REAL ESTATE TRENDS
January 12, 2017
Seven Real Estate Disruptors to Watch in 2017
By Kelly Mangold, Vice President, and Kim Bernardin, Associate
With a year full of political disruption behind us, RCLCO decided to look at the real estate disruptors that may reshape the industry in 2017 and beyond. We believe the following innovations have the potential to upend and challenge fundamental aspects of the real estate industry, though in many ways the future effects of technological change are unpredictable.
Ride Sharing and Self-Driving
The transportation sharing economy is beginning to create shifts in American daily life, policy, and real estate. Uber is now the most popular taxi app in 108 countries around the world, and in 2016, 46% of business travelers’ ground transportation transactions were for ride-hailing services (rather than car rentals, 40%, and taxis, 14%). The burgeoning popularity of ridesharing is heightened by Uber’s partnerships with the private and public sector. Last year, Uber announced its first real estate partnership with a rental apartment community, where residents will receive a transportation subsidy to use on Uber and public transit. In return, Uber will cap the fares of any resident’s ride to a transit station. Uber has also partnered with local governments to serve as an additional form of quasi-public transportation. For example, in April 2016, a Tampa suburb stopped running two bus lines and started paying for a portion of Uber rides instead. In 2017 and beyond, ride sharing may allow developers to be less wedded to transit-adjacent locations, and could lessen the need for large parking lots in non-transit locations.
In addition to the growth of the ridesharing industry, the past year was groundbreaking for autonomous cars. In 2016, Uber began offering its self-driving car service in Pittsburgh and San Francisco, working to overcome various legal and technological hurdles to offer passengers rides in autonomous vehicles. In addition, Tesla announced in October that all of its new vehicles will have the hardware to drive fully autonomously. Though still very much in an experimental phase, widespread use of self-driving cars has the potential to fundamentally change American culture and daily life, with significant impacts on real estate. Some households may choose to have only one car, or to not own a car at all, if autonomous vehicles can complete rides for multiple family members during the day. This could change residential parking needs, as well as parking restrictions at malls, offices, and urban downtowns, as visitors may simply get dropped off by their car rather than using a parking space. In addition, some speculate that driverless cars could expand the demand for real estate in transit-inaccessible areas that are currently less expensive, or that they will increase the distance that people are willing to live from work because they can do other things while driving. These possibilities show that although 2016 was a crucial year for transportation innovations, the coming years are poised to be even more transformative, and could disrupt the status quo in real estate.
Increased Interest in Alternative Sources
In recent years, the high level of interest and activity by both foreign and crowd-sourced investors shows the increasing demand for alternative real estate investment vehicles. The extension of the Immigrant Investor Program, or “EB-5,” by Congress in September provided a holdover until the next administration takes over, but experts believe that President-Elect Trump supports this legal immigration program and that investment visas will flourish under Republican leadership. Although the election results create some uncertainty, it is likely that the stability and “safe haven” status of the U.S. economy will preserve inbound capital flows.
The other emerging alternative investment vehicle, crowdfunding, first emerged in 2012 and has grown substantially since. It functions by allowing solicitation from the public for investment with lower minimum investment levels. There is high interest in this type of mass funding, and to date many of the larger platforms such as Fundrise have sold out most offerings quickly. Crowdfunding currently makes up less than 1% of total real estate investment volume, but with the uptick in volatility in equity markets, and continued low returns on fixed income investments, the demand for crowdfunded real estate is likely to continue to increase going forward.
Co-Working Continues to Flourish
Office has been impacted by the continued rise of co-working spaces and startup incubators that brought the sharing economy to this asset class. Similar to co-living, co-working harnesses the power of communal space to drive interest, flexible lease terms, and (only in some cases) lower costs. The co-working model has grown exponentially in recent years, both nationally and globally: in 2016, the co-working market surpassed 7,000 players around the globe. According to CoStar, co-working companies WeWork and Regus make up the largest and third largest tenants, respectively, with the highest new leasing volume since 2014. It remains to be seen if the introduction of fiber-to-home services and advances in video conferencing will further bolster the telecommuting impact and undermine the success of dedicated co-working spaces.
SOURCE: CoStar “WeWork and Other Shared-Office Providers Aiming to Reinvent How Office Leasing Works"
Hypergrowth in Homesharing
Like ridesharing, homesharing has the potential to have a dramatic effect on real estate: the widespread popularity of websites like Airbnb and HomeAway make traveling without a hotel more feasible and appealing than ever before. 2016 was a year of continued hypergrowth for Airbnb, specifically in markets outside of the U.S. such as China. In 2016, Paris and London had the most Airbnb listings, and only two of the 10 most-listed cities in the world were in the U.S. Despite its rapid growth, Airbnb generally competes with the leisure hotel demand segment, which is the smallest of the hotel industry. This minimizes the impact that homesharing has on hospitality, and shows that websites like Airbnb may be serving demand that was previously unmet or underserved. Thus, it is expanding the market share of the industry as a whole, rather than simply taking customers from traditional hotels.
In 2015, Airbnb Captured Nearly 8% of NYC Demand
SOURCE: “Airbnb and Impacts on the New York City Lodging Market and Economy,” HVS Consulting and Valuation, October 13, 2015"
As a reaction to this rapid growth, 2016 saw the progress of multiple anti-Airbnb laws which could challenge the homesharing industry if instituted on a wide scale. A New York State law would impose heavy fines on Airbnb hosts who advertise housing units for short-term rentals, although it remains to be seen what effect this new law will have. This type of legislation could further cushion the established hospitality industry from losses to Airbnb and similar companies.
Though homesharing may not compete directly with hotels, its seismic growth cannot be ignored. Sometimes cited as a “gentrification tool,” some studies have found that Airbnb can drive up real estate prices because people are willing to pay more for an apartment when they can make extra money renting it out. Listings also bring tourists to neighborhoods that were previously not destinations, changing community dynamics and retail needs. Thus the continued expansion of homesharing, despite its mitigated effects on the hotel industry so far, may still result in larger shifts in local real estate dynamics, especially for major tourist destinations.
Smaller Living Spaces and Greater Flexibility
While single-family home sizes have resumed steady growth after the downturn, rental units built since 2009 have decreased in size by almost 70 square feet. This change is generally driven by a shifting apartment unit mix, as developers are increasing the share of studio and 1BR units in their buildings. This trend is highlighted by the growing popularity of micro units, defined as units smaller than 350 square feet. Though micro units still make up a very small portion of the overall housing market, their ability to provide renters with more attainable housing on a gross rent basis (though generating higher per-square-foot rents) is representative of the shift towards smaller units due to such factors as an increase in young single person households and the rising cost of development in urban locations.
SOURCE: Erin Talkington, “Honey I Shrunk the Apartments: Average New Unit Size Declines 7% Since 2009,” RCLCO Advisory, September 15, 2016
Another housing type composed of very small units, co-living differs from micro units because of the larger communal areas that effectively extend living space. 2016 has shown increased market potential for co-living, as many of these existing properties are heavily oversubscribed.
The shift to smaller units can also be observed in the increasing popularity of Accessory Dwelling Units (ADUs), which are separate living units on single-family lots. Whether granny flats, backyard cottages, or English basements, these small adjacent units are becoming more prevalent as legislators take steps to make it easier to build and maintain ADUs, in the hopes of creating more affordable housing. One such example is Washington, D.C., which recently approved a new zoning provision that permits the construction of ADUs on private property without owners having to seek special permission. However, the laws regarding ADUs vary dramatically by city and state, and the expansion of this field depends largely on legislation.
Though the trend of smaller units has received much coverage in recent years, many developers believe that this is a growing, but likely not enduring, movement. In micro units especially, developers are building in flexibility so that units may be combined into conventional living spaces if the trend moderates in later years.
Big Data Affords Access
The residential sector is also facing significant changes due to increased access to real estate data through national real estate portals such as Zillow and Trulia. These websites provide home value estimates that some homeowners are using to set asking prices rather than calling a Realtor to find out what comparable homes had recently sold in the market. Redfin has also disrupted the traditional broker-buyer relationship and potential conflicts of interest by eliminating pay based on commission, and has created a new Opportunity Score which integrates proximity to employment and Walk Score data. Another emerging competitor in this space is Opendoor, which completed a $210M fundraising round in 2016. The California-based company buys homes quickly, then fixes them and lists them for resale on its website, using an algorithm to find attractive deals and minimize investment losses. Online brokerages still only control a small share of overall transactions, but as consumers become savvier and Millennials continue to enter the for-sale housing market, it is likely that future tech startups will continue to change the nature of real estate transactions, especially in the sales of personal homes in the marketplace.
Another innovation affecting the homebuying process is virtual reality (VR) technology, which is revolutionizing the design and construction industry by allowing users to “walk through” designed spaces. This makes it possible to view and tour real estate offerings remotely, and to narrow down a broad number of listings more efficiently than touring multiple open houses, often a time-intensive process. For large condo developments, this is quickly becoming a crucial component in the pre-sales process, as these buildings usually require achievement of a significant pre-sales target before construction begins.
7. Retail and Industrial
Fight or Flight
The past year has shown huge advances for retail delivery services, such as Amazon Prime, and for subscription-based services like Blue Apron and Stitch Fix. These services aim to upend the traditional retail structure of physical stores and salespeople in favor of online ordering and accelerated delivery. In December, Amazon Prime conducted its first commercial drone delivery in the UK, marking the start of its long-anticipated Prime Air program, which aims to deliver goods to customers in under 30 minutes. In 2017 and 2018, Amazon plans to continue expanding the program, though still in preliminary phases and held back by various regulations. While a successful wide scale implementation of a technology such as Prime Air (coupled with existing online shopping with traditional delivery methods) could decrease the demand for brick-and-mortar retail stores, especially power centers, it is likely that restaurants and bars, services, and other experience-based retail will be more insulated. These retailers offer goods and services that cannot generally be delivered by drone or even UPS or FedEx, underscoring that disruptors like Prime Air will not affect all parts of the real estate industry equally.
E-commerce may also redefine the conventional industrial sector, with large retailers focusing on expediting the delivery process through optimally located warehouses. In the coming years, the typical distribution system will likely be based on three types of facilities: regional mega distribution centers; mid-sized distribution centers at the market edge; and small, urban and suburban warehouses for last-mile delivery. Amazon has been a leader in this new industrial configuration, opening 25 sortation centers in the past two years, each of approximately 300,000 square feet and located in the suburbs of major cities. In the next two years, demand for smaller, urban industrial buildings will increase as Amazon and its competitors race for faster same-day delivery and aim to solve the last-mile delivery problem.
Delivery Technologies: Main Geographies and Projected Timeline for Adoption
SOURCE: “Technological Disruption and Innovation in Last-Mile Delivery,” Stanford Value Chain Innovation Initiative, June 2016
Though in many ways the future of technology is unpredictable, its impact on real estate in the long term is inevitable. Aside from the firms mentioned earlier in the article, other real estate tech companies will continue to make an impact on their particular niche in this market space, with firms like Opendoor, VTS-Hightower, Compass, Real Matters and LendingHome raising significant capital in 2016 for future expansion. Venture funding continues to drive new real estate tech firm start-ups, many of which are too nascent to be covered in this article, but will likely begin making tangible impact in the coming years. In this dynamic landscape, preparing for and closely monitoring real estate disruptors will be crucial for maintaining lasting profitability.
 Hugo Martin, “Uber and Lyft Continue to Gain Popularity with Business Travelers,” Los Angeles Times, April 23, 2016, http://www.latimes.com/business/la-fi-uber-business-travelers-20160422-story.html
 Brian Solomon, “Uber Teams Up With Real Estate Developer to Replace Car Ownership,” Forbes, May 18 2016, http://www.forbes.com/sites/briansolomon/2016/05/18/uber-teams-up-with-real-estate-developer-to-replace-car-ownership/#7d653e2b23bd
 Joshua Brustein, “Uber and Lyft Want to Replace Public Buses,” Bloomberg News, August 15, 2016, https://www.bloomberg.com/news/articles/2016-08-15/uber-and-lyft-want-to-replace-public-buses
 Mike Isaac, “Uber Expands Self-Driving Car Service to San Francisco, D.M.V. Says It’s Illegal,” New York Times, December 14, 2016, https://www.nytimes.com/2016/12/14/technology/uber-self-driving-car-san-francisco.html
Max Chafkin, “Uber’s first Self-Driving Fleet Arrives in Pittsburgh this Month,” Bloomberg Businessweek, August 18, 2016, https://www.bloomberg.com/news/features/2016-08-18/uber-s-first-self-driving-fleet-arrives-in-pittsburgh-this-month-is06r7on
 Cathleen Chen, “EB-5 Will Thrive Under Trump Experts Say,” The Real Deal, November 2016, http://therealdeal.com/2016/11/18/eb-5-will-thrive-under-trump-experts-say
 Falguni Desai, “Coworking Spaces Poised to Enter New Growth Phase,” Forbes, March 10, 2016, http://www.forbes.com/sites/falgunidesai/2016/03/10/coworking-spaces-poised-to-enter-new-growth-phase/#55e424f411c3
 Randyl Drummer, “WeWork and Other Shared-Office Providers Aiming to Reinvent How Office Leasing Works,” CoStar News, March 24, 2016, http://www.costar.com/News/Article/WeWork-and-Other-Shared-Office-Providers-Aiming-to-Reinvent-How-Office-Leasing-Works/180890
 Joshua Brustein, “The Conflict Between Airbnb and New York is Only Beginning,” Bloomberg, November 1, 2016, https://www.bloomberg.com/news/articles/2016-11-01/the-conflict-between-airbnb-and-new-york-is-only-beginning
 Renate van der Zee, “The ‘Airbnb effect’: Is it Real, and What is it Doing to a City like Amsterdam?,” The Gaurdian, October 6, 2016, https://www.theguardian.com/cities/2016/oct/06/the-airbnb-effect-amsterdam-fairbnb-property-prices-communities
 Steve Law, “Portland Makes it Easier to Site and Design Granny Flats,” Portland Tribune, December 2, 2015, http://portlandtribune.com/pt/9-news/283838-160384-portland-makes-it-easier-to-site-and-design-granny-flats
 Emily Brown, “Want to Add a Small Apartment to your House in DC? That Will Soon Be Allowed,” Greater Greater Washington, May 10, 2016, http://greatergreaterwashington.org/post/30745/want-to-add-a-small-apartment-to-your-house-in-dc-thats-allowed-now
 Konrad Putzier, “The 10 Biggest Real Estate Tech Deals of 2016,” The Real Deal, December 21, 2016, http://therealdeal.com/2016/12/21/the-10-biggest-real-estate-tech-deals-of-2016
 Georgia Wells and Laura Stevens, “Amazon Conducts First Commercial Drone Delivery,” The Wall Street Journal, December 14, 2016, http://www.wsj.com/articles/amazon-conducts-first-commercial-drone-delivery-1481725956
Article and research prepared by Kelly Mangold, Vice President, and Kim Bernardin, Associate.
RCLCO provides real estate economics and market analysis, strategic planning, management consulting, litigation support, fiscal and economic impact analysis, investment analysis, portfolio structuring, and monitoring services to real estate investors, developers, home builders, financial institutions, and public agencies. Our real estate consultants help clients make the best decisions about real estate investment, repositioning, planning, and development.
Disclaimer: Reasonable efforts have been made to ensure that the data contained in this Advisory reflect accurate and timely information, and the data is believed to be reliable and comprehensive. The Advisory is based on estimates, assumptions, and other information developed by RCLCO from its independent research effort and general knowledge of the industry. This Advisory contains opinions that represent our view of reasonable expectations at this particular time, but our opinions are not offered as predictions or assurances that particular events will occur.