This article appeared in the winter issue of Urban Land on page 50.

According to its mission statement, ULI’s new Sharing Economy Council is “focused on the confluence of traditional real estate and new business models; platforms; digital enablers, such as smartphones and wireless networks; crowd-based capitalism; trust; and changing consumer behavior.” Members of the council discuss the opportunities and challenges that the sharing economy and new technologies offer the real estate industry.

Why did you start the Sharing Economy Council?

John Healy: The Sharing Economy Council is looking at business models that are impacting the traditional ways that real estate has been utilized, how we manage real estate, and what the returns are. Richard Perlmutter, the assistant chair, and I decided that 40 percent of the council would be traditional real estate participants, 40 percent representatives of “disrupters,” and 20 percent different types of service providers, consultants who serve both sides of the 80 percent.

Richard Perlmutter: I was on the Small-Scale Development Council for many years and began to see the sharing-economy companies having an impact on the traditional business of real estate. For example, in the co-living space, I saw a company like [co-living brand] Ollie potentially affecting the traditional business of multifamily by providing a myriad of services to residents on a short-term basis. I saw a company like WeWork starting to affect owners of traditional office buildings by providing short-term opportunities and more flexibility. I saw a company like Airbnb starting to impact not only the hotel business, but also the multifamily business. And finally, I saw a company like Uber starting to change the way we travel around cities and—at some point in the future—the way we develop cities and parking.

What opportunities does the sharing economy hold for the real estate industry?

Steve Reents: The opportunities the sharing economy holds for the real estate industry are vast. It’s enabling capital-raising and crowdsourcing, enhancing market analysis with machine learning and advanced analytics, and changing the way we think about leasing buildings and the way buildings are utilized in nonpeak hours. Sharing economy startups represent a new wave of tenants coming into the market, and they also are having an influence on building operations.

Healy: The sharing economy has moved along to the point where some of the technology is no longer in search of a problem to solve, but has reached the proof-of-concept stage. The micro-housing and co-living company Ollie is one example and Airbnb is another. Airbnb addressed the underutilization of housing and proved that consumers would be willing to put their bedroom on the market and that travelers would be willing to stay there. Now, Airbnb has moved beyond the business-to-consumer market to the business-to-business market. Major apartment REITs are talking with Airbnb because so many tenants are putting their units on Airbnb against the terms of their lease. But there may be a way that Airbnb and the landlords could work together to make it win/win for the shareholders of the REITs and for the shareholders of Airbnb.

David Lentz: The sharing economy allows us to reduce fixed costs. For example, many senior- and student-housing communities currently offer their residents buses or shuttle services. Owners of these properties can leverage ride sharing instead of or in addition to their own transportation services, which would reduce fixed costs and help reduce liability risk.

Jack Chandler: In some parts of the real estate industry, things are being done today much the same way they were 10 or 20 years ago. So there is a lot of low-hanging fruit for sharing-economy companies to pick off, and talent and capital are pursuing those market opportunities. I’m working with a couple of new companies—one that provides a new technology platform for building access and security, and another that has a new technology to remediate contaminated soil.

What are some of the challenges of integrating these innovations with the habits and standards of the real estate development world?

Chandler: The real estate industry has been a very slow adopter of technology. The industry is fragmented. It’s highly intermediated. That makes it an ideal sector to be disrupted by technology, and technology firms are starting to buy and rent houses in different ways. They’re starting to apply artificial intelligence and big data to real estate investing. They’re starting to use cloud-based platforms for software and for analysis and presentation and data storage. They’re trying to figure out the impact of driverless cars on cities and on the demand for various kinds of real estate. It’s a broader and deeper thing than most people in the industry give it credit for.

Lentz: The sharing economy is about two things: technology and change. The real estate industry has historically been slow to adopt new technologies. So real estate leaders have to work to understand how the sharing economy drives change and creates not just challenges but opportunities. Right now, we’re in the process of hiring a dedicated chief technology officer who will help us develop and maintain an understanding of what’s going on with technology, understand innovations and how they can apply to our business, create opportunities, and ultimately help create a sustainable competitive advantage for us.

Reents: Landlords still require a return on the leasing capital they invest. In the traditional model, you build out an office tenant space for a 10-year lease, and you might spend $100 per square foot [$1,076 per sq m] on leasing costs. That model is still appropriate for many tenants, but there’s also a growing segment of users who don’t want the five-, seven-, or 10-year lease—but they still want the space, and they want the space to be built out to a specific configuration or specification, requiring landlords to invest significant capital. So how do landlords do that in a way where you can still get an appropriate return, when some tenants are demanding much more flexibility with their lease term? We’re testing different models, and we’re open to a lot of them, but it’s still early days. This is just one challenge to which the industry has to adapt.

What technological innovations are you particularly excited about?

Perlmutter: Autonomous vehicles. We don’t know when they’re coming, but they may be coming at a faster pace than envisioned. That’s going to have a major impact on the way we live and work. I understand to reach their full potential, among other things, autonomous vehicles need 5G [internet service], which may be available in several years. It’s not only about vehicles operating on their own, but vehicles interacting with each other. At some point, autonomous vehicles may travel at a much higher efficiency level. Passengers would be able to check email or work out on a stationary bike while commuting. Once we have autonomous vehicles, people might decide to live farther out from the city center than they do today, so it could have an impact on the new development in urban areas.

Chandler: The process of buying and selling a house is changing rapidly. There are companies using private-equity capital to buy and warehouse single-family houses, fix them, and then sell them to buyers. There are online clearinghouses that are able to provide market information at much lower prices than traditional clearinghouses can. There are companies using artificial intelligence and big-data algorithms to identify which houses to buy. Sophisticated capital providers and entrepreneurs are driving these businesses, and in some cases, regulatory changes have opened up new opportunities to build different business models.

Reents: I think it’s worth keeping an eye on innovations that will occur within the food-delivery model, both grocery delivery as well as fresh- and frozen-food delivery. The logistics industry is developing more warehouses and distribution facilities close to population centers to support e-commerce, and as the fresh- and frozen-food segment grows, what does that mean for cold-storage facilities and the “last mile” delivery of food? Similarly, might we see more innovation regarding indoor agriculture, such as startups like Bowery and Plenty, that are growing organic produce in warehouses in infill locations? I think the industry will respond to consumer demand for healthy and fresh foods and seek to find more efficient ways to produce and distribute these goods.

Lentz: For our near-airport parking business, we use a mobile app very effectively, and our customers can manage their entire transaction with us on the app. But the app also gives us the ability to get feedback from our customers in real time and to collect and tabulate that data much more quickly and easily than we could before. That helps us serve our customers better. In other business, technology will allow us to create a platform for customers that leverages other sources, whether it’s a food-delivery app or an app that gives residents access to college courses. This platform can let our customers tap into all these external resources easily.

What else should more developers and investors be aware about in terms of the sharing economy?

Healy: Just about every product type is being affected by changing behaviors. Retailers, for example, face competition from online companies like Amazon, Rent the Runway, and Poshmark. So consumers are impacting real estate owners, whether it’s investment managers on behalf of the large REIT funds or large family offices that are now investing in real estate. More people are becoming aware of the opportunity to increase utilization and productivity and perhaps increase their returns through higher rental rates.

Chandler: History has taught us that things tend to change more slowly and gradually than projected. Twenty years ago, videoconferencing was supposed to decimate the travel industry and the hotel business. Obviously that didn’t happen, because of the way people like to work and interact. So technology probably isn’t going to eliminate, say, the advisory brokerage function in real estate. Not everybody is going to want to buy or sell a house through a website. There are lifestyle and emotional aspects that can’t be outsourced completely to algorithms. But at the same time, there are huge dislocations in business models and value propositions. Fifteen years ago, the brokerage function had many value propositions, one of which was providing market data. Today, all that data is provided online. So the changes won’t be as fast as some people think, but it probably will be more substantial than other people think.

What other trends should the industry be paying close attention to?

Perlmutter: There’s a lot of interest in blockchain, the electronic ledger system. Blockchain may someday have a big impact on commerce. For example, it may have an impact on the title industry because the title process is currently very expensive and cumbersome. Blockchain may one day be used for the transfer of residential leases. This would allow an individual the flexibility of transferring a residential lease to someone who has the same FICO score, or better.

Lentz: We are just scratching the surface of how technology and the sharing economy are going to impact regulations. It’s going to take a while to figure out how all these things are really going to work in the long run, because there has been so much change so quickly. For example, for autonomous vehicles to work, many regulatory issues have to be addressed, and a lot of capital will have to be spent so the vehicles can communicate with the roads and the traffic signals. It’s not just cars. I was in downtown San Diego a few weeks ago for a conference, and ride-share scooters were everywhere. You had to watch every step you took, because scooters were coming at you from every direction. They’re lying around the city like debris. At the same time, it’s great that you can just pick a scooter up off the sidewalk if you need to get somewhere six blocks away.

Healy: It’s very early days for some of the sharing-economy companies. Airbnb probably has more rooms than any hotel company, but even Amazon—in terms of total sales in the real estate industry—has a small amount, perhaps less than 15 percent. So, it’s early days, even for the giants in the e-commerce and sharing-economy business. Autonomous vehicles are a ways off, but the car-sharing phenomenon has already made a big difference. Automobile manufacturers like General Motors and Ford are seeing the cars they make go from 5 percent utilization to 60, 80, 90 percent utilization.

Reents: We have seen a lot of players enter the shared-workspace concept, and now there are a handful of firms taking a similar model to the multihousing industry with shared or common living. It’s a logical extension to think that startups can emerge in the industrial sector. Will there be a more innovative 3PL [third-party logistics] model that focuses on shared loading, shared storage, or shared assembly areas, and integrates that with advances in logistics technology and warehouse automation? Can there be a better model for real-time capacity utilization in warehouse space to better match one tenant’s excess capacity with another tenant’s demand?

Contributing Their Insights:

Jack Chandler, founder, Majesteka Investments Holdings, Winnetka, Illinois; vice chair, Sharing Economy Council

John Healy Jr., principal, Hyde Street Holdings, Raleigh, North Carolina; chair, Sharing Economy Council

David Lentz, chief executive officer, Green Courte Partners, Chicago; vice chair, Sharing Economy Council

Richard Perlmutter, managing member, Argo Development Company, Potomac, Maryland; assistant chair, Sharing Economy Council

Steve Reents,  senior vice president, transactions, Bentall Kennedy, Seattle; member, Sharing Economy Council