Can Commercial Real Estate Brokerages Justify Developing Tech?

For a while now I have rejected any article that comes across my desk that is based on the idea that “the property industry is a dinosaur when it comes to tech.” Sure there might be low tech adoption but that is more a factor of the average age of a commercial broker and the personal nature of property sales than anything. In fact, if you have been following the big brokerages for the last decade you know how much tech is being built by commercial brokerages large and small.

But as more property brokerages hire dev teams and acquire tech companies I can’t help thinking back to a redacted quote from an interview I did from a commercial property exec. For an author a redacted quote always sticks in your mind both because you know you hit on something juicy and because you had to race to make the change before the unauthorized version got published. 

Now, I won’t say which company this one is but I will say that it’s one of the big ones. What this person told me was that he didn’t think investing in tech really panned out for commercial property companies because, at the end of the day, they were tied to their multiple as a property company, not a tech company. What he was referring to is the fact that historically, commercial brokerages can’t command the same price to earnings ratio as tech companies can. 

Historically, publicly traded commercial property brokerages trade at from around seven to twelve times their earnings. Tech companies, on the other hand, usually trade at ten times that. Even relatively boring tech companies like Salesforce trade at a price to earning ratio of around 100. By this metric every dollar that a property company makes thanks to their tech only gives them ten dollars in value, whereas a tech company would add one hundred to its market cap.

One of the reasons that tech companies get such a high multiple is that their product costs almost nothing to distribute and their services are incredibly sticky. The same is not true for property companies. Sure there is relationship and brand value for the best names in the space, but usually the loyalty lies with the individual brokers, who can move to another brokerage or go out on their own any time if they want.

One of the companies that was supposedly cracking the code for developing proprietary technology was Compass. They created nifty new term investors (“tech enabled”) and were rather successful in using their technology to onboard brokers who brought their book of business with them. Initially this worked, Compass IPOed with a valuation of around $10 billion, raising the question of whether or not it was a tech company (and therefore justified tech multiples) or not. Eventually the market spoke. Compass’s stock price is down to almost one tenth of what it was at its post IPO highs, valuing the company currently at around $1.2 billion.

There are plenty of reasons for a brokerage to invest in tech. Being able to complete more transactions and reducing costs can certainly increase a brokerage’s revenue and justify the spend. But it is hard to see how brokerages can stay ahead of the tech companies innovating in the space. Core competencies aside, tech companies have more access to the investment capital needed for the astronomical upfront costs that can be incurred when creating new tech. 

I don’t want to sound like a detractor. I applaud innovation in real estate. But I do know that there is no way around economics. The financial community, be it right or wrong, has not given the same kind of value to technology developed by a property company than it does by a tech vendor. But, thanks to a selloff in equities, that gap is shrinking. Formerly highflying tech stalwarts like Facebook are now approaching the PE levels of what a broker might achieve. The days of calling the property industry a technology dinosaur are over. Now we might see another animal analogy apply. If property companies follow each other off the technology development cliff, we might start calling them lemmings instead.

Overheard 

I spoke with a CRE brokerage this morning. 20 brokers. They spent ~$1m customizing "the CRM of CRMs."

None of their brokers used it.

— David Y. Young (@DavidYYoung) November 30, 2022

Mapped

Investing in technology is regional. I found this great map that uses 105 metrics to rank each region by its state of innovation.  

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