From Store Fronts to Data Fronts: Unlocking Retail Real Estate's Full Potential With AI

Prelude

The commercial real estate, particularly retail subsegment, has undergone significant changes since the 2008 financial crisis. First, real estate emerged as a mainstream financial asset class for investors thanks to availability of low-cost capital. Second, traditional brick-and-mortar retail was impacted by the rise of e-commerce (and also temporarily but severely by Covid-19 lockdowns).

Today, e-commerce sales make up about 20% of total retail sales in most developed markets including the Netherlands but in the longer run e-commerce is expected to continue growing whereas physical retailing is expected to slow down.

Despite the anticipated continued growth of e-commerce, it would be too soon to write off traditional physical retailing. After all, its fundamentals are strong as people still enjoy in-store shopping for a variety of reasons including touch & try-on of the product, leisure, socializing, instant gratification and more.

In our view, one of the key hurdles faced by brick-and-mortar retailers is the uneven playing field. E-commerce companies know far more about their customers through constant data collection and analysis, whereas physical retailers lag behind. A critical decision such as opening or shutting down a store is still done with only sporadic data collection, unsophisticated analysis and mostly on gut feeling. Proptech promised to change this but struggled to deliver on the promise as real estate businesses have too much fragmented data spread across too many excel sheets, software systems, Pdf’s… While the abundance of so much data presents a genuine opportunity to regain a competitive edge, the challenge remains that such data often goes untapped in making better decisions.

Today, we are at the dawn of a new technology that is about to change all this and level the playing field between e-commerce and physical retailing. That technology is called Artificial Intelligence (AI).

What really is AI?

In the most simplistic and broadest context, an AI is a statistical model that makes predictions based on patterns in data. It is trained on large datasets so it can generate accurate answers to questions. The key technology that enables this is called transformers. Transformers break language down into tokens, usually individual letters or words, and learn the statistical relationships between tokens. This allows the AI to predict the most likely next token when generating text. So in a simplified view, transformers tokenizing letters and forecasting the next letter is how AI systems are able to generate human-like text and respond to questions. There is a helpful visual explanation of the process here if you want to understand it more deeply.

AI refers to a broad range of capabilities that aim to simulate human intelligence. On the simpler end, AI can automate mundane tasks and follow programmed rules. More advanced AI can perform data analysis, recognise patterns, make predictions, hold natural conversations, and optimize complex systems. A key aspect of AI is its ability to learn over time, similar to how humans acquire knowledge. As AI systems ingest more data and iterate on their own algorithms, they continuously improve at the tasks they are designed to perform.

If you want to dive deeper into understanding AI, here is a useful article from Google.

How will AI impact Retail Real Estate?

AI is poised to revolutionise the retail real estate industry in the coming years. Specifically, AI will change the following disciplines:

Lease Management and Administration:

● Automated Document Handling: AI can process and organize vast amounts of lease documents, extracting essential information and making administrative tasks more efficient.

● Contract Analysis: AI-powered tools can analyse lease agreements, identify key clauses, and draw insights on the portfolio level.

In-Store Analytics:

● Footfall & Visitor Analysis: Facial recognition technology (a branch of AI) can be used to accurately count footfall traffic and analyse customer profiles (age, gender, visit frequency, customer preferences…).

● Retail Offer Optimisation: Using AI, retailers can analyse product placements and optimize store layouts accordingly.

● Security and Loss Prevention: Advanced AI algorithms can enhance security cameras, helping to prevent theft and enhancing overall security.

Building Management & Analytics:

● Smart & Efficient Buildings: We are likely seeing the emergence of the first truly “intelligent” buildings that can be controlled by voice commands. Such smart buildings using IoT sensors can analyse usage patterns and automatically adjust lighting, heating, and cooling systems to optimize energy usage, saving costs and making the building more sustainable.

● Preventive Maintenance: AI can predict when infrastructure like HVAC systems will probably fail or need service. This helps prevent downtime and extends the lifespan of equipment.

Tenant Experience and Services:

● Virtual Assistants: The capabilities of virtual assistants to conduct natural conversations will offer immediate responses to tenant inquiries, including coordinating maintenance requests.

● Space Utilisation: AI can analyse how tenants use the spaces, helping to make necessary adjustments or offer services that enhance tenant satisfaction.

Market Analysis and Investment Decisions:

● Predictive Analytics: AI can process and analyze market trends, predicting future market movements and helping investors make informed decisions.

● Risk Assessment: AI algorithms can better assess the risk associated with particular investments by analysing multiple factors and historical data.

Valuation and Appraisal:

● Automated Valuation Models (AVMs): AI can quickly analyse multiple factors to give an estimated market value of a property, improving the accuracy and efficiency of appraisals.

● Enhanced Comparative Analysis: AI can more effectively compare similar properties, ensuring that valuations are more aligned with market realities.

The future is in the making. There will probably be many other uses of AI that we cannot foresee at the moment but one thing is for sure that AI will bring greater efficiency and insight across all key areas of Retail Real Estate.

Is AI a threat or an opportunity for Retail Real Estate?

Like other transformative technologies in the past, AI will probably lead to some job losses, especially in copywriting and customer service roles. Nonetheless, fears that AI will eliminate millions of jobs are overblown. Ultimately, unique human abilities like social skills, teamwork, and specialized trade skills are difficult for AI to replicate.

Furthermore, we should recognize that current AI technology is not some sort of Artificial Super Intelligence - it’s simply a sophisticated statistical model trying its best to predict the right answers based on the data it’s trained. This means that in practice, today’s AI technology is not an Auto-Pilot but instead a Co-pilot, augmenting employee productivity rather than replacing it.

Particularly, when we look at the potential application fields of AI in retail real estate, AI offers immense potential to help real estate professionals have a deeper understanding of their portfolios by quickly analysing large amounts of data and handling repetitive mundane tasks.

In summary, AI will make work more meaningful and productive for real estate professionals by freeing up their time to focus on high-value, strategic tasks, and possibly a better work-life balance.

Final Words

AI's impact on retail real estate will be both profound and foundational, offering a new paradigm where data-driven decision-making and predictive analytics become standard operating procedure. As we peer into this promising future, it's clear that AI will not just level the playing field - it has the potential to construct entirely new arenas where the retail experience is more personalized, efficient, and aligned with the evolving demands of society.

Retailers, investors, and property managers alike must thus remain agile and forward-thinking, ready to embrace the myriad opportunities that AI will undoubtedly present.

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