October 4, 2021Calculating...

Chapter 5: Real Estate and Technology

The Next Wave of Innovation in Canada

The impact of COVID-19 has caused great disruption in real estate, while also accelerating the use of technology across the industry. As people have begun re-imagining how physical spaces will look and operate in a post-pandemic era, technology has emerged as a key factor in this re-imagining process. Many large institutional landlords, property owners, investors and lenders are innovating to disrupt processes that are often antiquated, complex and slow; with a view to increasing revenues and reducing costs, improving customer service, and optimizing operations. With these changes, a host of legal and operational considerations have emerged.

In addition to the adoption of in-house technology, startups are increasingly being engaged across various sectors of commercial real estate—from investment, development and construction to asset and property management. Some examples of how technology is transforming the real estate industry are below.

Areas to Watch

Investment

VCs, traditional real estate investors and real estate corporations are increasingly investing in startups that are focused on changing the face of the property industry. The participation of real estate corporations (i.e., not professional investors) is a particularly noteworthy development as corporations are increasingly deciding to join startups in the march towards disruption. This increase in available capital will continue, powered by internal innovation, strategic partnerships, third-party investment and direct investment.

Construction technology

While digital solutions in construction have been utilized for many years, the pandemic pushed the industry even more towards project management platforms, digital collaboration, robotics, and automated functions around building, shipping and delivery.

Smart building and city solutions will continue to rise as ESG considerations and efficiencies increase. Sensors, biometric technology, touchless solutions, and air quality monitoring will become standard features across commercial properties. There will also be continued growth around the “Internet of Things” (IoT) solutions to make residential properties smart; by using sensors to monitor things like utility usage, lighting, property access, landscaping and security. Smart systems and applications will aggregate a lot of valuable data which owners and operators can use to improve building performance and end-user experience. As regulators increasingly expect higher levels of accountability for those using and collecting this data, startups will be presented with further opportunities to provide data management, security and analysis to the real estate industry.

Property Search and Imagery

Technology touches on every point of a property search—from using drones to capture aerial images to utilizing big data to compile marketplaces that showcase insights on home value trends. Innovation in property viewing and imagery will see a continued prevalence of virtual tours, an increase in computer-aided design to showcase space configurations, and the optimization of AI to provide more refined search results.

Evaluating and Financing Properties

The evaluation and financing of properties has also gone digital, through online appraisals, lending technology, digital brokers, and transaction management/due diligence. The integration of technology in these processes has allowed for a decrease in labour, cost and time and has provided less room for human error. The use of diligence platforms will continue to rise, with further adoption of software for lease abstraction, contract and estoppel reviews, and automation services to isolate key provisions.

Managing Assets and Properties

Many are utilizing proptech to reduce, automate, or in some cases, eliminate, routine and time-consuming tasks. This has led to the adoption of cloud-based platforms to track workflow and processes. As the use of cloud-based services and the sharing of information rises, it presents concerns around data privacy and operational cybersecurity issues. Real estate companies, and those who invest in them, will further look to blockchain-based applications to manage the financial aspects of real estate transactions. There will also be a continued integration of backup systems and increased IT capacity to mitigate risk around cyberattacks.

Office

The COVID-19 pandemic has forced office developers and landlords to reconceptualize space, including access, density and operational safety, such as indoor air quality levels and effectiveness of HVAC systems. The safety of these spaces, and how they are used, will continue to be impacted by how people now work, including the impact of a work-from-home and hybrid workforce. Many properties will be including co-working and adaptable office space, moveable floor plates, and smarter storage as ways to adapt to changing demands of the workforce from both a tenant and landlord perspective

Housing

As with office space, working from home has also impacted the multifamily sector, creating several additional needs and changes, such as increased internet connectivity and the re-imagining of the layout and functionality of units, concierge services and delivery models.

Those in student housing are focused on how to safely bring students back using portfolio analytics, transformation of physical spaces, sensor-based security systems, and increased digital interaction between student residents and housing managers. Community housing, in particular, will see an increase in the use of smart locks, tenant smartphone applications and web portals.

Hospitality

As hotels and resorts re-open, they must navigate the balance between service and physical distancing requirements. This focus on safety standards and the overall guest experience will greatly increase sanitation, digital based service experiences, and air quality considerations. The addition of technological offerings will lead to ongoing and increased competition amongst hotels and resorts.

Healthcare

The healthcare sector has always presented unique real estate challenges—many of which have increased since the onset of the pandemic. These include new layout designs to provide physical distancing, and additional sanitation points in lab spaces, hospitals, long-term care and seniors’ homes. The level of investment in startups serving these spaces signals a continual appetite for innovation in these areas, both in terms of space configuration and improved processes and efficiencies.

Industrial

In industrial, the trend for functional and high-tech space continued throughout the pandemic. There was an increased focus on supply chain logistics technology, with a continuing increased demand on industrial condos to help fulfill the demand for greater industrial space and innovative options. Many investors and end-users are now looking for smart warehousing—where distribution and fulfillment spaces can be customized to tenant needs. These factors, in addition to technological services that allow tenants to fulfil next day delivery demands, will continue to have a profound impact on lease negotiations and pricing in this space.

Doing Deals and Investing

From a legal and operational standpoint, there are so many factors for parties in this space to think about, including:

  • data, privacy and confidentiality of information, including the collection and aggregation of data from owners and operators of smart buildings;
  • in terms of digital security, the use of cloud-based services and the sharing of information raises operational cybersecurity issues since any entity that connects to an electronic or technical system can be subject to a cyber-attack if compromised;
  • reliability and backup systems and plans; and
  • regulation around accountability for those who are in charge of smart systems and the data that is being collected in connection with those systems.

Curbing Risk

There are a variety of ways to mitigate the risks involved with the considerations set out above, such as:

  • increasing your organization’s information technology capacity;
  • obtaining cyber-risk insurance to compensate for business losses that may occur if there is a cyberattack;
  • putting focus on reliability considerations, business continuity plans and backup systems—business continuity considerations are paramount, including the importance of having a business continuity plan in place and updating those plans regularly;
  • ensuring regular and detailed and effective messaging and communication with team members is another factor—job roles may be changing, some functions may be automated or greatly reduced due to new efficiencies and it is important to let team members know the objectives behind these changes;
  • thinking about your organization's staffing needs and think about what different skill sets, training and perspectives you may need to round out your proptech team, including real estate teams having individuals with technology or software engineering backgrounds; and
  • being mindful of employment law considerations when changing job titles, roles and position.

The overarching consideration is how to balance the need vs. cost and ensure adequate protection and safeguards without compromising or impeding the innovation itself. Make sure to engage your trust advisors, including your legal consultants, as you embark on embracing the new normal.

 To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2021 by Torys LLP.

All rights reserved.
 


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