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School of Business > UPDATE > Spring 2002 > Article Brave New World By Lee Gottschalk 
* The Internet Revolution is perhaps the most profound technological innovation to affect real estate since the invention of the automobile and the elevator. The Internet has revolutionized real estate by instantaneously distributing vast amounts of information on prices and availability of goods and services to a global audience. The Internet also provides new tools for performing real estate transactions and analysis-everything from online application forms to software for statistical analysis. Future development of real-time auctions on the web will dramatically change the existing marketplace. * Transportation development and the development of cities will continue current trends of decentralization and growth of the largest metropolitan areas. Cities are unlikely to become entirely decentralized even with increased telecommuting because of the continuing need for face-to-face contact (albeit reduced) and because people want to be near cities for entertainment and socializing. City size will continue to be limited by the length of time people are willing to spend physically commuting. * New, improved or cheaper consumer goods, especially electronic devices, new drugs and health therapies, and bio- engineered products are flourishing. This, in turn, influences real estate by creating the need for storage facilities for these products and by creating wealth in the economy that generates demand for more consumer goods. * Construction technology has affected the real estate market historically through three innovations: the development of steel frame construction, the invention of the elevator and the introduction of mass manufacturing methods in building construction. Current innovations include the "smart building," with high-tech control systems and broadband technology. More efficient procurement systems are also increasingly available through B-to-B e-commerce. * Manufacturing systems have had substantial impact on industrial real estate through improved supplier-producer relationships and just-in-time inventory methods. Manufacturing facilities are becoming more specialized and centralized as product mix becomes more complex and "lean manufacturing" techniques multiply. As distribution management strives to become more efficient, just-in-time inventory management has reduced overall inventories, diminishing the need for smaller localized storage facilities. Industrial-building investment as a share of GDP will continue to decline, as these trends continue. * Financial engineering has definitely come into its own in the provision of debt and equity capital to real estate. On the equity side, the development of the REIT (real estate investment trust) and REOC (real estate operating company) markets over the last decade has made it easier to deliver equity capital to commercial real estate. On the debt side of the market, the development of the commercial mortgage- backed securities (CMBS) market has enhanced liquidity and reduced the swings in credit availability and cost. The continuing development of e-commerce will spur the growth of the securitized debt and equity components of the market. Green and Vandell believe technology will not make real estate redundant; even though commercial real estate values will decline as a share of GDP, they will increase in real terms as the economy continues to grow due to new technologies. In terms of employment, they expect traditional agency positions in the residential primary and secondary mortgage market to be most affected as a large share of that industry moves online. The commercial secondary mortgage market will not be far behind. People in agency jobs who perform larger commercial property transactions will be more insulated from "web obsolescence" because these positions will continue to require extensive personal interaction. They don't see demand for retail real estate (malls, etc.) shrinking significantly as e-commerce grows. The recent decline in the share prices of many e-commerce dot- coms may indicate that there isn't a broad base of demand for e-shopping and that it may well exist more as a niche in the market, such as catalogs and TV shopping networks, rather than replacing traditional shopping. Even if e- commerce does take off in popularity, the resulting higher rate of economic growth overall may more than make up for the loss. How will technology affect real estate trends in our cities? Cities will continue to be important, but many central cities will experience soft office markets due to decentralization driven more by non-technological factors such as low density zoning requirements, increasing affluence, a flight to high-quality schools and government services, and U.S. tax policy that encourages the purchase of larger homes. "Landmark" high-end skyscrapers have rarely worked out well financially and have been more the products of grandiose vision than economic sense. Clusters of office space that are more cost-effective, flexible and functional will be in demand even though the amount of office space per worker will decline. Ultimately, the challenge for the real estate industry is the same as that facing all other industries: Knowledge must be a primary source of value. Given the above analysis, Green and Vandell offer these helpful hints to real estate professionals intending to survive -and thrive - in a technological age: * Stay informed on industry research so you can understand what is driving urban growth and development in commercial market sectors * Ramp up your technical education * Stay on top of trends created by technology and how these affect real estate companies, local markets and the profession in general * Develop a strategic response to optimize future opportunities Finally, Green and Vandell encourage real estate professionals to enjoy the ride! Lee Gottschalk is assistant director of education and outreach, Center for Urban Land Economics Research (CULER).
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