Artificial intelligence and real estate: effects on the sector and its professionals

March 26, 2021

The term artificial intelligence scares many, real estate lawyers included. When brought up at cocktail parties, the term can turn festivities into lamentations on how the legal industry's acceptance of automation will upend the profession; and as the night wears on, on how ill-equipped cyborgs are suited to the firm's partnership. While the latter fears are (for now) unfounded, the former aren't entirely misplaced. But instead of fighting the inevitable, a better course for real estate lawyers and professionals generally is to focus on understanding what artificial intelligence is, how real estate businesses are using it, and why it is just one piece in the greater evolution of real estate from a product to a service. Doing so is a better way to understand what are the legal skills required to keep pace with real estate's new world order.

What is artificial intelligence?

Artificial intelligence, at its core, is smart technology that processes information and data to draw logical conclusions. The technology typically comes in the form of computer programs that digest massive amounts of data and use algorithms and predictive analytics to make autonomous decisions about future behavior. Stripped down to layman's terms, artificial intelligence takes all the data floating around in our digital world and delivers findings to a degree beyond human capability. This technology offers businesses a host of benefits, namely the ability to automate routine tasks, increase speed and efficiency, and improve decision making.

It sounds futuristic, but artificial intelligence is used all around us, from the universal assistance Apple's Siri provides, to the predictive text this author, a creature of habit, is using for this article. In fact, over 30% of companies utilize artificial intelligence in some form already¹, and looking ahead, this technology is expected to contribute over US$15 trillion to the global economy over the next decade². And perhaps most surprising, artificial intelligence may cause a net benefit in global job creation in the decades to come, with jobs in value-added growth sectors such as healthcare, science and education expected to more than offset those in automated loss sectors such as manufacturing³.

How is artificial intelligence being used in real estate?

Real estate has been slow to adopt artificial intelligence compared to other sectors such as manufacturing, healthcare and financial services. But if you look closely, you'll see it is already changing real estate in unique ways.

Valuations

Pricing makes or breaks real estate deals, with parties often oceans apart, particularly on future values. By harnessing the awesome power of artificial intelligence, parties can collect and process data points, often in excess of the thousands, to find a middle ground. Points such as historical property trends, macro and micro market fluctuations, taxes, crime rates, parking, sound disturbance, transportation options, and school district ratings can be analyzed to make reasonable predictions on future rent and sale prices, in addition to market trends and even new configurations and investment opportunities for existing property.

Lead generation

Artificial intelligence provides deep learning capable of sifting through massive data sets to pre-qualify leads and filter out the serious buyers from the window shoppers. Companies such as Zillow and Redfin are employing this technology on their platforms to provide tailor-made residential and commercial offerings to qualified buyers. This type of technology saves significant time for all parties involved in a real estate transaction, thereby cutting down on transaction costs. Platforms are coupling such optimization with chatbots and 3D walking tours for commercial and residential properties to enhance the user experience and better match buyers to suitable properties.

Lending and financial modeling

Mortgage lending is data intensive and the machine learning offered by artificial intelligence is accelerating the document review process through optical character recognition. This means that lenders can capture information faster and more accurately during financial due diligence exercises on mortgagors. Closings can occur faster and with less downside risk to lenders. Similarly, manual and repetitive processes, such as financial modeling, can be automated using extraction and classification technology. Use of such technology in both lending and investment analysis allows individuals to focus on more value add, customer service-oriented activities.

Property management

With research indicating roughly a third of office space is underutilized⁴, landlords and tenants seek to manage space more effectively. Artificial intelligence allows companies to address this underutilization by aggregating and analyzing data collected through sources such as Wifi and IoT sensors, and offering solutions ranging from rearranging work configuration to energy-saving optimization. Tracking rental and property listings, requests for maintenance and tenant applications additionally allow parties to better manage property by understanding common maintenance issues, tenant characteristics, and price trends.

Streamlining documentation

Artificial intelligence is being used with simple transaction documentation and lease information extraction technologies to identify terms and clauses. Doing so creates a digitalized, machine-readable document or lease, clear of the errors commonly arising from human data inputting. This type of documentation recognition software is not yet common across more complex unstructured data and documentation, such as sales and purchase agreements; however, over time, it is expected to get there⁵. Looking forward, artificial intelligence is expected to be employed with smart contract technology to allow for the negotiation of terms between parties and to implement the self- executing nature of smart contracts.

Why artificial intelligence shows real estate is evolving into an operational asset class

What can be gleaned from how businesses are using artificial intelligence? It's that real estate is becoming a service, not simply a product.

Real estate traditionally has been viewed as bricks and mortar, steady and reliable. Landlords entered lengthy fixed term leases and collected rent. Individual bought homes and resided in them, often for their entire lives. Even before the pandemic, these norms were shifting in concert with our 'on-demand' economy, evidenced by the rise of co-living and co-working, which is expected to represent over 30% of the office market by 2030⁶. The COVID-19 pandemic is accelerating this shift, particularly in commercial real estate, where developers look beyond the floor plan to become service providers. Increased attention is paid to everything related to 'occupier experience', from the restaurants and gym to the general community vibe. Some landlords even offer digital connectivity, FF&E, and staffing for tenants to run their businesses on site.

Like the commercial segment, residential properties are undergoing similar changes, with buyers looking to offer hotel services and even subscription-based housing programs, whereby people occupy different living environments based on current needs and their stage in life.

For other property types, lines also are being blurred, with coffee shops acting as workspaces and restaurants incorporating retail elements.

Artificial intelligence allows all parties within the real estate ecosystem to determine how and what services are optimal for any given space and to transform services in real time based on occupier behavior and needs.

How do real estate lawyers need to adapt?

Real estate professionals should be reading the tea leaves and looking to incorporate the value-added skills that clients require in this shift to service-oriented real estate. Some of the skills include:

• Understanding the role of data: Real estate developers and property managers will be increasingly reliant on data collected on occupiers: this is to customize the experience and amenities provided. The law in this respect is constantly changing and real estate lawyers will play an important role in assisting clients balance commercial objectives against data privacy concerns.
• From lease agreements to membership agreements: As occupiers of commercial properties seek flexibility in their real estate, agreements will change from leases of fixed duration to flexible membership agreements. Real estate lawyers will be essential to create service agreements suited to a landlord's commercial objectives.
• Tokenization: It is widely expected that the biggest changes facing real estate lawyers will be effecting the tokenization of real estate, making a historically illiquid asset class liquid, through virtual tokens representing ownership of a real estate interest. Such interest can be flexible, being anything from ownership of the underlying asset, to a stake of the owning entity, to a share in income arising from real estate use.

Artificial intelligence is just one piece in a macro transformation of real estate from a historically bricks and mortar business to a service-oriented one fit for today's digital, on demand economy. The real estate professionals capable of embracing this technology and evolution are positioned to thrive.

1. Gartner Survey Shows 37 Percent of Organizations Have Implemented AI in Some Form
2. PwC's Global Artificial Intelligence Study: Sizing the prize
3. Ibid.
4. 'Workplace planning in the new world of work (2018)', published by Jones Lang LaSalle, available at https://www.us.jll.com/en/space-utilization.
5. See quote by John Abbott, Director of Digital, Date and Technology, Her Majesty's Land Registry, available at https://www.sbs.ox.ac.uk/sites/default/files/2019-03/FoRET-ReportFull_1.pdf.
6. See 'Flex space evolves' published by Jones Lang LaSalle, 2019, available at https://www.us.jll.com/en/trends-and-insights/research/flex-space.

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