LeaseCalcs: Corporate Real Estate Journal

Marc A. Maiona | March 2016

[email protected] | 949.284.6900 | 38 Discovery #100, Irvine, CA 92618 Corporate Real Estate Journal Volume 5 Number 3

Editorial The democratisation of knowledge: The battle between common knowledge and proprietary knowledge

Whether or not you are a student of history, ­common knowledge is teachable, observable it is impossible to downplay the role of or otherwise accessible to those curious democracy in bringing about powerful and enough to learn. In the context of the world lasting changes on both a local and global commercial real estate world, this means a level. The most significant of these changes lot that currently passes for proprietary have been in instances where power, knowl- knowledge could, and arguably should, be edge and control were previously vested in common knowledge. the minority to the detriment of the major- Service providers, however, fret about the ity. The commercial real estate industry is implications to their business models in an beginning to have its own democracy environment where what is currently consid- moment, driven by technology and a fuelled ered proprietary knowledge might become by demand for better and more instantaneous common knowledge. Technology and the access to information. Some have predicted freeing of information that results from the this democratization of information could adoption of technology will not, however, significantly disrupt or displace service pro- result in anything that is really proprietary viders like brokerage firms. Ultimately, how- knowledge becoming common knowledge. ever, the service providers will not truly be After all, truly proprietary knowledge is disrupted unless they mistakenly think of where meaningful value is created by service common knowledge – or those things that providers in the services delivered to their arguably should or could be common knowl- CRE clients. In other words, there is no real- edge today – as being proprietary knowledge. istic way to democratise experience, skill, The value of what is truly proprietary knowl- diligence or unique insight. edge, whether it manifests itself as experi- Where, then, should CRE professionals ence, skill, diligence or unique insight, will expect to see this democratisation occur? instead become more valuable. Those things that can be readily learned, or So, what is the difference between com- should already be known or knowable, by mon knowledge and proprietary knowl- real estate professionals are most easily edge? In its simplest definition, common democratised. Two relevant examples come knowledge is that which is known by every- to mind, both of which – when complete – one or almost everyone, and where everyone will result in better information for all knows that others know this fact as well. involved while not posing a real threat to That Big Ben is located in London, two plus service providers’ business models: two equals four and the Earth orbits around Financial acumen: Real estate transactions, the Sun are each examples of common whether leasing, purchasing or buying, are Corporate Real Estate Journal Vol. 5 No. 3, pp. 192–194 knowledge. Each, however, were learned at often the largest financial decisions a CRE © Henry Stewart Publications, 2043–9148 some point in everyone’s life, such that professional will face each year. Even a series

Delivered by Ingenta to: Henry Stewart Publications Page 192 IP: 185.24.85.49 On: Thu, 02 Jun 2016 13:24:58 Copyright: Henry Stewart Publications Editorial

of seemingly inconsequential transactions, that the method by which that knowledge is like shorter term leases of small, satellite most frequently made available treats it as offices, can add up in terms of their nominal something that is unique and special, and is value. However, as CRE professionals and often accessible only for a price – whether their service providers work together to paid by the client or by the broker via an negotiate these transactions, the overwhelm- internal allocation of their commission or ing majority of them are analysed and advised compensation. Human nature being what it on only the most basic of financial terms, is, this means many transactions do not ben- most frequently limited to a discounted cash efit from optimal advice and analytics in an flow analysis. Oddly, though, when the effort to minimise cost. At the end of the C-Suite reports and reviews financial results, day, when CRE professionals realise accu- discounted cash flows are never part of the rate, in-depth financial analysis is a com- discussion or reporting. Companies report modity that could have been leveraged to financial results on the basis of balance sheet improve the advice they received and the metrics like shareholder equity, and on decisions that were made, and then grasp it income statement metrics like net income was not utilised because there was a ‘pay wall’ and EBITDA. around it, everyone loses. If those are the financial metrics that mat- Change is coming in this area thanks to ter to the C-Suite, the question is whether technology and a key realisation by the ser- really knowing how transactions affect finan- vice providers and brokerage firms: financial cial results, and how transactions could be acumen and intelligence more broadly distributed altered to improve those results, represents is more valuable than a relatively tiny group of proprietary knowledge or should, instead, be financial wunderkinds who can only provide ser- considered to be common knowledge. vice to a select few. Should a CRE professional be able to expect Market data: Not to be mistaken with confi- her service provider to be able to know the dential information about tenant or landlord EBITDA implications of structuring a turn- behaviour or intentions, consistent and key lease as opposed to receiving a build-out accurate information about vacancy rates, allowance from the landlord, or whether the construction activity, so-called ‘market rents’ renewal of an existing lease might be less and the like is often incomplete and/or expensive overall but actually worse for her inconsistent from one market research firm’s EBITDA results? Considering these department to another. While there are cer- examples are concepts that are teachable, tainly some large technology players in this observable or otherwise accessible to those space, even the largest among them do not curious enough to learn, it would seem they have complete data for every (or maybe any), should be a minimum requirement for a ser- market. This market data also resides behind vice provider to be successful. In other words, a very tall ‘pay wall’, and hence what could if one can obtain this knowledge without a become common knowledge is elusive. At requirement for advanced degrees or special- some point one would expect that informa- ised licence, it ought to be considered com- tion to be more widely accessible while also mon knowledge. For many years, however, it being more accurate and consistent. has been disguised as proprietary knowledge The analogy to the residential real estate by many in the commercial real estate world. industry is easy to follow, and also instruc- This is not to say the service providers tive. The residential real estate industry lack these skills or do not have the requisite moved much more quickly to embrace tech- knowledge at all. Rather it is more the case nology and democratise market data. In the

Delivered by Ingenta to: Henry Stewart Publications IP: 185.24.85.49 On: Thu, 02 Jun 2016 13:24:58 Page 193 Copyright: Henry Stewart Publications Editorial

US, for example, companies like Zillow and model was that people couldn’t get into Realtor.com, are widely utilised sources of houses, they wanted advice. At some point we market data on homes for rent or for sale, realized that we had to become a service company.’ including price histories, projections, etc. [emphasis added] In other words, the service When these firms first started making this providers of the commercial real estate world market data available online, for free, there should have little to fear from making market were many predictions that home buyers and data common knowledge, as long as their sellers would no longer need a real estate emphasis remains on service and not on agent, or they would otherwise result in a thinking of information as proprietary when structural change in the brokers’ commission it really could, and should, be of the com- model. Those predictions, however, have not mon variety. held up. A March 2013 article from Bloomberg, By focusing on the truly proprietary for example, reported 89 per cent of home advantages any firm or individual can bring to buyers utilised the services of a realtor, even bear for the benefit of a client, the most tal- though 43 per cent of home buyers started ented, most diligent, most capable and most their search online. The article, entitled ‘Why experienced will rise to the top. Ultimately, Redfin, Zillow, and Trulia Haven’t Killed Off this democratisation of knowledge will yield a Real Estate Brokers’, quoted Zillow’s CEO as more efficient and intelligent marketplace, saying ‘consumers don’t really care about while maintaining ‘pay walls’ around what commissions. They say they care . . . [b]ut amount to mathematical equations or what when push comes to shove and it comes time could be (and likely one day will be), some- to sell their home, the transaction is so infre- thing akin to a Google search, will, in retro- quent and so highly emotional and expensive spect, be the symbolic equivalent of the Berlin . . . that they turn to a professional.’ Wall – destined to fall. Redfin is another firm that attempted In the meantime, the echoes of US democratise the same market data, but its President Ronald Reagan’s famous 12th business model went much further down the June, 1987 speech in Berlin will ring in our path of trying to disrupt the realtor’s commis- ears. ‘Mr. Gobachev . . . tear down this sion model. Redfin’s initial business model wall!’ was to not just provide the market data but to act as a less expensive broker, charging a flat Marc Maiona fee instead of a commission. However, the LeaseCalcs, Inc. Bloomberg article quoted Redfin’s CEO Editorial Board Member Glenn Kelman as saying what they found, over Corporate Real Estate Journal time, was ‘[t]he problem with our original March, 2016

Delivered by Ingenta to: Henry Stewart Publications Page 194 IP: 185.24.85.49 On: Thu, 02 Jun 2016 13:24:58 Copyright: Henry Stewart Publications