Real Estate Developers Can Expect Relocation, not Dislocation, from the Internet

By M H Ahssan

Some real estate developers see the Internet revolution the same way an aristocrat during the French revolution might have viewed the guillotine. The reasons for their dread are easy to fathom. As more and more CEOs recognize that the Internet is here to stay, they wonder how e-commerce will affect demand for real estate. E-commerce, after all, is about moving business from physical to virtual space and replacing brick-and-mortar storefronts with digital ones. As mainstream Corporate America embraces e-commerce, shouldn't those whose revenues and profits are derived from brick-and-mortar construction fear for their lives?

Not really. Real estate developers and brokers must recognize that the coming of the Internet does not eliminate demand for real estate; it simply changes it, according to academics and industry professionals who met at Wharton recently for the fall members' meeting of the Samuel Zell and Robert Lurie Real Estate Center. Speaker after speaker at the conference — which featured the first Max M. Farash Roundtable on E-Commerce and Real Estate — pointed out that the Internet offers more opportunities than threats to property developers and brokers. As such, real estate professionals would be better off embracing e-commerce rather than ignoring or fearing it.

How does e-commerce change demand for real estate? By way of an example, consider Amazon, the Seattle-based granddaddy of online merchants. The company, which did not exist five years ago and now claims to offer the biggest selection of products on earth, does not occupy a single square foot of space in any mall or shopping center. And yet, as its operations have grown, the company has had to build large stocks of inventory and find warehouses to house them. "Amazon wants to build a fleet of warehouses," says Christopher Peacock, president of Jones Lang LaSalle, a global real estate services firm. In New Jersey alone, Amazon last year was in the market for one million square feet of warehouse space.

That is just one way e-commerce changes demand for real estate. It also changes the skills requirements within real estate companies, which must now increasingly build expertise in technology. "We must help our clients make the right infrastructure decisions," Peacock says. "Our challenge is not just to hire brokers but experts in telecommunications, energy, corporate finance and logistics." Building such skills is crucial as real estate firms seek to redefine their roles for the digital economy. "Success does not begin and end with designing a web page for your company," Peacock adds. "We should use e-commerce to serve our clients."

Jones Lang Lasalle has begun to explore ways of doing that. The company's property management business buys services worth $6 billion from more than 35,000 vendors. In the past, sales orders were typically placed and processed by fax. Recognizing the potential of the Internet to transform the purchasing process, the company decided to move these operations online. Result: Jones Lang Lasalle was able to slash costs by 10% — or $600 million. "That's just one project, so consider the potential," says Peacock. "The future will be even more exciting. I can see a day when the ability to trade in intellectual property relating to real estate will be as valuable as the real estate itself."

Other speakers emphasized that the Internet makes it essential for companies to act fast. One reason is that the web itself has grown — and continues to grow — at an incredible pace. In a presentation on "Forces Shaping the Digital Economy," Gerald Lohse, research director of the Wharton Forum on Electronic Commerce, pointed out that while radio took 38 years and television 13 years to reach 50 million users, the Internet reached that milestone in just five. E-commerce, too, has been exploding. Forrester Research, a consulting firm, estimates that global e-commerce transactions by 2003 will exceed $3.2 trillion. (To put that number in context, Lohse explains, the U.S. economy today is $20 trillion.)

In a panel on e-commerce and retail, Wharton real estate professor Todd Sinai offered another perspective. Discussing whether e-commerce would cannibalize or augment bricks-and-mortar retail, he pointed out that the latter would certainly happen in some markets. "There are places where no one would set up a shopping center, and the Internet can pick up those sales around the edges," he says. In other instances, though, e-commerce sales may not cannibalize traditional retail as much as catalog sales. Time-starved consumers who once browsed through catalogs and ordered products by phone or by mail may now do so over the web. "The Internet is a direct marketing channel," he says.

The Internet also transforms where and how property is built, which means that real estate companies must re-think old assumptions. The maxim that the three most important things in real estate are location, location and location assumes a new meaning in a global, web-based economy. When business is transacted over the web, producers of intellectual products need no longer be physically close to their customers or even their suppliers. Carrie Byles, an architect with the firm Skidmore, Owings & Merrill, says that if one country's regulations are too onerous, Internet-based companies could easily move overseas or to tax havens. Technology, in many ways, makes location less relevant than it used to be. "For companies like Yahoo, the most important consideration is being close to bandwidth," she says.

Technology also makes it possible for architects to design better environments in which people can work. "We can create offices with casual collision spaces, where new ideas spawn," she says. "Our goal is to create environments that support learning, casual interaction, flexibility and speed in a setting where technology is invisible and the buildings and landscape sustain the human soul."

James Young, president of the Jameson Group, points out that the coming of the Internet is not a short-term change, like the typical 10-year real estate cycle. "This is a major socio-economic shift," he says, comparable in world historic terms to the agricultural revolution and the industrial revolution. The implications for real estate companies, Young says, are clear. "If you sold barns at the end of the agricultural age, you might consider something called a factory."