AI is rapidly evolving, impacting a wide array of businesses, including commercial real estate. In our latest In Conversation, ARA CEO Stanley Iezman and Head of Research Sabrina Unger discuss the impacts AI could have on real estate, from how market research is conducted to the sectors that stand to benefit from the technology. 

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Stanley Iezman: Let’s start with the big picture: What is AI? 

Sabrina Unger: Let’s put it into layman's terms, because I am a layman when it comes to AI. Effectively, AI, artificial intelligence, is a helper that learns from data and experience. I think the simplest way I can explain it is: you have a small child, and you want it to be able to recognize a cat. So you show it – you’re not going to do this with your real child – but you show it hundreds and thousands of pictures of a cat. It has little pointy ears and a long tail. The system, “the baby” in this case, starts to learn: This is a cat. I recognize these components as a cat. And then when you throw a dog picture in there, it says, I don't know what that is, but I know it's not a cat. And so it's effectively learning through experience and then helping you identify, segment, and analyze. It just takes that experience and then leverages it into pattern recognition and relationship analyses. 

I think what people may fail to recognize is that AI has been a part of our world in some form or fashion for quite a while. If you go into Google and you search for something and it shows you targeted ads, that is being powered by AI. If you have an Alexa and you are saying, Alexa, turn my lights on, that is powered by AI.

It has existed for some time. I think what's really creating the buzz is sort of the leaps and bounds that are suddenly coming to the forefront with this technology. But one of the things that I've heard and I think is powerful is that AI is not a “data-in, miracles-out” tool. There are definitely limitations and learning curves.

SI: We’re talking about AI applications, in business, and here at our own firm today. But what are the non-business uses of AI that you see that are out there, before we get into the business uses, because actually this is probably the more interesting conversation?

SU: : This is the most fun, right? I think, again, thinking about whether you have a Dot or an Echo or an Alexa in your home. How satisfying is it to ask Alexa, Hey, Alexa, what's the temperature outside? And she'll tell you, or What's the time? or setting a timer. There are all these little ways that it's making our lives easier, and it already exists.

But I think an area that I'm personally really excited about is the potential for AI to help in industries like healthcare. Think about a scenario where AI can analyze hundreds or millions of anonymized family histories, test results, x-rays, and is fed your data, with your permission, with your doctor, and without having to do any other tests, can identify that you're predisposed for certain types of cancer, identifying things earlier, treating things earlier.

It could literally save thousands of lives. I think everyone knows someone that's been affected by cancer. The ability for a machine to be able to analyze millions of data points and do that much quicker than the human touch, I think that's really exciting. And I don't think we're that far away from it.

SI: So how pervasive do you think AI is going to be used in the business world and in real estate? Because we're getting emails and calls from every vendor in the country asking us to take a look at their new product. What do you think it's going to look like?

SU: Real estate as an industry, we're not necessarily known for being on the cutting edge of every technology. But I think with AI, our lag in adoption is excusable. And I think the reason for that is, if you think back to the earlier example about the baby learning to identify the cat. It's able to do that. An AI system is able to learn from those patterns, because the quantitative data – in this case, the two pointy ears, the long tail, the little nose, whatever it is – they’re all consistent. The cat can be different colors, but all of those quantitative data points are the same. 

Real estate is not a homogeneous asset class. We can feed the system all this data on every office building in downtown Los Angeles, but every building is unique, it has different floor plates, sizes, vintage, when was it renovated, who are the tenants? There’s a lot more to analyze than just the singular data points. Because we're not a homogenous asset class, it takes much longer to prepare the right data for AI so that what you're getting out of it can be actionable. 

SI: San Francisco was a city that, several years ago was in the death throes, and everybody was writing off San Francisco. All of a sudden now AI is creating incredible demand and employment. How do you think AI is going to impact the growth of cities, jobs, businesses, and are there going to be winners and losers in this in the real estate industry? 

SU: Let’s take the San Francisco example. AI, the companies are signing office leases there because that's where the greatest concentration of tech talent in the world is. If you're on the forefront of AI technology, you need that type of labor and talent, and so naturally you're going to gravitate towards San Francisco. Just like any other new technology, there are going to be several companies that just knock it out of the park and really become the de-facto synonymous company with AI, and then there will be a lot of companies that either get acquired by those big groups or fail. 

That's just true of the tech cycle in San Francisco in general – it is creating real demand. Is it going to create the next Apple or Google? It's possible, but it's going to be one out of 200 companies, not 200 out of 200 companies. So that's what it'll do for that local market. 

In terms of job creation, there are a whole host of skills that are going to be needed when it comes to implementation of AI, and since we're just scratching the surface, I think it's arguable that we will see a real demand for that type of labor. Although where it evolves from beyond sort of the traditional tech centers of the world is really, I think, contingent on the businesses and the different sectors and how they adopt AI and how much growth potential they assigned to that. 

SI: So let's pivot to ARA for the moment. How are you thinking about AI with us? And what are we doing? How are we thinking about that in the processes that we use?? 

SU: On the research side, we're certainly leveraging it to analyze the millions of data points that we have for markets, submarkets, and individual assets. It’s removing the human element of analysis, it’s allowing us to look at a lot more data, a lot more quickly. And instead of taking time to aggregate data, which is a low-impact function, and instead taking the time to analyze the output, question what’s coming out of it – I think that's making us much better researchers. 

On the asset management side, low hanging fruit, an AI system can scan every single lease we've ever executed and say, here are all the existing co-tenancy clauses with all our existing tenants, or alternatively, we signed a lease with tenant A 15 years ago, and this is how many rounds of revisions on the lease we had to go through. We can start with that version of the lease and save ourselves time, that makes us more competitive in the market. There are a lot of low-hanging fruit applications when it comes to taking processes that are manual and time consuming and instead allowing our professionals at ARA to spend their time on activities that really moved the needle, so interpretation and application of the findings.

SI: And recognizing, of course, that privacy of all of that data and those documents has to be built within a system that is totally contained within ARA, not on the web.

SU: I think that is a critical point, which is that compliance and legal implications of this. Nobody wants to be in a position where they're feeding data into the cloud of a system and somehow it gets used by others, by competitors, and so that's why we're focused on essentially having something that's built in house that stays within the walls of our business and isn't feeding back out.

So we're getting all the power and benefits of the open AI system, but it's a one-way flow of information.

SI: And recognizing that as we're talking about AI, that we're at the beginning of the beginning. How do you think that AI is going to be impactful from an investor standpoint?  

SU: I think we should obviously think about what it means for demand for different types of real estate. And the most obvious winner is data centers. AI is creating a lot of data, it’s processing a lot of data. The latency or the speed at which it can give you back information is really critical. So data center demand, a physical location to be able to process that, is going to be really important. 

I also think any real estate sector that has a people or customer service element, so multifamily, residential rentals, hotels, maybe health care, anything that can customize your experience when you come in, make your process smoother, that's going to benefit operating margins. I think that's a huge opportunity. 

In a hyper-adoption scenario, so maybe we're jumping 15 years in the future, or however long it takes to get there, in a hyper-adoption scenario, you could see the destruction of certain types of office-using demand if some of those certain functions get completely outsourced to AI. But of course, the silver lining there is it should create different types of office-using jobs that are just maybe higher skilled because they're having to interface with the AI system. 

SI: So this has been a great conversation about AI, and we really appreciate you sharing with us all these conversations about how you think it's going to be utilized and how we may be able to use it within our business.

We're at the early stages of this. We're at the nascent stage of really what this is going to evolve and look like. And so we're excited to be able to talk about this again. 

This transcript of the ARA In Conversation discussion has been edited for clarity.

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