Technology is commoditizing physical space. Real estate owners and operators must adapt to remain relevant.

Historically, real estate assets enjoyed a set of advantages that, taken together, worked to preserve their value and limit the amount and type of competitors faced by their owners. These advantages include:

1. The importance of location as a key differentiator between assets, grounded in the scarcity of central and differentiated locations. A location’s value is derived from the level of accessibility and visibility as well from its ability to lend credibility and market positioning to its tenants;

2. The information asymmetry between owners of large asset and their tenants or potential competitors. Those on the inside had exclusive data on pricing and occupancy as well as other proprietary information related to planning and operation that those on the outside could only obtain at a considerable cost, over a long period of time, if at all;

3. The high switching costs for tenants bound by long-term contracts, yet-to-be-amortized capital expenditures, and with limited access to information about alternatives.

4. The scarcity of capital and of providers of capital. Meaning that established players had scale and relationship advantages over smaller or newer participants; and

5. In some cases, the ability to maintain (legal) relationships with related authorities and benefit from unique access and incentives that are not available or known to new or smaller market entrants.

Technological and social developments are undermining each of these defenses. They diminish the importance of location by facilitating remote work and change the way in which we shop and socialize; they democratize access to capital and information; they introduce models of shared and on-demand usage, reducing tenants’ switching costs; and they change the way in which demand is generated, redefining real estate visibility and accessibility.

The crumbling of traditional defenses puts many real estate assets at the risk of being commoditized — undifferentiated and dependent on online aggregators and tech operators. This brings to mind the Smiling Curve, originally used to illustrate how profits (“value”) are distributed along the supply chain of the electronics industry.

The curve shows how the commoditization of physical products works to shift profits from those who build and manufacture (the middle of the supply chain) towards those engaged in R&D and concept development (beginning of the chain) and those engaged in sales and customer support (the end of the chain).

For example, value in the supply chain for personal computers is captured by those who develop proprietary software and components and those who specialize in marketing and online sales. Those who actually “build” the computer capture a fraction of its value.

Developers and traditional operators are at the risk of becoming stuck in the middle of the supply chain, with profits flowing to ventures that specialize in developing attractive concepts, brands, and technologies on one side and those who specialize in aggregating and marketing inventory on the other.

This means that the overall yield extracted from real estate assets may rise, but a growing part of it will come from non-traditional business models and captured by new or innovative players. Ultimately, on-demand “space as a service” might replace ownership and long leases altogether in many segments.

The automobile industry offers some guidance: Long term commitment shifts towards on-demand usage, and software companies are eating incumbents.

Funds and owners that focus on the value and operation of individual assets and lack the mandate or the scale to acquire or develop broader capabilities will be at a disadvantage. The ability to create synergies between assets within a portfolio is no longer just an advantage, but a necessity. The ability to innovate and differentiate is no longer an advantage; it is critical.