“Disruptive innovation has nothing to do with real estate, but everything to do with the future of real estate,” said James Chung, President of Reach Advisors, waking up attendees at the opening keynote session of the ULI Washington Real Estate Trends conference.
What is disruptive innovation? Chung defines this term as unexpected innovation that taps new pockets of demand. Recent examples from the world of US business include:
- $5 billion in retail booksellers’ shareholder value wiped out, primarily by Amazon
- $10 billion in video rental companies’ shareholder value and 18 million square feet of retail space vacated, primarily by Netflix
- $33 billion per year annual revenue loss by the nations’ newspapers due to news being available online
Three major trends are driving disruptive innovations in today’s economy, said Chung:
- The move from control of physical assets to coordination of community assets – the shared economy. Rental car companies, with nearly a billion cars, have lost 60 percent of their shareholder value due to Uber and other ride-sharing start-ups. Air BnB, the second biggest winner in the sharing economy, now has a $25 billion valuation, more than the recent sale price of the Starwood hotel chain.
- Moving from very predictable demographic patterns to an era of dramatic clustering – the assortive economy. For example, standard demography talks about millennials, baby boomers, and so on; however, we now know that there are such large differences among members of these groups that they no longer can be viewed as like-thinking groups. For example, among millennials, low-income men have low marriage rates, while higher-income men are marrying at traditional rates. Childbirth rates among low-income women are dropping, but have not changed in ten years among women with bachelors’ degrees. Older adults who are married have 38 times the net worth of those who are single or divorced. “The headlines are incorrect; they mask the extremes,” said Chung. “There are no more averages; there is no mass market.”
- Moving from a focus on products to a focus on data – the data economy. Data used to be a byproduct, but now it is a differentiator, said Chung. The volume of business data is growing exponentially, and will continue to grow. Using data effectively, the real estate industry can determine what type of product will be needed, where it will be needed, by whom, and when. For example, the Washington, DC region has the best demographics of any metropolitan region in the nation, said Chung, but few people know that while the region is a great talent magnet and incubator, it also is a net export of educated people, who are moving to high-growth metros with lower living costs. Some developers, he predicted, will find success by becoming the Tesla of real estate: i.e., providing more housing space for less cost.
“Real estate is the last of big industries to have not seen disruptive innovation, but it is not immune just because it’s composed of non-digitizable tangible assets,” Chung concluded. “Some real estate businesses will face shrinking profit pools due to oversupply, while others will find opportunities to mine greater value than ever before. The question is: is it better to be disrupted, or be the disruptor?”
James Chung, President, Reach Advisor
Recap Written by Leslie Braunstein
Click here for an video recording of this session.