How We Have Seen Obsolescence in Commercial Real Estate

That's becoming a common question as people in the commercial real estate industry notice the accelerating pace of technology and innovation.  

It's a fair question to ask, given that many other "middleman" positions have become obsolete. They were displaced by technologies that allow buyers to engage with sellers and avoid the middleman altogether.  

You've seen it happen with stockbrokers and travel agents. In every area you look, you'll see evidence of innovation and technology crunching down on the middleman.  

Middlemen exist because they provide value in the transaction process by reducing costs and increasing efficiency. A value that came in numerous forms: more connections to buyers and sellers, detailed knowledge of processes, and so on.  

Without middlemen, buyers and sellers lacked the connections and expertise to make deals happen fast and effectively. The relative cost of each transaction would be too high and the volume too low. In that sense, middlemen were the innovation, and they more than justified the commissions they charged, but that's changing.  

Technology and its Effects

Technology and other forms of innovation reduce friction in the buying process.  

Whether that's making knowledge more accessible, making connections easier, reducing risk in some manner, and so on. That leads to a decrease in the relative value of middlemen.  

If the friction and cost to engage decrease sufficiently, the middleman in that specific corner of the economy becomes obsolete.  

That's what happened with travel agents, stockbrokers, and countless other positions of antiquity. Because of this pattern and the effect of technology, many believe that the extinction of brokers is inevitable. We're already seeing the accelerating influx of new technology into the commercial real estate industry.  

There may be many middleman positions that should have been displaced but haven't.

And some middleman positions have grown more powerful with the inflow of innovative technology.  

Fortunately, for commercial real estate brokers, it turns out that the situation is not as clean-cut as that picture portrays.

There is a good chance that commercial real estate brokers will be a permanent fixture, depending on how brokers respond to the flow of new technology into their world.  

So, what will decide whether a particular type of middleman position thrives or goes obsolete, and how does that apply to CRE brokers?

How Technology Should Be Leveraged in Commercial Real Estate

A few factors correlate with the staying power of middleman positions, such as typical deal size, deal frequency, etc. None of those factors account for the patterns seen across the industry.  

Marina Krakosvsky, the author of "The Middleman Economy", made a compelling case about middlemen harnessing new technology to increase their value to clients.  

Krakovsky provides examples showing how most "middleman" broker positions have a unique advantage of leveraging innovative technology themselves. Better than typical buyers and sellers, to provide increasingly higher value to their clients.  

And when they do, they end up fortifying their position further and increasing the value gap between them and any potential threat.  

The problem is that, historically, not all "middleman" positions have been open to adopting technology. And when that happens, there is much more susceptibility to displacement.

What matters most is if middlemen harness new technology to increase their value to clients.

In cases where they don't, they go obsolete, and in cases where they do, they thrive and often increase their power.  

One "middleman" position that serves as an example success story is the "professional recruiter". It was assumed that recruiters would go obsolete, especially with the influx of new technology, like LinkedIn, which gave unlimited access to employers to find targeted prospects. But that's not what happened.

Instead of getting displaced by LinkedIn, recruiters began leveraging the platform. Recruiters used LinkedIn and other technologies to enhance their value proposition to employers. They began accessing larger pools of prospects at a faster pace and used better email technology and other tools to communicate more efficiently.  

This worked well for employers because they were satisfied with the increased value of recruiters who were bringing in better-qualified candidates at a faster pace. The employers, therefore, had less need and incentive to bypass recruiters. The industry has boomed.

For LinkedIn, it turns out that recruiters became their biggest revenue driver. So, their product offerings are tailored to help recruiters rather than trying to displace them.  

Similarly, if commercial real estate brokers are to thrive, they will have to adopt new technology to increase their relative value to their clients. That may be in the form of providing higher-quality deals at a faster pace (like recruiters).  

The important thing is that they begin to adapt and adopt faster than the "buyers" and "sellers" do. Once that happens, it can lock in the value of the "middleman" and eliminate the need or incentive to be bypassed.

Insights from AlphaMap

At AlphaMap, we have insight into the full industry because we sell to all the key players: brokers, investors, owners/REITs, developers, and operators.  

And so far, we're seeing patterns that point to optimism for commercial real estate brokers.  

The AlphaMap product provides easy access to powerful insights that can help discover, analyze, and execute CRE deals. It's a product that applies to all the key players, but there's a unique advantage we've noticed when it comes to CRE brokers specifically.  

Being the "middlemen" of the industry, brokers transact a higher number of deals per person than other types of players/firms.  

That gives brokers more financial justification and incentive to adopt technologies. When they do adopt, they will make their business more efficient and increase their value proposition to their clients. Which increases their need to work with them.  

We already see these effects compound further in several ways. Like LinkedIn, we are already paying increasing attention to brokers because their usage and demand are accelerating. And we're also seeing a positive impact on their clients.  

So, if we feed their needs, it helps the entire industry, which in turn helps us. Although we're a technology company, we're on the side of these "middleman" brokers.  

We aim to provide them with the best technology possible to enhance their value proposition to the industry for the benefit of all. And if they continue to adopt as they have been, then brokers are here to stay.

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