 From Site Selection magazine, January 2001
C O V E R S T O R Y
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Real Estate Playing Field
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M A R K
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Interestingly, the traffic jams are not being caused by corporate real estate executives racing to learn about the latest, hottest industry dot-com, though a few intrepid souls are working hard to stay current on the activity. Rather, they are being caused by the dot-coms themselves, racing to ally themselves with complementary, larger, perhaps better-financed players that seem to have the missing piece of their ultimate business solution.
"There is no true business-to-business exchange yet, but we are in the very early stages of a transformation in this business," observed Dennis R. Irvin, vice president, real estate and lodging investment banking at Chase Securities, New York. Irvin was a panelist in a session at PikeNet Expo, in New York in October, on how the Web will shift power between real estate tenants, owners and brokers. "The Internet--the technology overlay on this industry--will accelerate the transition that has been occurring over the last two or three decades," he asserted. "Technology is providing this industry a lot more liquidity and a lot more price transparency than has ever existed before. There is no turning back. It's just a matter of the right business models and the right companies taking advantage of it. There is a lot more coming." More than a Keystone Cops show, this frenzy of activity is a natural process unfolding. As in other industries--air transport and automobile manufacturing to name two--whole processes are being retooled that take advantage of the Internet's ability to move information more efficiently among parties to a transaction. In that sense, of course, the Internet really does change everything. It changes the corporate real estate profession most profoundly in its ability to level the playing field between occupiers of space and owners of or investors in space--in essence between supply and demand. "I am a proponent of the view that the Internet does change everything," says Jeffrey A. Landers, president of Offices2Share.com, a New York-based, online aggregator of temporary workspace sources, including incubators, executive suites, sub-leases and standard office space. "Perhaps not as quickly as some of the dot-coms' investors would hope, but it changes things in very dramatic ways." The notion of brokers being disintermediated (shown the door) by Web-based services has some merit in cases where brokers serve mainly as a gatekeeper for information, bringing no other real value to the process, he argues. "However, a good broker adds value over and above showing available space to a client, and his role is fairly secure" says Landers.
"Business tenants, for all of their size, market clout and purchasing power otherwise, do not stand on a level playing field with real estate suppliers," observed Rick A. Pederson, chief knowledge officer of RealCentric (www.realcentric.com), in a May 2000 white paper entitled "Future Corporate Real Estate". RealCentric is a Los Gatos, Calif.-based Internet company that allows tenant businesses to identify, acquire and outfit office space. "Space acquisition is a one-off exercise where information regarding available product is limited, pricing is inefficient and transaction costs are high. Real estate is not integral to core business processes, and tenants as a class have no simple means by which to organize as a cohesive buying force." Until now, that is. The Internet's role in the corporate real estate profession is best viewed through two prisms: a short-term prism and a long-term one. Both require keen information-filtering capabilities, because the volume of activity to consider is not abating, even if financing sources are. Short-term developments to watch have mostly to do with the breathtaking array of strategic alliances, acquisitions, marketing partnerships, e-procurement platforms and other "convergences"--all that trade-show activity, which is transforming the commercial real estate Internet community. Notable examples include Project Octane, a joint venture of CB Richard Ellis, Jones Lang LaSalle and Trammell Crow Co. designed to serve as an Internet-based transaction services platform and procurement service among other functions. Insignia Financial Group is participating on the transaction services side. Project Constellation is another consortium formed by most of these players and some large REITs and others to invest in and support collaboratively various Internet and telecommunications initiatives for the real estate industry. Cushman & Wakefield has agreed to conduct its commercial leasing transactions on the Zethus (www.zethus.com) transaction platform set to launch in the first quarter of 2001. And watch carefully, for this activity is setting the stage for a truly level playing field, perhaps even a tenant-defined one, with fewer and fewer players. "Almost every industry has two or three leaders, and this will happen with the online services in our profession," says Landers, who wisely declines to speculate on which ones will endure. Long-term considerations are now coming into focus that have a remarkable resemblance to what Pederson was looking for in the spring of 2000. "The correct solution in a nutshell would be the invention of a horizontal procurement process combining all business activities surrounding real property acquisition, outfitting and operation, a goal defined here as Operational Infrastructure (OI)," he wrote. "Business craves an OI infrastructure, which is more perfect in economic terms," because such a model is transparent, efficient, involves minimum transactions costs and is where OI goods and services are priced at equilibrium of supply and demand. "By massing corporate spending at one end of the Internet pipeline, you are able to force behavioral changes at the other end of the pipeline." --Michael Baumann, netStruxr
"Corporate real estate, whether demand side or supply side, will evolve to only one side primarily," says Chekijian. "It will be fully converged through the tools of technology and the Internet, and real estate will be dealt with just like any other procurement process." This notion is still far-fetched to most real estate practitioners, but Chekijian insists it will be in place within several years, or sooner if the pace of convergence and the power of technology maintain their momentum. "We have made the subject of real estate more complex than it really is. The real benefit we will get from the Internet is from connectivity of all the different Web-enabled sites into one common application. That is where the drive for standardization in corporate real estate is coming from. The definitions must be uniform." An early experiment in this view of the future of corporate real estate and the Internet is taking shape at netStruxr, an e-commerce platform designed for the complex world of commercial real estate transactions. This service, a joint venture of Bank of America, IBM and Prudential Insurance, is designed by and for corporate real estate executives.
Details of the service can be found at www.netstruxr.com, but the point of the service is to be an electronic conduit of service provider-supplied information focused on the needs of the corporate real estate executive. "We provide it in a format that makes it comparable and understood and in a fashion in which the corporation collects its data so that they can make their decisions," Baumann elaborates. "We are attacking the market at the point where we see the inefficiencies and the waste. Some of that is in terms of the procurement process, where we hope to reduce substantially the amount of time it takes to procure space."
In the meantime, the industry is trying to make sense of new crops of Web sites emerging all the time-an exercise not unlike sipping water from a fire hose. Last summer, RealCentric introduced to the industry its business model, which seeks to facilitate transactions between workspace users in specific markets and best-in-class providers of office equipment and furnishings, telecommunications and related professional services in those same markets. Such service providers are carefully vetted to make sure they can provide the caliber of product and service with which RealCentric is comfortable making available via its service. RealCentric's co-founder and CEO, Jim Stuart, likens the model to a consumer shopping at Nordstrom's. "As a consumer, Nordstrom's delivers to me the assurance of the sale," he relates. "I may not recognize the brand of shirt on the counter, but the fact that it's there tells me it is of high quality, and that if I have a problem with that shirt, I don't have to deal with the manufacturer. I take it back to Nordstrom's which is dedicated to solving my problems. That's what we're doing in the real estate environment." One online corporate real estate model the industry will hear a lot about in the coming months is the application service provider (ASP). This typically is an independent database management system on which software and other applications are stored and accessed as needed by end users, such as corporate real estate managers. This removes the time and expense associated with purchasing and maintaining technology functions in-house. WorkplaceIQ, Waltham, Mass., represents a twist on the ASP concept in that it lets corporations manage their real estate portfolio or even projects remotely via the Internet. Service providers would have access to portfolio information they need to more efficiently deliver relevant information or help negotiate a transaction. In this sense, WorkplaceIQ is essentially a communications tool that bypasses phone calls, email and other traditional communications means. Ultimately, the Internet is nothing more than a communications and information management tool. John Fleming, CEO of WorkplaceIQ (www.workplaceiq.com), realizes the "space" he occupies is becoming increasingly crowded with other ASPs, broker-initiated sites and many others. "Very few have been tenant-focused, whereas many are transaction and broker-focused," he says. "Our applications are integrated from the front end of the real estate cycle--from a site search transaction throughout the real estate life cycle to building operations and the back end. We're providing a real estate department all the tools they need to deliver a modern workplace." "Technology is providing this industry a lot more liquidity and price transparency than has ever existed before. It's just a matter of the right business models and the right companies taking advantage of it." --Dennis R. Irvin, Chase Securities
Listing services, which are among the earliest users of the Internet for disseminating market information, play a vital role in delivering industry intelligence, provided the content is thorough, accurate and timely. But obtaining space availability and pricing information is no small task, as brokers are loathe to make such information widely available. Listing players determined to survive the "Digital Darwinism" already at work in the Internet arena know they must demonstrate significant added value. CoStar Group (www.costargroup.com) and others invest heavily in researching the markets and properties they cover. This results in such sites being far more useful from a site seeker's perspective than ever before. "We track every lease that gets signed in a market," says Bruce Weissberg, CEO of RealtyIQ, a listing service used mainly by brokers and property owners. "In New York, for instance, you can see how industries have migrated from one part of town to another. We recently analyzed how technology firms have evolved over the past three quarters in terms of their demands for space in the city. An owner of a property in an area to which they are migrating would want to know about that, so he can alter his marketing plans." Weissberg says this capability will expand to other markets his service covers in the coming months.
"There is an appropriate suspicion that the tools we have are not yet the tools we will be using in the future," says Jerry Porter (above right), vice chairman of CRESA Partners Executive Committee, Los Angeles. "So how much of an investment does anyone want to make in any given tool? The proliferation of these providers is a pretty big negative right now. Until the herd gets thinned a bit, there will be a great hesitation on the part of the users to pick a horse."
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More Change Ahead
This very process already is taking shape, says Cesar J. Chekijian (left), principal of CoRE-SERVE (Corporate Services e-Coalition), Livingston, N.J., a Web-based platform linking the investment, supply, demand and service sectors of real estate. Chekijian was a corporate real estate executive at Chase Manhattan Bank prior to forming CoRE-SERVE (
"By massing corporate spending at one end of the Internet pipeline, you are able to force behavioral changes at the other end of the pipeline," says Michael Baumann, executive vice president and general manager of SPACEdirect, netStruxr's primary service. Baumann is the former head of corporate real estate at Prudential, and SPACEdirect is an offshoot of a business plan he developed there in conjunction with peers in the industry. "Our approach is totally demand-centric. We are designing a tool for who we see to be the true customer in the market--the corporate real estate executive. They make the market turn. It is the value they bring in terms of lease payments that creates all the demand landlords have, all the revenue brokers have and that which the service providers get."
The directory of online corporate real estate services lists beginning on page 58 includes links to other such services and a range of other Internet-accessible tools. The important point to remember when evaluating any Web-based service for use in a corporate real estate context is that all such services are in transition. A service introduced this month will look and feel very different a year from now when it is part of a broader platform of real estate services.
