TOPICAL REPORT Technological Disruption and the Real ... · 20161; internet protocol version 6...

Technological Disruption and the Real Estate Industry:

How Technology is Changing Our Business and Opening a World of Opportunity

by: Amy Erixon, Avison Young

May 2016

TOPICAL REPORT

2 Partnership. Performance.

Technological Disruption and the Real Estate Industry

The Fourth Industrial RevolutionThe theme of the January 2016 World Economic Forum in Davos, Switzerland was the so-called Fourth Industrial Revolution. This term refers to the current stage of automation, data exchange and process transformation in which the Internet of Things (IoT), the Internet of Services and cyber-physical systems are being increasingly drawn together. The Fourth Industrial Revolution is characterized by a range of technologies that are fusing the physical, digital and biological worlds. Smart machines, virtual reality, real-time health data analytics and optimization logistics are just some application examples. And just as with previous industrial revolutions, this latest wave of innovation will profoundly impact all corners of society—including the real estate industry—in ways we are only beginning to understand.

Engines of digital disruptionComputers are expected to outpace the computational abilities of humans in 20161; internet protocol version 6 (IPv6) has already created the ecosystem to support an infinite number of internet addresses2; recent radical increases in available computing and data analytics power can now be augmented with wireless sensors to analyze virtually any metric (volume, motion, light, sound, current, temperature, speed, etc.). Together, these factors are enabling the rapid advancement of what has come to be known as the Internet of Things.3

This means, essentially, that the “things” or objects that make up our personal and commercial worlds—think of a smart meter, thermostat or Fitbit—can now continuously communicate and exchange information with computers. These computers can, in turn, analyze and modulate those “things” as commercial and consumer needs require, becoming even smarter through data feedback.

1784 Mechanical production equipment and engines driven by water and steam power

1870 Mass production driven by the division of labour, assembly line and electrical lights

1969 Use of IT and electronics, such as robots, to further automate production

2012 Additive manufacturing (3D printing), IoT (Internet of Things) and application of cyber-physical systems to reorganize the way production and consumption occur

INDUSTRIAL REVOLUTIONS



The Internet of Things

IoT refers to smart, connected objects in homes and businesses that can communicate without human-to-human or human-to-computer involvement.

with China eclipsing the U.S. in this technology.8

5BILLION 27BILLION2015 2024

MACHINE-TO-MACHINE (M2M) CONNECTIONS WILL GROW FROM:

over the next 10 years.7

By 2020 250 MILLION VEHICLES

will be connected to the internet.6

The global market for WEARABLE DEVICES grew 223% in 2015.5 223

%

PRIVATE SECTOR

PUBLIC SECTOR

$14.4TRILLION

$4.6TRILLION

CISCO BELIEVES THE IOT COULD GENERATE:

$10-$15 TRILLION TO THE GLOBAL GDP BY 2020.4

GE ESTIMATES THAT THE INDUSTRIAL INTERNET WILL ADD



CPS are physical and engineered systems whose operations are monitored, co-ordinated, controlled and integrated by a computing and communications core. Just as the internet transformed how humans interact with one another, CPS will transform how we interact with the physical world around us. Transportation, healthcare, manufacturing, agriculture, energy, defense, aerospace and construction are the sectors most affected.

A concrete example of the IoT applied to the real estate world can be found in Toronto, Canada at the newly constructed, LEED Platinum-certified RBC Waterpark Place. Every system in the building is managed via a wireless sensor network connected to a single, smart operating system that is continually learning about the behaviours, tastes and preferences of its users and occupants.

According to the property’s developer, Oxford Properties, the building’s systems were 30% less expensive to install than conventional systems, and Cisco is claiming they will reduce energy consumption by 30%-70%.9 That’s game changing.

This type of single system can be better cyber-secured (it reduces entry points) and is far more economical to operate (man vs. machine), although the building engineer must be retrained. While it is uncertain where this is headed, one thing is clear: this type of innovation can provide users and owners with a triple bottom-line advantage by reducing cost, improving performance and enhancing functionality (for example, facilitating movable walls to better manage workspace)—a compelling value proposition.

COMMUNICATIONCOMMUNICATION

ACCESSACCESS

24/7 MONITORING

HVACPOWER

LIFTS

LIGHTING

ENERGY

SECURITY

SECURITY

FIREFIRE

24/7 MONITORING

IT INFRASTRUCTURE

IT INFRASTRUCTUREHVAC

LIFTS

POWER

Integrated systems (single IP network)Multiple systems (traditional design)

ENERGY

30% MORE CAPITAL AND OPERATION COST SAVING

Cyber-Physical Systems (CPS)



Re-engineering the workplace — process

revolution

Big data

Workforce transformation (human and machine)

Intelligent enterprise (two-way relationships with customers)

Cybersecurity

Robotics

Platform revolution (cloud,

collocation)

New value propositions

Technologies of “me” and “we”

Digital revolution

Social

Mobile

Analytics

Cloud

Internet of Things

Material science and engineering

revolution

Modular construction

Embedded sensors

Biomimicry

Revolutionary materials

3D printing

Talented real estate professionals have been defined by their ability to spot trends and accurately assess the impact they will have on the world around us. They have historically considered properties that have stable lease agreements, attractive configurations and preferable growth locations as desirable. Most underwritings assume that things will unfold in the future as they have in the recent past. But what if they don’t?

Far from being immune to the rapid acceleration of technological change, the real estate industry—which is profoundly “old school”—will be deeply affected by innovation as adoption accelerates and disruption unfolds. Understanding the most relevant forces and concepts involved will help industry players avoid investing in properties that will have lower future value, require disproportionate refurbishment capital or simply become functionally obsolete.

Key forces at work



The real estate implications of our technological futureChange is coming to the real estate industry in the form of a vast array of communications, construction, energy, security, process and operational (“smart”) technologies that will affect virtually every aspect of the industry. In fact, that change is already here. The way properties are conceived and built; the way they are researched, marketed and sold; and, most importantly, what they offer to tenants in the way of energy-efficient, flexible, adaptable smart functionality are all becoming critical factors when assessing the future viability of investment properties and establishing sustainable long-term investment criteria.

Everything in real estate from how retail, industrial and office processes are conducted to the way buildings are designed, built and operated will be transformed in profound ways.

In the U.S., residential real estate is already well along in its digital transformation. Change is already evident in the ways properties are marketed and managed, in social programming and e-commerce accommodations, and in new and different footprints and amenities.

Digital imperativeDigital disruption occurs when new digital technologies and business models reduce cost or redistribute value around the creation, distribution, sale and consumption of goods and services. By one estimate, 32% of business revenues will be at such risk by 2020.10 Companies can either seize new opportunity, like Uber, or see their businesses disappear, like Kodak and Blockbuster.11 Don’t let legacy investments blind you to the potential value of disruption.

To that end, investors need to be aware of, if not deeply informed about, the latest disruptive technology trends affecting the industry. At last count, over 2,500 companies are poised to disrupt the real estate industry,12 with innovative models set to alter everything from real estate’s traditional role in business operations to how it is funded and where it is located. Just as Amazon successfully mainstreamed e-commerce and forced retailers to rethink their supply chains and store offerings, fin-tech will similarly transform retail banking and insurance while bio-tech reconceives both medical practices and service delivery.

Forward-looking real estate professionals have

informed advisors

Whether you’re seeking “smart” building investments, developing sustainable value strategies or wondering how best to refurbish existing properties to meet tomorrow’s technological requirements, it’s critical to understand both current and emerging trends.

Rather than be alarmed by the technologies themselves and their potential implications on jobs and society, take the time to consider the future and prepare accordingly.



This topical report is intended to help institutional investors and their service providers gain a better grasp of the causes and impacts of these—and many more—impending changes. We will examine four critical areas: software and hardware innovation, construction and materials engineering, process technology, and smart cities infrastructure and policies. Not intended to be exhaustive, this topical report provides examples of places where change and disruption are most prevalent and discusses how the convergence of various technological applications can result in profound progress and significant investment opportunities.

HUGE OPPORTUNITY OR EXISTENTIAL THREAT?

Companies can either seize the opportunity or see their businesses disappear.

1

2217

INFRASTRUCTURE IS LAGGINGHong Kong ranks 1st globally in high-speed internet.

The U.S. ranks 17th. Canada ranks 22nd. 13

ADOPTION RATES ARE UNPREDICTABLEOnly 7% of companies surveyed by Gartner in 2014 felt they

were digital, but 83% felt they would be digital by 2017.14

LEGACY INVESTMENTSoften blind companies to the potential for disruption. Sunk

costs, accounting treatment and corporate hierarchies have a

vested interest in the status quo.SPEED IS THE KEY

What all digital businesses have in common is that

they can rapidly deploy new technology, for limited cost, upsetting traditional barriers

to entry (e.g., Uber).



Software and hardware innovationThe number of real estate apps for collecting, managing, marketing and reporting property data across all segments is set to explode. The MIT Center for Real Estate is currently tracking over 2,500 apps in development15 and has noted that students are almost universally gravitating to app development over investment banking, investment management and property development roles. It’s likely that these apps, as happened in the travel industry, will be supplanted by aggregator apps, as their data manipulation capabilities and productivity advantages become hugely valuable to real estate professionals.

The business applications of social media are also growing, with networks increasingly disintermediating buyer and seller relationships and replacing corporate websites as the place to go, not only to develop business relationships, but to research industry developments and, increasingly, to actually get business done. Cutting-edge architects, for example, are beginning to crowdsource solutions to design and engineering problems, as well as to collect stakeholder feedback. E-commerce is moving into mobile and social networks as retailers look to improve the effectiveness and reach of their platform investments.

By leveraging these technologies, real estate professionals could report on industry data on a far greater scale than ever before. They could then develop and manage a portfolio of acquisition targets and portfolio initiatives and optimize the entire process based on the specific data inputs and metrics they deem most important, such as sustainability, tenant retention or customer engagement.

Ninety per cent of prospective homebuyers and renters start their search with web tools and apps.16

Airbnb, a website for people to list, find and rent lodging, has over 1.5 million listings in 34,000 cities.

MagicPlan by Sensopia is a smart phone app that can scan a room’s dimensions and then create an exportable floor plan in multiple formats.

Smarking is an app for both users and owners that uses big data to locate, manage and arrange payment online for parking facilities.

Omni-channelling refers to an in-store and online ecosystem that connects consumers with retail products and services with maximum convenience.

Technology transforms the real estate services industry



Construction and materials innovationWe often think of technology largely in terms of IT, but advances in building and materials technology will be equally profound in shaping how real estate professionals do their jobs. These technologies— developed with the goal of creating more cost-effective, high-performance buildings—are changing not just what and how we build, but where we build, design possibilities and advanced functionality.

Modular construction (not a new technology, but benefitting from advances in all other areas) allows for more personalization and customization of space. Modules are also quicker to build and can be shipped from anywhere and assembled on-site, and because they are manufactured in a controlled environment, shrinkage is far less, quality control can be improved and costs can be reduced for both materials and labour. As more companies develop expertise building modularly, construction timelines will reduce dramatically. For example, in China, a 30-storey luxury hotel was erected in 17 days—with furniture installed.17 Similarly, both office and residential properties in New York City have been constructed using this technique, reducing time, costs and, importantly, sidewalk disruption. Canadian and Israeli producers are manufacturing moveable housing concepts for temporary and migrating populations. In the U.S., modular construction is focused on the luxury segment.

Biomimicry is the art of applying ideas from the natural world to solve design and engineering problems in more ecological, cost-effective ways. Nature has millions of years of experience seeking low waste, low power and lower toxicity means to a variety of ends. Researchers are applying chemistry, physics and biology concepts—including neural networks, artificial intelligence, genetic sequencing, evolutionary coatings and atomic nanotechnology—to a range of contemporary engineering challenges.

Genome sequencing and quantum physics are two of the tools drawn from science that are being combined with computational methodologies to produce engineered materials with desired characteristics.

3D printed spider web polymers with the structural strength of steel

Concrete metal and human tissue for 3D printing

Coatings that give iron ore the characteristics of titanium

Electrochromic glass that lets in the right amount of light for maximum comfort

Embedded sensors in products and manufactured materials

Fiber optic materials

Coatings that cure super-hard ceramics through evaporation

Bio-mimicry and engineered materials



There are many new applications being explored around recycled and renewable materials too, such as bamboo, which grows to massive heights with incredible speed and is extremely strong and light. Recycled construction debris and reuse of other abundant materials, such as soil and plastic, are also being actively employed. Renewable energy also remains on the radar, with cutting-edge companies such as Google, Microsoft, Facebook, IKEA, Walmart, Amazon and HP taking their corporate headquarters off the grid. These smart power initiatives promise to radically lower energy consumption and increase the investor appeal of future buildings.

Process technology revolutionThe process technology revolution—the application of data analytics, hardware and software innovation, and disruptive business models—may have the greatest effect of all on the real estate industry. In the last 35 years, the industry has undergone a transition from cheques, letters and carbon copies to fax machines, ATMs, electronic money transfers and mobile phones—and most recently, to e-mail, desktop publishing, tracking of business analytics, computer-aided design, social media, bitcoin and crowdfunding. The automation of everything—from manufacturing processes and robo-lawyers, to driverless vehicles, block chains and the IoT— is accelerating. Eight years ago, the U.S. presidential election was the first to be heavily influenced by social media and crowdfunding; now those are standard tactics. Change is the only constant. As the automation of everything unfolds, new jobs and technologies pop up to exploit fresh opportunities, and real estate must keep up—locationally, technologically and functionally.

Radical innovation

A 3D printer is a type of industrial robot that uses various processes to synthesize three-dimensional objects from an electronic data file. It may eventually be possible to send a blueprint of any product to any place in the world, replicating it with “elemental inks” that can be combined into any material, substance or form. Over 20,000 Boeing 747 plane parts are now 3D printed, including engines,18 and the company may eliminate the spare-part supply chain entirely. And we are just beginning to see the first 3D printed buildings and building components coming to market.



Process innovation has always changed the math. Up until now, it has not altered the role of real estate service providers much, but that is starting to change. The very nature of real estate’s role in the business ecosystem is open to innovation. For example, Amazon, well-known for fulfilment warehouses, must see operationalizing big data as the next big thing, as the company has 6 million square feet of office space under construction in Seattle13 while cloud computing is its fastest-growing current business.

In addition to building state-of-the-art warehouses, Amazon derives its success from constructing new prototype facilities—including data centres and, in the future, office buildings that will be filled with people exploiting that data. Leveraging technology across its spectrum of applications (for example, the use of robots in its e-commerce supply chain) has been the key to Amazon’s success. Amazon is using social media to socialize the idea of drone delivery of same-day fulfillment because, while early adoption provides first mover advantage, resistance to adoption is the reason change sometimes doesn’t happen as soon as it could.

Uber is an example of just how disruptive process innovation can be in an industry where adoption occurs quickly. Many cities are scrambling for solutions to address protests from businesses and workforces, and are facing dwindling city resources as a result of private networks operating outside of established tariff structures.20

Other examples of process revolution are abundant and all around us. Alibaba, notorious for exploiting both social media and big data, has a real estate sub-category where the firm is marketing, open sourcing and customizing modular construction for a variety of applications, including offices, hotels and apartments worldwide. Credit card chip technology, only a few years old, may be upended by mobile pay, providing enhanced cybersecurity as fingerprint and retina scan technology come online.

Last year, $35 billion of real estate projects were crowdfunded,15 cutting out traditional financial service providers. The point is, process technologies are disrupting how things get done, and that means the building spaces that will sustain their value going forward will be those that reflect and enable that process revolution, hosting lower-cost, higher-tech facilities in the right locations.

The cost of renewable energy is declining rapidly. New wind power is now cheaper than energy from coal-fired power plants.

Rooftop solar power is the fastest-growing source of new power generation and is now competitive with average grid prices in 40% of North America without subsidies.22

Smart grids—using sensors and software to monitor and manage energy availability, affordability and reliability—allow integration of renewables and remote management of switchgear to avoid brownouts.

The greenpower industry now employs more people than the coal industry in North America.23

Rapid advances in battery technology will further improve the cost/benefit calculations for renewable energy production, as well as the future of electric vehicles.

Renewable energy, conservation and strategies to mitigate global climate change

Despite very low oil prices, multiple forces, including government policy, are driving an electric power revolution that is here to stay.



Smart cities, infrastructure and policiesSmart services, smart buildings and the cities of the future are, of course, where all this technological disruption is leading. We will see more of this disruption over the next five years, and all of the technologies mentioned here—and many more—will be part of that growth as we move inexorably from thinking about individual building sites to planning integrated urban and suburban environments.

Residential rental properties are currently leading the way in smart development and building technology. They are the experimenting ground for these innovations, with U.S. projects far ahead of the pack. It is predicted that 40% of U.S. homes will have adopted some form of smart technology by 2020,24 such as smart thermostats, security or off-site mobile control apps and net metering for energy.

The smart city is, most obviously, a city where infrastructure is in place to support the latest needs of its citizenry in an efficient and cost-effective way. Residents, social and physical infrastructure, smart buildings and transportation are connected to each other, communicating seamlessly to form a broader, smarter urban infrastructure. Smart cities will have a competitive advantage over their counterparts in attracting and retaining the most desirable employees.

Designed to balance key stakeholder interests, and thereby promote sound, sustainable development, smart cities will be the locations of choice in the future.

Real-time integration of big data analytics and city infrastructure and services

Greener equipment = big savings in operating costs

Sensors on everything to reduce waste and get resources where needed

Smart buildings, which are cost-effective, functional and flexible

Innovative, living buildings—creating beauty and community

Universal broadband, Wi-Fi and low-cost, online, multi- dimensional education

Digital analysis of transportation, water and social systems for planning enhancements to service delivery

Smart infrastructure will feature

Smart Diamond to Define Smart City

Smart Governance

Smart Energy

Smart Building

Smart Mobility

Smart Infrastructure

Smart Technology

Smart Healthcare

Smart Citizen



But the smart city is more than the sum of its technological parts. People running companies will choose to make investments in resilient locations with reliable power, transportation, education and affordable housing that are not at risk of political upheaval or environmental disruption due to climate change. There are clear economies of scale for cities investing in these priorities. Big savings can be achieved by providing services at the point of need, that is, by relying on the Internet of Things to determine distribution priorities while sensors and smart control technologies potentially manage everything from traffic and crowd control to water or electrical system diagnostics and repair.

Everything will be smarter: properties, governance, education, energy, health care—even potentially the citizenry itself, given the high levels of information and services at hand.

The point is, the future will be smart, and the repercussions—many of which we can hardly guess—will be vast. Companies and industries looking to adapt must be able to leverage technological change to come out on top, and that’s a critical principle for real estate investment professionals and investors to remember.

Winners in the new economy

Companies

Collaborators

Adapters

Disrupters

Knowledge organizations

Learning organizations

Things

Smart cities

Smart buildings

Smart infrastructure

Smart machines

Smart networks

Sectors

Data centres

Additive manufacturing

Online education

Public health

Renewable energy



Today’s successful real estate professionals undoubtedly believe they are highly sensitive to change, including technological change. But the change afoot is not simply a market shift due to an industry boom or retirement demographic—and the technological change is not about retrofitting the buildings of the past to support the technologies of the future. We’re talking about full-scale industry disruption and transformation that will, or certainly should, radically alter investment portfolio criteria—and those criteria must be clearly, deeply and strategically understood by decision-makers.

If your service providers are not thinking about things like the IoT, big data, modular construction, renewable materials, social media, automation and smart systems, buildings and cities, they are not thinking hard or broadly enough.

Investors and occupiers need to be ready to separate the wheat from the chaff and identify properties that will build rather than bleed value. This means having managers and advisors in place who not only understand the trends at work, but recognize their strategic significance in creating real estate portfolios that are relevant, forward-thinking and built to last.

Built to last, in more ways than one

To discuss preliminary steps that real estate professionals should take to capitalize on opportunities and avoid making investment mistakes in this rapidly-evolving future, please contact your local Avison Young office.

www.avisonyoung.com/find-offices

About Avison YoungAvison Young is the world’s fastest-growing commercial real estate services firm.

Headquartered in Toronto, Canada, Avison Young is a collaborative, global firm owned and operated by its Principals. Founded in 1978, the company comprises 2,200 real estate professionals in 77 offices, providing value-added, client-centric investment sales, advisory, management, financing and mortgage placement services to owners and occupiers of office, retail, industrial and multi-family properties.



Amy Erixon joined Avison Young in August 2010 to develop the company’s cross-border and investment management activities. Since joining the firm, she has launched a number of products and separate accounts, working across property sectors in four countries. Prior to joining Avison Young, Erixon was CEO of IGRI, a privately held Canadian investment and development company, which she joined in 2005. While at IGRI she grew third-party assets under management to $800 million and oversaw the completion of more than of $1 billion of investments and green development projects.

Prior to moving to IGRI, she spent 12 years at LaSalle Investment Management where she served on the firm’s operations and investment committees. She founded and led the firm’s Canadian and Mexican operations, product development activities, property development and hotel investment areas. Prior to joining LaSalle, Erixon served as a regional partner for two leading development companies, completing more than $800 million of land investment and development projects in five states and two Canadian provinces. She started her career at Prudential Insurance Company where she completed in excess of $1 billion of acquisitions and hotel, office and industrial developments. She graduated from MIT with a bachelor’s and master’s in city planning, real estate development.

Endnotes1 http://www.theguardian.com/technology/2014/feb/22/robots-google-ray-kurzweil-terminatorsingularity-artificial-intelligence

2www.cisco.com

3www.internet-of-things-research.eu

4www.istockanalyst.com, www.bloomberg.com, www.forbes.com

5http://fortune.com/2015/08/27/apple-wearables-market-share/

6http://www.gartner.com/newsroom/id/2970017

7http://www.cisco.com/c/dam/en_us/about/ac79/docs/innov/IoE_Economy_FAQ.pdf

8http://www.reuters.com/article/ma-ibasis-idUSnBw276382a+100+BSW2016012

9hbr.org/2006/06/building-the-green-way (Havard Business Review), www.cisco.com

10MIT Center for Information

11www.huffingtonpost.co.uk

12MIT Center for Real Estate

13 http://www.xconomy.com/boston/2015/01/08/state-of-the-internet-us-connection-speeds-rank-17th-in-world/

14http://www.huffingtonpost.co.uk/sumir-karayi/business-digital-disruption_b_8471696.html

15 MIT Centre for Real Estate

16 http://www.mortgagenewsdaily.com/01072013_home_buying_behaviors.asp

17 www.bbc.com/news/

18www.businessinsider.com/boeing-uses-3d-printers-for-airplane-parts

19www.kiddermathews.com

20 www.hbr.org/2015/12/what-is-disruptive-innovation (Havard Business Review)

21 http://www.crowdfundinsider.com/2015/07/71010-the-largest-real-estate-crowdfunding-platforms/

22 http://www.greenbuildingadvisor.com/blogs/dept/guest-blogs/when-will-rooftop-solar-be-cheaper-grid

23 http://fortune.com/2015/01/16/solar-jobs-report-2014/

24 www.goldmansachs.com/our-thinking/outlook/internet.../iot-report.pdf , www.achrnews.com/

About the authorAmy Erixon, Principal and Managing Director – Investments

416.673.4034 [email protected]

Avison YoungToronto (HQ) 18 York Street 400, Mailbox #4Toronto, Ontario, M5J 2T8, Canada

www.avisonyoung.com

© 2016, Avison Young (Canada) Inc.

The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young (Canada) Inc.

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