Innovation and disruption are studied a lot these days as everyone tries to identify industries ripe for disruption and figure out exactly how to disrupt them. One way to do that is to reverse engineer disrupting companies to create a blueprint of sorts to help innovative types find a path for disruption.
As I was reading about some of these theories on Stratechery.com (excellent site, btw) I couldn’t help but think about how they apply to commercial real estate. How does what CRE disruptors are coming up with fit into these theories? Are they on the right path? And is there really a route to disrupt the commercial real estate industry?
First, some definitions:
Modularity – The degree to which a system’s or organization’s components may be separated and recombined. For real estate, listing data is modularized, i.e., its collection and distribution is relatively easy to separate from the real estate transaction process.
Commoditization – Lack of meaningful differences between products (or services) with no reliance on brand. So when you hear people saying “listing data has been commoditized” they’re saying that listing data is everywhere and it is mostly the same no matter where it comes from.
And once something becomes modularized and commoditized, disruption becomes possible – and we get to apply the Law of Conservation of Attractive Profits which points the way.
It basically goes like this: Since a formerly competitive advantage has been removed through modularization and commoditization, another player can recombine components in a unique way to achieve profits. To do that, they need to find an integrated relationship that they can break.
They actually make up charts for this. There wasn’t one for commercial real estate, but I imagine it would look something like this:
Though listings have become commoditized, many owners still rely on agents/brokerages as the service provider to disseminate their listings. So trust is the factor “integrating” owners with brokerages. For owners to choose another service provider, that trusting relationship needs to be broken.
One path might be a digital service platform using something that is or can be commoditized. That platform must perform as good as or better than and for the same or less cost than using the services of a brokerage or agent. Additionally, it has to show that it has the ability to attract users who like and trust the platform.
Owner trust would then separate (become modularized) from brokerages/agents – in effect commoditizing trust, i.e., there is no meaningful difference in quality of performance of the service provider’s ability to provide listings and attract prospects.
Don’t think you can commoditize trust? AirBnB was able to do it by providing a digital platform that people liked and trusted. They effectively neutralized the brand trust on which hotel chains had always relied providing users with another, trustworthy option.
One thing to keep in mind in AirBnB’s case – and the case of any of the current crop of disruptive companies – is that they’re all offering a similar or same product or service but in a different way. AirBnB is offering people’s homes as a substitute for staying in a hotel. Uber is offering drivers on demand instead of ones that need to be flagged down or dispatched. Netflix removes the scheduling gatekeepers by offering movies and TV shows on demand.
For real estate disruptors, the question will be how they can offer real estate services in a different way that is good enough to break the trusted relationships that currently exist or keep new ones from forming. From the chart, listings looks like the key, but disruptors are looking for other components in the CRE process that can be modularized and thus commoditized – like the small space office leasing process.
But incumbent brokerages can use these same tactics to bolster their business, too. Knowing that trust is the target means that relationship management becomes more important. Listening to clients and keeping an eye on trends can identify needs and processes that need to be changed that preserve owner trust.
Or you can ignore all of this and believe it’s just a passing fad. Look how well it turned out for Kodak, Swiss watch manufacturers, Blockbuster, travel agents… It’s not that everyone can’t coexist but it definitely means a smaller piece of the pie than you’re used to.
Or you can spend time and money on lawsuits to fight off competition. Just think if the taxi companies spent their money digitizing dispatch instead of fighting off Uber. And I’ll let you think about current CRE incumbents who take that same route. Because it’s not just brokerage that can be disrupted.
Original Post: 8/4/2015
Mark says
Thanks Chris. EBay and Amazon are two other great examples of aggregators who disrupted how goods are sold. Co Star/Loopnet could disrupt CRE if they decided to become consumer focused rather than try to charge brokers, consumers and everyone in between. They already have the ability to aggregate listings and are now selling local broker ads on those listings. All they need to do is offer more services to owners/users and they could displace brokers. Assuming they could assemble some of the displaced brokers to provide these services on an hourly or reduced rate and charge owners/consumers for those services.
Chris Clark says
Mark – Have always wondered myself which master LoopNet/CoStar would end up serving – users or brokerages…but with all the competitive suing, it looks like it’s brokerages for now…
And there’s actually a Theory of Aggregation…who’d have thought?
Mark says
Chris Anderson’s “The Long Tail” does a good job exploring different business models including traditional media and music and how disruption has impacted these businesses.
Vic Bruno says
Chris – nice article as usual. Something I figured out a long time ago is this: “Trust is harder to earn and easier to lose than money”. I use that as a motto of sorts. I continue to see a model for all of brokerage (cre and resi) that disrupts traditional practices of matchmaking and moves toward a consultative role for a fee, perhaps at hourly rates. Apparently, so does the National Association of Realtors (http://www.realtor.org/articles/ownership-of-real-estate-s-future?om_rid=AACwkI&om_mid=_BVuoJDB9EAgHhS&om_ntype=NARWeekly) and many other trade associations as they are aware and beginning to work toward a consolidated brand and system of aggregating data from listings and sales transactions in order to keep from being squeezed out by innovative disrupters. Its clear there is opportunity for those who are seeking ways to capitalize on an industry that has functioned not too differently than a closed union shop for several decades… it will be interesting to watch!
Chris Clark says
Vic – Re trust – I was discussing this post with an agent who said trust – which he believed to comprise both honesty and competency – can’t be “done” by a machine. But unless the machine is programmed differently, it certainly can be both honest and competent – and with less personal bias. It’s not unreasonable to think that with advances in AI and the like that you’d get as good advice from a computer as you would a person. That’s a way off for CRE or anything right now. But let’s just hope people will always prefer dealing with people rather than machines…
Diane Danielson says
Loopnet did that study with Google in 2014 that showed that even when a broker is engaged, 55% of clients go online too. Some because they don’t “trust” that they are seeing all the information from their broker. Obviously Loopnet had it’s own reasons for promoting that. But, this reliance on the internet is only going to increase as millennial clients increase. They trust algorithms more than humans, and assume that everything should be open and shared. This is why I agree that brokerage needs to move towards a more open and consultative role and away from double-ended, pocket listings, etc. This is something our company (SVN) has been open about for years. Recent work we’ve done with Millennials and CRE, plus the entrance into the market in a huge way of WeWork, has only emphasized that a shift is coming in how space is found, used and valued.
Another great thought-provoking article Chris!