José Carlos Alemán
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Tech a Great Opportunity for Commercial Real Estate in Mexico

By José Carlos Alemán | Wed, 02/23/2022 - 13:00

Residential tech startups have been shaping the real estate sector in Mexico for the last five years, as companies like Homie or Truehome entered the market. Although the opportunity to continue creating value is still immense on the housing side of the equation, there is a huge opportunity in the commercial[1] sector as well for both investors and entrepreneurs.

Even though the commercial sector appears to be more sophisticated and professional than residential, there are some pain points to overcome to improve the transactional process and yet, very few solutions. The pain points for commercial real estate are concentrated in two big categories that I will try to slice and dice in the following paragraphs: lack of efficiency and transparency in transactional processes and access to reliable data.

Lack of Efficiency, Transparency

In the last 10 years, the commercial real estate industry in Mexico has evolved from being mostly made up of family businesses to an ever-growing number of more sophisticated companies, in terms of their financial and operational understanding. Mexican Real Estate Investment Trust (REITS) and pension funds have paved the path through which the market has been transacting. In this respect, they have made huge efforts to take the whole industry to the next level by installing corporate governance and investment committees in their own organizations and demanding the same for those that are fundraising, especially CKDs. However, although they still transact, along the way it seems that something has stalled.

Currently, the totality of the commercial real estate transactions in Mexico are made by traditional means; that is, with a brokerage agency mediating between the buyer and the seller. Naturally, it is in the best interest of the broker, the seller, and the buyer to close the deal quickly and, yet, the selling process takes months (or even years). Administrative procedures tend to be highly bureaucratic, mostly because they take place within a low-trust society. This, in turn, is compensated (by the broker) with a wide array of legal and nonlegal instruments that serve as warrants for both the seller and the buyer: nondisclosure agreements, letters of intent, assessments of the real value of the property or of its investment highlights, so they can be communicated to the potential buyer. While this lengthy and bureaucratic process takes place, the acquirer never really knows whether the asset is in dispute over ownership rights or other legal or family-related issues. At least not until they start their due diligence.

The lack of transparency and efficiency opens a huge opportunity for technology. Firstly, technology can automate and standardize processes and market data to maximize the time that potential acquirers spend searching for investment opportunities. Secondly, the interaction between sellers and potential buyers could have better visibility of the sales journey, thus, more transparency in the transactional process. Thirdly, a platform or marketplace in which investors, either institutional, family offices, or high-net-worth individuals can gain access to on- and off-market properties or investment projects is essential. Currently, these opportunities are not public or are highly segregated among different listing sites that are more focused on the residential sector, meaning the information related to commercial properties is not presented in a way institutional buyers would prefer to see it.

Diving Deeper Into Marketplaces

In more developed economies, like the US or the UK, marketplaces have been evolving to transact with almost every service or product that we can think of. This trend has rapidly spread to every part of the world. And I am not talking about Amazon only, which is one of the biggest and more versatile marketplaces; 10 years ago, the idea of letting a stranger stay at our house or buying a car through an app (like Kavak) was out of the question. Now, it is completely natural to us.

Shopping through digital platforms has become part of our daily lives, and the types of products and services we can buy is growing fast. Today, we can certainly aspire not only to buy small products or services, but houses or even office buildings and logistics warehouses through a marketplace. As Evan Williams says in "Platform Scale" by Sangeet Paul Choudary: "Today, we all understand the internet business is not the software business. We strive to build networks and platforms."

Access to Reliable Data

Information and quality data have always been critical to the decision-making process, not only in real estate but in other industries as well. Organizations, such as Real Capital Analytics, CoStar, or Green Street Advisors, have transformed the commercial real estate sector in the United States into a more transparent financial business, triggering capital inflows from all over the world. Market, financial and property data are crucial to fairly compete in a more professionalized market in which there are more sophisticated players with "deeper pockets" looking for better opportunities.

Currently, there are a few tech solutions in Mexico that provide reliable market data. Nevertheless, there is still plenty of work to do, not only in terms of placing data in a platform but standardizing the way we measure, calculate, and model such data. There are supporters and detractors of these kinds of initiatives. It is not easy to get everybody on board when there are conflicting interests. Today, there are still real estate professionals who firmly believe that keeping information hidden helps them maintain some sort of power. The reality is that data and information are becoming commodities in a world where access to model processing is becoming easier and faster. The value-added item is not the data itself but the way you use it and model it to make better decisions. I bet that in the long term, market data for real estate will be available for free.

 

[1] According to Investopedia, Commercial real estate is property that is used exclusively for business-related purposes or to provide a workspace rather than as a living space. Most often, commercial real estate is leased to tenants to conduct income-generating activities.

Photo by:   José Carlos Alemán