in favor of the Regus’ of the world.  Maybe the disruption everyone in CRE has been waiting for will come from the outside – from places that look inconsequential at first glance but are shaping the way people find, acquire and maintain where they live and work.

 

Photo by mharrsch

Comments

  1. I’ve been following 42Floors for quite a while now. I’m a big believer in the free access to market information for both tenants and landlords. However, the flaw in the electronic transaction model and perhaps in 42Floors business model is the misconception that the role of a broker is a space finder. A broker’s value proposition is no longer pairing tenants/buyers with landlords/sellers. The new role of a broker, at least as a tenant representative, is to be an advocate, to negotiate unflaggingly on behalf of your clients’ interests to achieve the best economic and operational real estate outcome. Access to market information is no longer enough. To offer this new value proposition as advocate, deal manager, and financial and legal analyst a broker must have unique skills and experience that has prepared them for this role. Sure, a broker needs to be able to sell to get hired, but the new commercial real estate broker is no longer a salesman. The new broker needs deep legal and financial skills and training. The new broker – the broker as advocate – cannot be replaced by electronic transactions or free market information.

    • Really well said, Ryan.

    • I’ve heard the “agent as adviser” argument before. Don’t disagree with that but the agent role – whether on the tenant or owner/landlord side is still as matchmaker. You can give all the advice you want to a prospective tenant, but if you can’t find them a space, what good is it? I think if agents actually thought about what a true electronic marketplace would do, they’d welcome it. They’d never has to prospect again….

  2. Great post, once again! http://www.airbnb.com (vacation rentals) is an example that comes to mind – another nail in the travel industry coffin? And totally agree that the tech folks have finally discovered CRE – one of the last bastions of traditional industries lagging behind the curve. Should be an exciting few years as the rate of tech adoption is shortening and individuals from the outside will continue to look more objectively at the industry. I still think mobile technology is going to be the driver here.

    To underscore Ryan’s point – with these changes a broker can no longer rely on their role as a “matchmaker” (clients are going to be able to do that for themselves) but they need to be a financial/asset management problem-solver.

    • Exactly – agents would be like stockbrokers – assessing needs, providing advice, wading through property prospectuses and so on. Not everyone is going to want to do that themselves…which is why stockbrokers (or “financial advisers” as they’re called now) are still in business in spite of eTrade and all the rest of the DIY sites.

      And yes, the change will be consumer driven. For CRE, in my opinion at least, the user is a large part of CRE’s tech lag problem. Once they get used to doing things another way, the CRE process will change.