Site logo

Proptech Can’t Disrupt Real Estate

Why hasn’t proptech disrupted real estate yet? It’s now 2022, and last year, proptech surpassed pre-pandemic levels of investment with $32b in VC funding. And I can confidently say that NONE of this investment will disrupt the real estate industry. I’ll explain why by conceptualizing a truly disruptive building and dissecting what would need to happen in order to build it today.

What is Disruption?

First, some definitions, which I’ll borrow slightly from Clayton M Christensen’s book, The Innovator’s Dilemma.

Disruptive innovation is a product or method that is so clearly superior to the established norm that it will cost you money NOT to switch to it. This kind of technology challenges and eventually overtakes the incumbent.

Sustaining innovations on the other hand just improve or evolve existing technology to make the existing way of doing things more efficient and profitable.

Examples of “Disruptive innovations” include Netflix, and the iPhone, and we’re witnessing crypto gradually turn several industries inside out. These products and technologies have completely changed consumer behavior along with underlying business models.

Apple was able to disrupt the smart phone market in ways that no single company can do to real estate because Apple designs, manufactures, and distributes their hardware as well as the operating software that runs it. They also have a much shorter product life cycle.

What it Would Take to Disrupt Real Estate

Real Estate developers are quite the opposite. We barely do any design, construction, or sales ourselves. we have limits to how much we can scale. And our product life cycle is over 100 years.

Real estate developers are like orchestra conductors. We don’t play any instruments- we manage everyone who’s in the ensemble. At best we are cheerleaders for disruptive innovation because we just vote with our dollars by choosing new tech to put in our buildings. On top of that, the real estate industry is made up of many sub segments, and even THOSE have proven hard to disrupt on their own.

To really illustrate what has to happen to disrupt the ENTIRE industry, let’s imagine a super technologically advanced, 3D printed, AI-designed organic looking structure made of experimental lightweight materials stronger than steel. It’s also zero waste, zero energy, and negative carbon. The interior is loaded with home automation. It has a digital twin that exists in the metaverse and investment is done entirely on a cryptocurrency with digital smart contracts handling all transactions. Sales will be conducted entirely without brokers. And it’s cheaper and faster to build than any building of its size. Now THIS would be disruptive if we built it today.

THE REAL ESTATE DEVELOPER

If only a developer were delusional enough to tackle this. But not me. I tried it this past summer with just single family homes and it didn’t go so well. Fine I’ll humor you.. suppose I take it on. I’ll call the project.. THE DELUSION.

There’s a lot of cutting edge tech that goes into this thing. I have to have at least a surface level understanding of how to deploy each technology. And I also need to know whether the systems I choose can work together and create a better value than the status quo. I keep myself pretty up to date on real estate technology, but deploying early prototypes of products adds a layer of problems I just don’t have to deal with on a standard development project. So I have to be delusional AND masochistic.

Most developers don’t need to think about pushing new technologies because they make plenty of money without needing to throw in unproven technological bells and whistles. We are deal makers and problem solvers, not technologists.

That’s why there’s no disrupting my job. I could do all my tasks with just email, a phone, and pre-covid, a handshake. I’m a fan of a couple proptech companies that offer indisputable visual records of my properties, like OpenSpace.ai, Matterport, and Digibuild, but I don’t NEED this tech to do my job. It actually gives me a bigger headache if I try out software that nobody else wants to adopt.

So, I’ve committed myself to THE DELUSION. I’ve found the perfect site and now I have to line up the financing for it. It’s time to call..

THE BANK

If your project’s business model hinges on an unproven technology, you’ll be hard pressed to find any bank that’ll lend to you. And their definition of unproven is VERY liberal. Products from startups that haven’t raised at least a series B round yet will probably not be okay with a bank. Because potentially disruptive tech means a potentially risky project. We can’t get too experimental unless we finance with mostly equity, which leads to an unfavorable risk/return profile.

There’s some good news on the horizon though. There are a number of disruptive innovations brewing in the Fintech and DeFi. And There’s been an explosion of digital currencies and several attempts at creative and more democratized ways of raising investment.

So to recap, I’ve committed myself to THE DELUSION. I’ve found the perfect site, I’ve robbed a bank, and now I can close on the land, so I need a closing lawyer.

LAWYERS

There’s actually a lot of technology that’s threatening to legitimately disrupt the legal industry, and for the most part, lawyers are embracing this change. There are a number of sustaining innovations, like Docusign that make it quicker to digitally gather and store executed contracts.

The big leaps forward will come from blockchain technology and digital smart contracts. Distributed ledger is a trustworthy form of proof of clear chain of title. So the application of blockchain to make title search more efficient is possible.

Also, if a building is financed with digital currency, it’s possible to automate contract enforcement in events like waterfall distributions. For once, lawyers won’t get in my way!

So to recap, I’ve committed myself to THE DELUSION. I’ve found the perfect site, I’ve robbed a bank, I’ve hired a closing lawyer who set up a digital smart contract, now I’ve gotta put the project team together, starting with…

THE ARCHITECT

If we want an AI to design THE DELUSION, we still need a human architect and designer to run the software and set design parameters. But this software only exists in academia right now. We’re quite a few steps behind in the commercial world, where the latest and greatest architecture tech are digital twins and BIM. For the most part, 2D CAD drawings still rule this industry. 

THE DELUSION uses new materials too. Advances in materials and structures have been pretty slow to evolve because the laws of physics fundamentally don’t change, and humans figured out how to erect 4 walls and a ceiling without it falling down a long time ago . So it’s a big ask to require that architects be familiar with the new materials’ properties and the right context to use them in. An architect using cutting edge software and materials would have to constantly be learning new methods or hiring fresh minds, but not all architects have the time or resources to keep up with trends, especially if most of their clients don’t care about new tech. And guess what? They don’t. So architects will adapt gradually with sustaining innovations.

So to recap, I’ve committed myself to THE DELUSION. I’ve found the perfect site, I’ve robbed a bank, I’ve hired a closing lawyer who set up a digital smart contract, and I found an architect from the future. They draft up plans and prepare to file with the city. Since the city’s not used to dealing with a building that has so many new technologies, we need a really good…

THE EXPEDITER

An expediter’s job is to file all sorts of paperwork related to the construction work at local government agencies. Despite its name, expediting is hands down the slowest part of development, and often a critical path item in the schedule. How do you think NYC’s department of buildings will react if we submitted plans for THE DELUSION in a landmarked district? Well first we’d need to submit the plans with several notarized forms, and they won’t be able to properly view the plans because we did them in 3D, not 2D. So we can expect a rejection… in about 3-6 weeks. And I know the neighbors are gonna be pissed off and they’re gonna stage a few protests on the site. So I’ll have to propose to pay for renovations in a nearby park as part of the budget, the city council and DOB will eventually approve, and at the end of it all a quarter of the neighbors will still hate me.

Any innovations in expediting moves at the speed of government, and Covid did push a sustaining innovation forward. All NYC DOB filings are now done online. But if several layers of government are involved, there’s no disruption coming.

So to recap, I’ve committed myself to THE DELUSION. I’ve found the perfect site, I’ve robbed a bank, I’ve hired a closing lawyer who set up a digital smart contract, and I found an architect from the future. I’ve quelled the neighborhood uprising and gotten the plans approved. Let’s f*cking build this thing. Lemme just summon the robots.

THE CONTRACTOR

I can count on one hand the number of vendors I would contact to build THE DELUSION… And all of them would tell me they can’t do it…. Yet. Right now all contractors use human labor and machinery. But I’ve seen hints that we’re making some nice progress towards new standards.

There’s human enhancement like exosuits that reduce fatigue. And automation of skilled labor like robotic masonry and drywall installation. Modular construction has been around for years. A few companies are making progress on 3D printing, like AI Space Factory and SQ4D.

There are also a bunch of academic papers explaining how swarm construction will work in the future. There are attempts to disrupt the construction industry coming from every angle and it’s going to happen one day. But for now, I’ve got to hire people from the future again to make THE DELUSION a reality.

So to recap, I’ve committed myself to THE DELUSION. I’ve found the perfect site, I’ve robbed a bank, I’ve hired a closing lawyer who set up a digital smart contract, and I found an architect from the future. I’ve quelled the neighborhood uprising and gotten the plans approved. And I’ve summoned a nanobot swarm. Time to launch presales! I’ve gotta hire..

THE BROKER

Brokerage is as difficult to change as expediting, and I blame commissions. If you were to plot the earnings distribution of brokers, it’d follow a power law curve. Meaning a disproportionate number of earnings goes to a tiny number of brokers. These are the best of the best and if you try to change the compensation system to something less than 5 or 6% of sales, you’re not only not going to recruit the best of the best, you’ll be competing against them.

Every attempt I’ve seen at changing brokerage compensation has failed. And yet, there’s a clear desire from the market to change how much it costs to buy and sell a home because the information a broker provides is becoming more readily available. This segment has to be disrupted, because nothing short of disruption will work. I have a feeling crypto will enable a disruptive commission structure.

So to recap, here’s what it takes to disrupt real estate TODAY. I have to commit myself to THE DELUSION, find the perfect site, rob a bank, hire a closing lawyer to set up a digital smart contract, find an architect from the future, quell a neighborhood uprising and get the plans approved, summon a nanobot swarm, and devise a totally new commission structure for brokers.

PROPTECH SPOTLIGHTS

Adopting technology in real estate starts with awareness. This blog regularly spotlights proptech that can create value for real estate developers and landlords. You can read all the PropTech Spotlights here.