The Impact of E-Commerce on Real Estate

Article excerpt

A took at the forces changing the way America lives and works and the implications for the real estate industry

"The world of the soft-the world of intangibles, of media, of software, and of services-will soon command the world of the hard-the world of reality, of atoms, of objects, of steel and oil, and the hard work done by the sweat of brows."

Kevin Kelly, New Rules for the New Economy, 1998

The real estate industry has experienced many setbacks over the years - the economic roller coaster of cyclical boom and bust, "credit crunches" when financing completely dries up, sudden changes in government land use or tax policy, and physical destruction as a result of wars or natural disasters.

But never in its history has the real estate industry faced a threat to its fundamental role in society - providing physical space for people and firms to perform their day-to-day activities. It is only in the last few years, as the use of the Internet has spread and been adapted to commercial transactions that the true nature of this threat has begun to emerge.1

This manuscript explores the e-commerce phenomenon and why it is so appealing to business firms and consumers. It then examines the nature of the threat to real estate and speculates on the magnitude of the impact on each property type.

WHAT IS E-COMMERCE?

Electronic business (e-business) is the use of the Internet and other electronic devices to operate and manage businesses.z Electronic commerce (e-commerce) is e-business involving a purchase or sale transaction that occurs electronically.

Electronic transactions involving the sale of products or services to retail customers are referred to as "Business to Consumer" or B2C.

Transactions conducted between business firms are called "Business to Business" or B2B. Figure 1 illustrates the process by which both B2C and B2B activities occur.

B2C activities, including payment for goods or services, are conducted through the Internet directly with the consumer. The delivery of the goods or service ("fulfillment") may be handled directly by the e-firm or by contracting with a logistics firm (e.g. UPS, FedEx, etc.). This interface is generally facilitated by the use of an "extranet," a dedicated portion of the Internet that connects an e-firm with its suppliers and customers. Either the logistics firm or the e-firm may operate the extranet.

The e-firm also may use the web3 to assist in producing and distributing goods or services. In the case of a manufacturer, this may involve an "intranet" connection within the firm with employees (and computers) involved in the marketing, production, and distribution process. Since many firms are outsourcing many of their non-core activities, the process also may involve an extranet connection with sub-contractors and suppliers.

WHY IS &COMMERCE SO APPEALING TO

BUSINESS FIRMS?

Most people think of e-commerce in terms of B2C transactions, largely because of the intense media scrutiny and the large ad budgets of the B2C firms. As indicated in Figure 2, however, 80 percent of e-commerce is currently B2B and its relative position is expected to increase over the next five years.

Improves Operating Efficiency

The rapid growth in B2B is due largely to a significant increase in firm operating efficiency made possible by the web. There are many reasons for this-shorter production cycles, higher employee productivity, better inventory management, and more direct control over distribution channels.

Many large firms such as GE, Ford, and General Motors are rapidly transforming their entire operations into Internet companies in which the web controls or influences virtually all aspects of their operations.

Lowers Investment Costs

Another major attraction of being an e-firm is the role of the web in dramatically lowering the amount of investment capital required to produce a given dollar amount of revenue. …