Will these and other innovations lead to the disintermediation of the commercial real estate powerhouses, the integrated CRE services companies (ICRESCs) like Jones Lang Lasalle, CBRE, Cushman and Wakefield, Colliers, Newmark Knight Frank, Marcus & Millichap, and Sperry van Ness that currently handle the lion’s share of office and industrial listings? Can these firms withstand the onslaught of tech-enabled start-ups offering automated processes and compressed fees and that might eventually eliminate the need for brokers altogether?
The residential brokerage industry is a good starting point for understanding the impact of technology on the future of commercial real estate brokerage. For decades, residential brokers have been adapting to the advent of technology in the form of Multiple Listing Services (MLSs) and more recently, they have faced challenges from technology-enabled competitors like Zillow, Redfin, Apartments.com. Their experience can provide clues to how the commercial real estate brokers might fare.
A tentative conclusion: The effects of technology in residential brokerage have been less pronounced in sales than in rentals. In market spaces such as sales, with substantial initial concentration and/or large network economies, transactional tech has actually facilitated the role of the broker and consolidated the position of large incumbent companies. In atomized markets where network economies are absent, disintermediation has taken place. These trends can serve as a guide to the future of commercial real estate brokerage.
The lesson of residential
In residential brokerage, the regional Multiple Listing Services (MLSs) seized on the Internet’s potential to centralize and publicize real estate listings. Before that, computerized MLSs were simply databases with standardized property data fields and photos, which brokers did not necessarily share with their customers. Seeing the potential to increase sales and turnover, the National Association of Realtors (NAR) quick-started the current internet marketing data infrastructure for residential sales.
Websites such as or Zillow, Homefinder.com, Homes.com, or ZipRealty.com took advantage of this trend, aggregating data from regional MLSs and facilitating ubiquitous access to present and past listings. These aggregator services combine the listings with other publicly available information about each home and neighborhood. In the future we will likely see more integration of listing records with other data and audiovisuals, including. Matterport© 3D renderings, thereby facilitating property analysis and statistical research of housing trends.
The effect of ubiquitous residential data has paradoxically been to strengthen the hand of traditional brokers. It has not, for instance, led to an increase in the for-sale-by-owner (FSBO) market, supported by such platforms as ForSaleByOwner.com, FSBO.com, or HomesByOwner.com. According to the NAR’s 2018 Profile of Home Buyers and Sellers, just 7 percent of recent home sales were FSBO, the lowest since the organization started tracking this data in 1981. While thousands of potential buyers log on to Zillow and other sites each day, few have the time, inclination, or knowledge to transact the purchase on their own—and sellers evidently feel the same way.
In other words, online listings have reinforced the position of brokers rather than diminished it. Prospective buyers report what they have learned from online listings to their brokers, and when purchasers approach sell-side realtors directly, these brokers typically realize the additional opportunity to act as dual agents.
While Redfin’s model of discount brokerage—combining online and offline services—has experienced some success, the promise of massive disintermediation in the very large and lucrative residential sales market has clearly not occurred. In effect, the IT revolution has provided brokers with more sophisticated marketing tools while increasing the prominence of realtor franchises.
The picture that emerges from the residential apartment sector is significantly different. Many landlords had historically targeted customers directly, via newspaper ads and dedicated magazine-like publications. The market was atomized and local, without the full consolidating strength of an organization as large as the NAR. In addition, renting an apartment or home is a simpler, less consequential transaction than buying one. As a result of both these factors, the internet furthered disintermediation in this market. Both advertising and searching for rentals—without the assistance of brokers—are now easier than ever, thanks to listing aggregators such as Craigslist, Apartments.com, rent.com, forrent.com, and apartmentguide.com.
The Implications for CRE brokerages
The residential sales market, because its structure is similar to the commercial real estate market, provides a more accurate indicator of the impact of technology on commercial brokerages than the residential rental market. Both commercial real estate sales and leasing exhibit relatively high levels of concentration, and the specialized professional services provided by commercial brokers are out of the reach of their clients. Furthermore, ICRESCs have strengthened their dominance of the industry by bundling brokerage with other critical offerings: marketing, PR, research, financing, investments, asset management, custodial, technology, site selection, planning, consulting, and advisory. The result is that they have forged multidimensional long-term relationships with buyers and tenants that are not easily dislodged, allowing for substantial cross-pollination and bolstering their dominance in brokerage.
ICRESCs are strengthening these relationships even further by adopting and integrating a wide range of prop tech innovations, allowing them to elevate their offerings in such fields as construction management, marketing, tenant representation, property management, smart buildings, asset management, underwriting and valuation, investments, legal, contracts, accounting, and other processes required by the commercial real estate industry. They are both acquiring start-ups and teaming up with software companies in order to develop proprietary IT solutions.
Technical innovation has, however, promoted the creation of services like LoopNet, an online centralized market-making platform that is roughly analogous to online MLS platforms, although it includes leasing as well as sales. LoopNet supplements these listings with data collected by its parent company, CoStar, one of the major repositories of commercial real estate information.
The relatively small numbers of companies that have successfully competed with LoopNet have done so by focusing on niche markets or developed advanced competencies. For instance, Real Capital Analytics displays extraordinary strength in the collection of data about transactions of institutional-grade properties. RE Meter focuses on providing predictive models of lease defaults or early termination of potential tenants. To do so, they apply artificial intelligence algorithms to databases capturing the past performance of similar firms. In the near future, we will see more integration between marketing apps and other data—such as legal information (mortgages, liens, regulatory action), electricity and water consumption, verified income generated by tenants, pedestrian traffic, and financial intelligence about tenants—and perhaps more specialization.
The efforts of these companies have, on balance, empowered traditional brokerage firms and ICRESCs rather than displaced them by raising their clients’ awareness of appropriate listings. At the same time, many of these intermediary companies have been proactive in incorporating their own market-making platforms or formed alliances with market-making providers.
There is a commercial real estate submarket, however, in which technology has led to disintermediation: short- or long-term commercial sublets and unexpired leases. Such transactions are smaller and less specific by nature. This area is reminiscent of the residential rental market, and the landlord base is much more diverse and less institutionalized. It is now facilitated by online platforms such as Flip.com and Real Massive.
Expect minimal disruption in CRE brokerage
New technologies such as data analytics, artificial intelligence, and blockchain were initially seen as forces of disruption and disintermediation, but the results across the general economy have been mixed. True, Uber and Lyft dealt a devasting blow to the taxi industry, but despite Airbnb, the hospitality industry continues to flourish—and technology has also reinforced the position of incumbent companies like Facebook and Google that grow more dominant with each passing year.
Similarly, the application of technology to real estate—both residential, as well as commercial—has led some commentators to see the proverbial writing on the wall for the traditional brokerage system. Right now, given the strength of entrenched intermediaries, their willingness to adapt new technology, and the specialized yet heterogeneous needs of commercial real estate buyers and sellers, landlords and tenants, that seems for the most part unlikely.
By: Lou Rosado (NREI)
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