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Welcome to Thoughts on the Market. I'm Ron Camden, head of Morgan Stanley's US Real Estate Investment Trust and Commercial Real Estate Research. Today I'll talk about the ways Genai is disrupting the real estate industry. It's Tuesday, July 1st at 10:00am in New York. What if the future of real estate isn't about location, location, location, but automation, automation, automation. While it may be too soon to say exactly how AI will affect demand for real estate, what we can say is that it is transforming the business of real estate, namely by making operations more efficient. If you're a customer dealing with a real estate company, you can now expect to interact with a virtual leasing assistant. And when it comes to drafting your lease documents, AI can help do this in minutes rather than hours or even days. In fact, our recent work suggests that Genai could automate nearly 40% of tasks across half a million occupations in the real estate investment Trust Industry, or REITs. Indeed, across 162 public REITs and commercial real estate services companies or CRE. With 92 billion of total labor costs, the financial impact may be 34 billion or over 15% of operating cash flow. Our proprietary job posting database suggests the top four occupations with automation potential are management. So think about middle management, sales, office and administrative support and installation, maintenance and repairs. Certain subsectors within REIT and CRE services stand to gain more than others. For instance, lodging and resorts, along with brokers and services and healthcare, REITs could see more than 15% improvement in operating cash flow due to labor automation. On the other hand, sectors like gaming triple net self storage malls, even shopping centers might see less than a 5% benefit, which suggest a varied impact across the industry. Brokers and services in particular show the highest potential for automation gains, with nearly 34% increase in operating cash flow. These companies may be the furthest along in adopting Genai tools at scale. In our view, they should benefit not only from the labor cost savings, but also from enhanced revenue opportunities through productivity improvement and data center transactions facilitated by Genai tools. Lodging and resorts have the second highest potential upside from automating occupations with an estimated 23% boost in operating cash flow. The integration of AI in these businesses not only streamline operations, but also opens new avenues for return on investments and mergers and acquisitions. Some companies are already using AI in their operations. For example, some self storage companies have integrated AI into their digital platforms where 85% of customer interactions now occur through self selected digital options. As a result, they have reduced on property labor hours by about 30% through AI powered staffing optimization. Similarly, some apartment companies have reduced their full time staff by about 15% since 2021 through AI driven customer interactions and operational efficiencies. Meanwhile, this increased application of AI is driving new revenue to AI enablers. Businesses like data centers, specialty CRE services could see significant upside from from the infrastructure build out from Genai. Advanced revenue management systems, customer acquisition tools, predictive analytics are just a few areas where Genai can add value, potentially enhancing the $290 billion of revenue stream in the REIT and CRE services space. However, the broader economic impact of Genai on labor markets remains hotly debated. Job growth is the key driver of real estate demand and the impact of AI on the 164 million jobs in the US economy remains to be determined. If significant job losses materialize and the labor force shrinks, then the real estate industry may face top line pressure with potentially disproportionate impact on office and lodging. While AI related job losses are legitimate concerns, our economists argue that the productivity effect of Genai could ultimately lead to net positive job growth, albeit with a significant need for reskilling. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.
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