The Long View: Why real estate tech won’t kill the middleman

Disintermediation is dead. Long live superintermediation.

Alec Baldwin's Glengarry Glen Ross Scene (Credit: New Line Cinema)
Alec Baldwin's Glengarry Glen Ross Scene (Credit: New Line Cinema)

Revolutions tend to promise one thing and deliver another. Think of the Jacobins paving the way for Napoleon, the Soviets toppling one autocracy only to ultimately replace it with another, or anti-corruption crusader Hugo Chavez building an empire of graft in Venezuela. Turns out this maxim also applies to real estate technology.

Not too long ago, it seemed like the real estate business was about to enter a new era. To some observers, websites like Zillow and Trulia or their office equivalents 42Floors and LoopNet threatened to put brokers out of business (although officially these firms said no such thing). Crowdfunding startups dreamed of doing the same to pricey fund managers. Why pay a cut to an agent if you can just find your house or office online, for free? Why give your savings to a pension fund, which gives it to an asset manager, which gives it to a real estate lender, which gives it to a developer, if you can just lend the money to a developer yourself, online, and save a fortune in fees?

These startups advocated a vision: A completely transparent industry freed from the burden of expensive middlemen, one where customers can find anything they need online and investing in a building or leasing an office is as easy as ordering a book on Amazon. Transaction costs would plummet, efficiencies would soar, and everyone would be happy (except, of course, for the thousands of brokers, canvassers, lawyers and analysts who would lose their jobs).

Fast forward a few years, and this vision hasn’t quite become reality. Instead, the opposite seems to be taking place: well-funded startups are currently in a quest to add more and more intermediaries to real estate deals.

Take the residential brokerage industry. Last year, HomeLight and OpCity raised $40 million and $29 million in venture funding, respectively, landing them among the year’s biggest real estate VC deals. Both companies offer software that matches people with the right real estate agent. Tired: hiring an agent to sell your home is so 2016. Wired: using a (virtual) agent to find an agent, who goes on StreetEasy to find a buyer, who probably has a broker too.

Speaking of StreetEasy: rather than threaten to replace brokers, listing websites now cater to them. StreetEasy’s parent Zillow makes much of its money through its Premier Agent feature, which lets brokers pay to get their names next to listings. It also charges agents in New York City fees for any rental listing they post. If your revenue depends on brokers, you don’t exactly have an incentive to push them out of business.

“A machine cannot explain to a buyer what it will feel like to live in a neighborhood,” Zillow’s CEO Spencer Rascoff said at a November conference. “Real estate will always be a people business.”

In commercial real estate, too, dreams of disintermediation are giving way to a reality of superintermediation. The highest-valued real estate startup by a wide margin, WeWork, leases office space from landlords and subleases it to companies and freelancers for a profit. The company, which last year raised $4.4 billion from SoftBank at a $20 billion valuation, recently announced a partnership deal with major brokerage firms that pays agents higher fees if they bring tenants to the co-working company.

If anyone dreamed of a future where you sign onto a listing portal and rent your office directly from the landlord, the future is more likely to look something like this: you hire a broker to rent an office from a co-working company, who in turn rents it from a landlord (who probably manages the building on behalf of a fund manager, who manages the money of a pension fund, and so on).

Convene, Knotel and their multifamily cousin Common are other examples of companies adding a new intermediary between landlords and tenants. All three startups are backed by landlords.

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In real estate finance, the crowdfunding revolution has been a disappointment. Most startups that are still around and doing well stopped focusing on matching developers and retail investors directly, and are instead trying to win big fund managers as clients.

Ray Sturm’s career exemplifies that change. In 2013, he co-founded the real estate crowdfunding company RealtyShares, which allows individuals to invest as little as $5,000 in real estate deals online. He left the company about a year later and launched AlphaFlow. Rather than match individuals directly with real estate investments, AlphaFlow is a technology-based intermediary that helps pension funds and other institutions find hard money lenders to invest with.

The marketplace model of matching developers and small-time investors “didn’t really work,” Sturm said. The problem: most investors simply don’t have enough information, or the ability to process it, to make good investment decisions. They still need an asset manager to make these decisions for them.

“Many investors found that investing well in this space is more difficult than they initially anticipated,” Sturm said.

Bill Brown, CEO of Matterport, has made a similar observation when it comes to the residential market. Online exchanges like eBay or Amazon work well for highly commoditized goods, where every product is the same, he said. Not so much for real estate.

“Your residence is not a commodity,” he said.

Say you want to buy a new phone. You can read reviews online and trust that the phone you’ll get will be exactly like a million others from the same assembly line. Now imagine you want to buy a pet tiger. You could look at the tiger’s photo online and trust the listing’s insistence that the animal is a Jainist, but do you really know enough about tigers to judge the odds of getting eaten based on an online listing? Every animal is different. You might want to consult an expert first. Where the stakes are high and reliable information is difficult to come by, intermediaries are crucial for a market to function. That’s why real estate brokers aren’t going to disappear anytime soon.

If middlemen aren’t going anywhere, it then makes sense to at least try to help them work more efficiently. A platform that matches homeowners with agents, for example, adds another layer to the transaction, but in theory it also allows sellers to find the right agent more quickly and get the best price for their home. Technology layering makes transactions more complex, but it can let intermediaries do a better job. In the end, we may be left with fewer, more productive brokers and agents, lower transaction costs, and a more efficient industry overall. That, at least, is the hope.

But the recent history of finance shows that trying to make an industry more efficient by making it more complex can backfire. Since the 1980s, Wall Street added more and more layers to virtually any transaction. The old business of banks taking deposits and issuing mortgages turned into a maze of loan brokers, collateralized debt obligations, credit default swaps, synthetic collateralized debt obligations, and so on. The result was an unnecessarily complex industry that enriched its participants through neverending transaction fees and ended up being so confusing to everyone involved that few people realized how shaky the construct was until it collapsed in 2008.

Real estate entrepreneurs often point to Wall Street as a role model — a sophisticated industry that’s been quick to adopt new technologies. Let’s hope they learn from its mistakes, too.