Will technology and AI replace CRE brokers?
No, and we should stop asking this question if we want to build a better industry.
As intermediaries, it’s understandable that commercial real estate (“CRE”) brokers would question their role in the industry's future given the rise of AI and technological advancement. The massive influx of proptech venture capital, which has recently sat at an all-time high, has many believing that brokers, as middlemen, are ripe to be disintermediated through technology.
In 2014, Peter Thiel, the famous venture capitalist, released Zero to One: Notes on Startups, or How to Build the Future, writing that his favorite interview question is:
“What important truth do very few people agree with you on?”
At Enaia, we believe CRE brokers are the lubrication that make the CRE industry run, and that the future of CRE involves better, smarter, more valuable, more connected CRE brokers.
While there’s no doubt the industry will evolve, this has always been the case for CRE. Not only will CRE brokers remain a core stakeholder within the industry, but it’s likely that the best CRE brokers and CRE brokerages will thrive as a result of the transformation that technology will usher in. Commercial real estate is a unique industry and outsiders almost always fail to recognize and appreciate the nuances that distinguish it from others. As a result, CRE brokers are not just here to stay - they’re vital to the industry’s ecosystem.
Here’s only a few reasons why:
Hyper-Local Regulation
Part of what makes CRE brokers so valuable is their subject-matter-expertise of local market complexities. Unlike financial services, CRE is hyper-locally regulated, often at the city or town level, and it’s often influenced by quasi-municipal organizations like Zoning Boards, Building Improvement Districts (“BIDs”), Historical Preservation & Landmark Organizations, and many, many more. Experts within CRE know that every transaction is like an iceberg where price, rent structures, size and incentives (i.e. free rent and tenant improvement allowances) are just the tip of the iceberg that can be seen. An enormous amount of legal, environmental and construction risk lies beneath the surface of every deal. Every property and building serves a unique purpose and every company’s space requirement or purchase intention is equally unique. Those not familiar with CRE transactions almost always underestimate the industry’s complexity that varies across properties, markets and user requirement demands.
As an example, years ago, in NYC, if a building wasn’t sprinklered before a certain date, the responsibility (i.e. cost) to install sprinklers was placed on the tenants occupying the building (a very expensive and operational business disruption). How would an eager startup leasing a new office know about this without outsourced expertise? Would a landlord go out of their way to tell them? Caveat emptor, baby.
Good brokers identify risks and vet opportunities quickly to save clients time, money and energy. In other words, they aren’t just “space finders” or “connectors;” they’re consultants, and since caveat emptor is the industry’s modus operandi, professional representation by full-time experts for moment-in-time transactions will always be valuable to executives that sign expensive, unforgiving contracts. The alternative to brokers is companies hiring real estate expertise in-house, but the broker-model releases companies of this fixed cost, and even those companies sizable enough to retain in-house real estate expertise understand the critical role brokers play - indeed, vetting brokers and managing broker relationships is often at the core of their job description.
Understanding the “Commercial” within Commercial Real Estate
If you apply a “5-Why” analysis to understand the root cause of just about any commercial real estate detail, you typically arrive at a simple, blunt answer - “Because owners of real estate want to make as much money owning it and “users” (tenants/occupiers) of real estate want to spend as little money using it,” a truth as inescapable as gravity within CRE.
Here’s an example:
Q: Why does my landlord care so much about elevator operating hours?
A: Because there’s other tenants in the building and the landlord has to manage the building responsibly to keep them happy.
Q: Why does the landlord care about keeping tenants in the building happy?
A: Because they pay the rent and cover the building’s expenses.
Q: Why does the landlord care about their rent more than mine?
A: Because the building is a single financial asset from the landlord’s point of view, regardless of how many tenants are in the building.
Q: Why does the building’s revenue matter so much?
As you can see, I didn’t even need to get to question 5 here. The simple answer is “Because the landlord wants to extract as much NOI (or FFO for REITs) as possible to support the asset’s highest valuation so the landlord can sell, refinance, cross-collateralize or draw as much cash flow as possible.
CRE is a massive industry that underpins all business activity around the world. It's also a pure financial instrument in the eyes of its owners and investors. There’s often a large swathe of stakeholders behind each transaction (GPs, LPs, lenders, end-users, and more) and these stakeholders all have different interests, but at its core, CRE is a simple business - investors want to extract as much income as possible and end-users want to pay as little as possible to accomplish their business goals. Brokers are the only mechanism for leveling the playing field amidst constantly evolving market, legal, operational and financial complexities.
As mentioned, brokers are on-demand knowledge-sources, efficiency-generators and risk-bearers (“Nobody was ever fired for hiring Goldman Sachs”). They’re also opportunity-discoverers. In a market as sizable as CRE, knowing relationship-level “inside” information is extremely valuable. As data standardization and transparency increases, this type of inside knowledge becomes only more valuable.
Misaligned Conflicts of Interest
It’s rare in CRE deals that both parties negotiating are on equal footing. Take leasing transactions as an example (although sale transactions are no different). Of the millions of companies that lease commercial space, their CEO’s and executives have a lot on their plate. Simply put, they don’t care to become real estate market experts. Operating their businesses is consuming enough. Landlords on the other hand are oftentimes professionals at LOI, lease and contract negotiation. The imbalance of expertise justifies why the vast majority of tenants (~90%) retain brokers to reduce their risk and cost exposure. Again, outsourcing full-time expertise for moment-in-time transactions is the responsible thing to do, especially when the transaction is as expensive, disruptive and unforgiving as CRE transactions typically are.
Understanding CRE from the owner and user’s point of view (through “5-Why’ing" its challenges) clearly shows that transactional expertise is rarely balanced and transactional interests are never aligned. When buyers and sellers or tenants and landlords transact, there is always a conflict of interest. “Win-win” scenarios might be the goal, but negotiation should always be the strategy. In CRE, negotiation is what ensures win-win agreements.
CRE brokers are essential to the operability of the CRE industry due the commercial nature of the industry. Brokers and their brokerages play a critical role that simply can’t be understated (although it often is).
The industry needs smarter, better brokers, but make no mistake - it needs brokers.
Brokers, keep going with your head held high. You’re doing important work.
