Innovate Quickly Or Die! In Real Estate?

August 24, 2022

“The economy will be back and things will be back to normal.” (Calm Charlotte Realtor)Get more details about¬†¬†

Only the Paranoid Survive (Best-selling book by former Intel CEO, Andrew Grove)

The economy is moving fast. And it’s not just about competing with people in your town or region; now the competition is global. As Pulitzer-winning journalist, Thomas Friedman’s latest book’s title says, the world is Hot, Flat, and Crowded. Putting aside the global warming “Hot” part of the title, the world is “Crowded” (with a rapidly growing population) and the internet has made it “Flat” (where people can compete with you from anywhere on the globe). This is scary stuff- more people in more places are going after your piece of cheese.

So when you stay still, the competition is gaining on you. You will not win in this global economy doing the things you’ve always done. In 2007, the National Academy of Sciences said that approximately 85% of growth in the world economy is due to innovation (ideas), with only 15% coming from other factors like productivity gains. As Jeff Wacker, the EDS futurist said, “The bullet that kills you never takes you between the eyes. It always hits you in the temple. You never see it coming, because you’re looking in the wrong direction.” Innovation comes rapidly and without mercy. Capitalism kills.

For further evidence of that, let’s look at the Fortune 500 (the 500 biggest companies in America). Between 1955 and 1995, the turnover on this list was around 20 companies a year. From 1995 to present, the turnover is 8% annually and growing. The Fortune 500 in 1995 only had 250 original members left in 2008. The companies that continued to innovate remained relevant, while the ones that didn’t were left behind.

How does this happen? Well, companies come up with new ideas and are able to sell them initially for a high profit margin. However, other companies from all around the world copy these ideas and make them cheaper and better (decreasing profit margins for the idea creator while lowering prices for consumers). Another way is that some innovations are completely disruptive and change the very face of the industry; think about the digital camera destroying Kodak’s Polaroid, and Apple’s IPod rendering the portable CD player obsolete. A better solution comes one day and you can be out of business the next.

So what does this mean to real estate? It means that we better come up with ways to innovate and keep ourselves relevant. With most big real estate companies staunchly staying with traditional buy and sell services, they have made themselves susceptible to a disruptive, game-changing idea. Consumers are frustrated and want to be able to transact real estate; their business will flow (in a heartbeat!) to whoever can do it the fastest, best, and cheapest. Cost cutting measures, such as mergers to achieve economies of scale, will keep big real estate firms solvent for a little longer, but not relevant and growing.

When the economy and real estate market were booming earlier this decade, new entrants with new business models (RedFin, Zillow, etc.) offered niche real estate services for less money; this worked because they significantly kept their overhead lower than traditional firms which allowed them to still earn a good profit margin (which also was cheaper for consumers = good). Some brokerages went the discount route to compete against them, hoping to compensate for the loss of profit margin with increased sales. As this unfolded, sales commissions went on a downward trend. This should not be alarming; this is the natural activity of our global economy. However, earning less money for the same amount of work is disconcerting.

But the possibility (and likelihood!) of a disruptive innovation is potentially much scarier. For example, what happens if Google decides they want to offer real estate services for free? They are already mapping our listings. What about if they mail out free lockboxes to homeowners and find a way to assuage their security concerns? Consumers could do their own showings. What if they gave homeowners the ability to list their own homes on Google’s nationwide MLS system? What would this do to our jobs?

This, or something similar, WILL happen. And it will happen soon. Every industry in our global economy is ripe to be attacked and reconfigured, especially those that are considered to have an unwarranted high profit margin (like real estate). Nothing is sacred.

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