Inflation is dead and even in a booming economy, income growth is likely to be in single digits. That cannot compete with the 20%-plus offered by new technology firms - which is why share prices are in the basement. Property companies also stand condemned because they cannot even cover the real cost of their capital. Ironically, technology could be one way to save the real estate sector.
The message is seeping through that property companies must change their culture to survive. 'They have to stop thinking as feudal landlords,' says Peter Kershaw. He jumped ship to run the European arm of HQ Business Centres - the kind of operation put forward as one route to survival.
A few big names have started to move but most are still lagging. Dot.com companies raise billions by offering loyal groups of online users, says Kershaw. Yet every landlord has a captive market of tenants. These can generate massive extra cashflow if persuaded to buy services such as Internet connections.
'Buildings can and should be treated as portals for business,' says Rosie Feenan, head of UK research at Jones Lang LaSalle, who shook up a packed audience of investors and landlords in the Millennium Dome a few weeks ago with such revolutionary views. She sees new technology 'threatening the very foundations of our property industry'.
If conventional firms do not catch on, a new generation of 'cybersavvy' players will move in. The service providers themselves may take over the market, offering buildings as an adjunct to the all-important online serves.
Investors are looking for leads from the US, where once-rampant real estate investment trusts are in disarray after negative returns for the second year in a row - the first back-to-back losses in the REIT Index since 1974. One glaring exception is the Cohen & Steers Special Equity Fund, which made a 28.76% return last year, outperforming even the main stock market index.
It achieved that by concentrating on companies like HQ Business Centres and OnSiteAccess, which provides Internet links to office tenants. 'We have created a new sector in real estate - services and technology,' said the annual report to shareholders. 'The greatest new revenue opportunity for landlords is to provide broadband services to tenants.'
Intermediaries have already made their move. Insignia is investing 20m pounds in Internet projects selling services to thousands of tenants it manages for big landlords. CB Richard Ellis is launching a facility for tenants to run their businesses more efficiently by accessing all the software they need online.
Feenan jokes about 'monetizing virtuality in the face of disintermediation'. But she is deadly serious that both assets and landlords must change. High-fliers like HQ, Regus and MWB are not property companies but service sellers. Others may need to follow, renting out facilities such as the wires running into their assets. JLL has even invented a 'wired' lease to tap this cashflow.
Arlington is already far along this path, with a separate subsidiary run by Howard Bibby to capitalise on services to business park tenants. On a smaller scale, Moorfield is planning a web hosting centre and investing in property-related dot.com ventures - probably testimony to management by a couple of bright, young former City whiz kids. The crucial test will be whether this broadening of approach spreads. Buying dot.com companies is not enough. That just substitutes one investment for another unless they service tenants.
'We build hotels, which now run networks of wires to every room,' says John Andersen of Burford. 'There is no reason why we could not rent out the services.' Modern, flexible warehousing could even see landlords widening boundaries to become logistics companies. 'We could be renting out by the week,' he says.
Forward-looking young leaders like Jamie Dundas of MEPC offer similar hope that traditional rigidity is changing.'I have long said that rental growth in a low-inflation environment will not be enough to satisfy investors,' he says.
MEPC has gone beyond the well-publicised shake-out of its portfolio, joining forces with Regus as an entry into tenant services. The partnership will buy corporate property and lease back on flexible leases, selling whatever services occupiers demand.
Martin Barber of Capital & Regional is so convinced of the new order that he has proposed dropping 'Properties' from the company title. 'We are a service company rather than a property company,' he says.
That may include adoption of Internet techniques such as a web portal for his shopping centres but mainly hinges on a change of attitude which stresses the need to work in partnership with tenants, helping drive their businesses.
Surprisingly, Kershaw believes major property companies will break out of old rigidities and survive. 'I just hopes it takes a while, so I can get lots of business,' he jokes.
Barber is just as confident that real estate skills will remain in demand - but they will be part of a broader picture. C&R, for instance, is putting six of its shopping centres in a pooled fund with PRICOA because they now require marketing and retail expertise to progress. The other four still need property skills and a different type of capital to reach this level of maturity.
The message appears to be that property companies will survive as long as they change the the symbiotic relationship with tenants. They can earn enough to satisfy investors - particularly when the technology bubble bursts - but they have to become partners rather than landlords.