Fresh off the 2018 Midterm Elections, I would like to talk about the incumbent advantage. But I am not going to be talking about politics here. As we are in the early innings of real estate technology adoption, we are seeing new tech-enabled platforms enter the space. Many of these platforms are challenging the traditional incumbents in the space, ranging from service providers to hardware to property management systems. Some of these groups have been around for decades and are deeply engrained in the property management industry.

In the American political system, the challenger only needs to beat the incumbent by one vote to gain control. However, in the “political system” of property managers, to unseat the incumbent, the challenger needs to win by a landslide. This means that the challenger needs to offer a product that is better than the incumbent, easier to use and learn, more cost effective, proven to increase revenue, and in some cases aggregate, analyze and provide data insights previously not possible. A challenger that checks as many of those boxes as possible will have the best chance to unseat the incumbent and gain more customers.

In the political world, incumbents have many advantages over the challenger, including name recognition, control over government policies, existing campaign bases (scale), and voter’s risk-aversion. In property management companies, the incumbents have many similar advantages.

Name Recognition: Property managers may be weary of the challenger, if for no reason than not knowing about this new group and what it does. For challengers, it is important to provide property managers with a concise overview of the product and benefits to the property manager. It will take effort, but as property managers continue to see product updates and other peers using the product, the challenger will start generating buzz.

Control: Many legacy property management systems control the spigot of new platforms that can integrate seamlessly within the system. In multifamily, companies like Yardi and RealPage are two of the most dominant players in the property management system industry. These companies control most of the data and many of the workflow processes. In order for challengers to work seamlessly within those systems, they need to spend significant time and capital. This is an important consideration because challengers will face questions about the integration with these systems (if needed). A challenger that does not integrate (or find a novel workaround) with these systems will not obtain enough “votes” to unseat the incumbent as they may offer a product that duplicates data entry or other processes.

Existing Scale: The incumbents have an existing customer base that allows them to price their product competitively. These competitive prices put pressure on the challengers to grow, as they may have to forego profitability for some time in order to pick up enough customers to achieve similar economies of scale. If the challenger is going to charge a higher price than the incumbent, then the property manager will want to see that the challenger’s product is better than the incumbent’s product. The magnitude of this differentiation will depend on the disruptive nature of the challenger and the ability to fulfill the unmet needs of the property managers.

Risk-Aversion: Many incumbents are deeply entrenched in the property management company and the cost of switching from the incumbent to the challenger may be high. These costs could include start up or cancellation fees, time and effort for training, and the risk of disrupting normal operations during the transition period. Further, what if the challenger’s product does not work as well as they said it would? For these reasons, property managers are more risk-averse to switching providers. Challengers need to be aware that it may take some property managers a significant amount of time to decide on unseating an incumbent. Therefore, challengers need to do what they can to reduce switching costs, ease transition, and provide upfront and on-going training.

I believe the real estate industry is in the early innings of technology adoption, and more property managers are going to be open to “voting out” the incumbent with new, innovative technology solutions. With a surging community of entrepreneurs in PropTech, more concepts are being created and more companies are iterating off existing ideas as they see opportunity in this space. I absolutely love to see this! However, for successful adoption in property management, these challengers need to distinguish themselves from the incumbents, showing a roadmap for easy integration, NOI expansion, and/or workflow efficiencies.

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