A shift in focus
This year’s MIPIM revealed an industry still grappling with change. Unlike the deal-making frenzy of past years, the mood was more subdued and thoughtful (not helped by intermittent torrential downpours). Conversations shifted from "When will the market turn and liquidity return?" to "What should we do to succeed in this new normal?". It is clear that the sector has accepted that the industry has fundamentally changed and is not going back to how it was 20 years ago.
That said, liquidity is beginning to return, evidenced by the resurgence of commercial mortgage-backed security CMBS issuance, renewed bank lending, and increased capital flows into North American and European real estate markets. However, the focus at MIPIM was on adapting to both intrinsic and extrinsic structural changes. Discussions this year were very often about evolving operating models to target new customers, geographies, and risk profiles, transitioning from investor-allocator to operator, and most frequently, leveraging data, analytics, digital, and artificial intelligence (AI) to enhance efficiency and effectiveness across the real estate value chain.
The AI opportunity
AI in real estate was a hot topic at MIPIM, with McKinsey analysis suggesting that generative AI could bring $110-180 billion in efficiency value, potentially improving net operating income (NOI) by 10% for individual players. We have certainly noticed that conversations have shifted from 'what' and 'when' to 'how' and 'where'. Even those who previously adopted a follower strategy in technology and innovation are now exploring AI use cases.
McKinsey hosted a panel session focused on the ‘how’ and ‘where’, with our experience showing that businesses often struggle to turn good, innovative technology ideas into successful implementations which deliver value.
The prioritisation and selection of technology use cases must be bespoke for each business and anchored both in the specific priorities and pain points of the business, and in the expected ROI. The utility of each use case varies across companies, depending on their strategic focus, strengths, weaknesses, and future ambitions. That said, five areas frequently discussed and prioritised are:
- Asset management: Using AI to digitize unstructured data like paper leases, creating a comprehensive platform for asset data. This improves efficiency, reduces errors, and can drive revenue by capturing missed opportunities
- Investment screening: AI tools can analyse vast amounts of data to identify potential investments based on forecast returns, improving the quality and speed of investment decisions
- Tenant experience: Enhancing tenant experience through digital platforms and AI-driven solutions can improve satisfaction and retention while reducing operating costs. These tools can also identify opportunities for additional monetizable services
- Pricing engines: AI algorithms can determine optimal pricing strategies by analysing market data, property attributes, and historical trends, significantly improving income and optimizing vacancy levels
- Decarbonization models: AI-powered models can address informational and computational challenges in decarbonizing large portfolios, enabling profitable decarbonization
Why do some digital implementations fail?
The second main topic of discussion this year was the frequent failure of digital implementations: Even after identifying the right scope and use cases, execution remains challenging. A common issue is the disconnect between different parts of the business:
- Separation between business and technology: When technology teams select and drive use cases without proper engagement from the business, the result is often a tool that doesn’t meet business needs, or doesn't adequately solve problems
- Separation between c-suite and technology: Without ongoing connection between the c-suite and technology teams, the final product can diverge from the business’s evolving needs
The solution lies in creating an operating model that integrates technology delivery with business needs. This involves seconding high-potential business people to technology teams to act as links and representatives, ensuring alignment and effective communication.
However, even when technology is delivered successfully, the link to value can often be missed. Another related recurring theme at MIPIM was the challenge of measuring and realizing the benefits of technology implementations. Establishing a baseline and a plan for banking benefits is crucial. This allows businesses to measure the impact and know when and how to realize the benefits, whether through reallocating team members or identifying the signal of revenue gains within the noise of other factors.
Despite the gloomy weather in Cannes, it was energizing to see many industry leaders viewing the current market state as a catalyst for change. The secure revenue of long leases has for so long masked the risks of not digitizing. However, the pace of improvements and proven use cases means that those not deploying tech at pace now risk being left behind. The industry must steer hard to avoid the looming iceberg of inaction and embrace the necessary changes.