AI, Retail Real Estate, Value: 6 Questions

The Bezestein Bazaar, El Khan Khalil, Cairo, 1872, by John Frederick Lewis. Watercolour. The Higgins Art Gallery & Museum, Bedford

The Bezestein Bazaar, El Khan Khalil, Cairo, 1872, by John Frederick Lewis. Watercolour. The Higgins Art Gallery & Museum, Bedford

Recently there has been much talk of a ‘Retail Apocalypse’, with millions of square feet of retail space shuttering and the demise of many long term household names. The US and UK have been particularly heavily affected but the impact has been felt widely across the developed world.

Just across the US we are now seeing over 100,000,000 sq ft of retail space closing per annum.

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And online sales have been, for years, growing much faster than offline:

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Though still the overall penetration is not that high and varies markedly across countries.

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Looking at all of this positively many real estate people point out that the majority of people still prefer to shop, in shops. A recent US survey results are shown below.

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Further comforting the real estate industry is the sight of many previously ‘online only’ Brands opening physical stores. So we may have an industry closing a lot of space but ultimately it seems like ‘online only’ does not work and shoppers, by and large, still want to go to physical stores. Or that is the way the real estate industry likes to look at the market.

What we will discover over the next few years though is that they are both right, and very wrong. Yes, people will always like the experience of shopping but the current experience of shopping, with notable exceptions, does not have product/market fit.

A rising tide will not lift all boats, it will expose the naked.

Fundamentally, and this is the problem for real estate investors, not all retail, or retailers, are equal, and the difference in capabilities of operators is going to become more and more a key driver of returns. As with the office market, where one could previously ignore the particularities of occupiers and focus purely on the NOI, today and going forward the operator of that asset will be a major determinant of performance. Retail Real Estate is going to become an asset class where understanding the dynamics of the retail industry, at a very granular level, will pay of handsomely. 

Real Estate Investment as a numbers game is coming to an end. Our industry is morphing from being about selling a Product to delivering a Service. And that changes everything. You’re no longer buying into an asset class, you are buying into an ecosystem of variables, most of which are not real estate related, that combined, will determine short, medium and long term value.

Where though does AI sit in all of this? 

Below are a series of questions I put together for a panel discussing the impact of AI on the valuation of retail real estate.

1. We can see how AI changes things for retailers but how does it change things for shoppers?

The best retailers have been utilising AI for some time. The recent report from the MIT Sloan Business School ‘Artificial intelligence in Business Gets Real’ shows how the early adopters are doubling down on their AI investments, building competencies, and working to take AI to scale.

Principally retailers are working on understanding their customers at a deep level so that they can:

  • Make personalised product recommendations

  • Tailor the inventory in individual stores to better reflect the wants, need and desires of the local population

  • Optimise pricing

  • Deliver more targeted offers and deals

  • Reduce the incidences of fraud.

All of the above is of course aimed at delivering a more compelling shopping experience for customers, by better understanding the individuals drivers of consumption.

Mostly this data harvesting and analysis is being performed online, which is why the best online retailers (think Amazon or Alibaba) are so successful. They understand what I want, and make it extremely easy for me to purchase goods, any time of the day.

Providing customers with what they know they want is a very hard thing for anyone to do better than an advanced e-commerce company. 

What online is not good at though is ‘discovery’, the serendipitous finding of something I didn't know I want. And generating that frisson of pleasure when this occurs.

Which is why offline shopping will persist, albeit with a huge caveat.

And that is that the offline retailer has to make it a more enjoyable experience for me to get up off my sofa, leave my house, and travel to visit their store. And then, when I am there, know enough about me that this experience is tailored to me. Yes I know, this is all sounding very ‘me, me, me’ but the reality is that is what offline retail is all about. Delighting me, and whoever I choose to go shopping with.

Much of all this personalisation is made possible by carefully collecting the right data, with the requisite ‘Volume, Variety, Velocity and Veracity’ (the famous four V’s of data) to be able to answer the right questions that provide the answers to deliver this personalisation.

So how does AI change things for shoppers? By upping their expectations as to what a shopping experience is.

It was recently said, by the ‘Retail Prophet', Doug Stephens, in response to a question about millennials being fickle:

‘Millennials don’t suffer from shortened attention spans. Rather, they simply have a much higher sensitivity to things that are boring.’

That’s how AI has changed things for shoppers.

2. Amazon Go is pioneering AI powered automated stores - is this going to be a big thing?

You’ve probably seen the promotional video Amazon released, showing how the experience of shopping in one of their Go stores was different. You simply walk in, tap your phone to begin shopping, then pick up whatever you want, and simply Go.

Frictionless retail. Just pick it up and off you go. How easy it that?

Essentially this is only possible because of the incredible advances in the AI behind ‘Computer Vision’, which is the ability of computers to understand photos, videos or the world around them. Today, a computer can ‘see’ better than a human. This is the same technology behind many of the autonomous vehicles you hear about, and the ‘self driving’ capabilities of a Tesla.

In computing terms, this is now largely a solved problem. The technology will improve (it is mostly a function of computing power and the availability of training data) so these prototype small Go stores are very likely to grow in size over the next five years. They will be a big thing. Autonomous shopping will be a big thing.

Paradoxically the aim is not solely to replace humans in store. In fact new prototypes include open kitchens, where you can see your food being freshly prepared, right in front of you.

Remove the boring bits of shopping to concentrate on the product and service.

It is speculative at the moment whether or not Amazon will release this technology as a ‘Software as a Service’ product but if they do, close attention needs to be paid to who picks up on these new capabilities, as they will almost certainly be the most innovative retailers in the market. Possibly, even probably, they will enable a new range of entrants.

Critical from a real estate perspective will be whether your asset is equipped to enable a retailer to ‘go autonomous’. Could it be that, in five years time, not having such infrastructure will be like having an office building with poor broadband? i.e effectively useless.

3. Alibaba talk a lot about ‘New’ Retail, especially connecting offline with online shopping. And are huge investors in AI. How does this impact on real estate?

Alibaba is prodigiously good at AI. They are also prodigiously good at e-commerce. The two are connected.

80% of all e-commerce in China touches one or more Alibaba entity, as they control the 3 largest marketplaces in the world, the B2B (Alibaba.com), C2C (Taobao), and the B2C (Tmall). 

Simply put, this enables them to have almost perfect knowledge about the nature of demand across China, in real time.

They have opened 65 of their Hema branded supermarkets in the last year. They own 29 department stores and 17 shopping malls across the country. And through their ‘New Retail’ platform they are helping to digitise hundreds of thousands (yes, hundreds of thousands) of ‘Mum and Pop’ stores.

Jack Ma explained what he means by ’New Retail’ in a shareholder letter in 2017:

 “E-commerce is rapidly evolving into New Retail. The boundary between offline and online commerce disappears as we focus on fulfilling the personalised needs of each customer.” 

The key here is that not only does 80% of Chinese e-commerce pass through Alibaba, but a large percentage of the merchants also run Alibaba software in their stores. So the two way insight, between demand and supply, is something new within retail, and immensely powerful

How does this impact real estate? 

First, as above, it is vital that any retail asset that wishes to plug into this sort of ecosystem (Alibaba is not the only one, just the largest) is technically capable of doing so. 

Secondly, investing in ‘New Retail’ locations should mean investing in areas where retailers are likely to be more successful, as the level of data and AI powered analytics should enable better matching of demand and supply.

And thirdly, hunting out locations where ‘New Retail’ does not yet exist but is likely to arrive in the near future should offer good returns as the quality of the retail experience will improve as these new technologies and analytical capabilities are put into practice. Asset values should rise accordingly.

4. New retailers like b8ta - who say their mission is ‘Retail designed for discovery’ - provide a very different in store experience. What role does AI have in their business?

What actually is the point of a store today? What will it be in five, ten years?

Most likely, it will not be about product distribution. You used to have to go to a shop because that was where the goods were. Today you do not; they can get to you in a myriad of ways. Delivered to your home, or office, even to your car boot. Delivery has largely been solved. Sure, we still have issues of deliveries when you are not at home but one way or another, that will be resolved in the near future. In a drone delivery world, they would only ever deliver when you were in because the system would know, you are in.

Amazon in particular are spending vast sums trying to solve this ‘last mile’ problem, so it will be solved.

So what then is a store for? Prefaced like that it is obvious isn’t it? A store is for ‘discovery’ and fun. Finding out about things you didn't know, or more about things that you did. All wrapped up in a human-centred environment that is enjoyable and a pleasure to experience.

So how does AI help with that?

Enter the likes of b8ta. They started a store where they work directly with Brands, and act as a marketing platform for them. Each Brands products are displayed in dedicated areas, with Brand trained staff on hand to demonstrate and inform. Sort of like the Apple Store but for multiple vendors.

They are beautifully designed stores dedicated to presenting a Brands products in the best possible way. You cannot buy anything in store, the whole point is nurturing and positioning each Brand.

In the background every movement and preference of every customer is recorded; what Brands they looked at, if they looked at Brand X did they look at Brand Y, what questions did they ask, what did they ask for that was not there, and so on. All of this data is then analysed by AI and fed back to the Brands, together with suggestions as to how to refine, optimise and improve on every aspect of the experience.

This is the software industries ‘Build, Measure, Learn’ for stores.

Since launch in 2015 they have opened 78 stores across the US.

The clever bit though, is that they realised that designing these types of environments was complicated, so they started ‘Built by b8ta’ and now offer their software and systems ‘as a service’ to third parties.

This pay monthly solution includes checkout, inventory, point of sale, inventory management, staff scheduling services and more.

There are large Brands that can do all of this on their own, but there is also a long tail of companies where this is beyond their capability to deliver but nevertheless could benefit greatly from having access to it.

This is analogous to the office market, where the workplace is becoming a too difficult problem for many companies, who are then ‘low hanging fruit’ targets for Flex space operators to sell to.

AI is a great enabler, but it is hard. All companies can benefit from AI powered services but most likely, they will buy into a complete, turnkey solution. Who owns the solution could be sitting on a great deal of value. 

The OneMarket spinoff from Westfield is essentially mining the same seam of need. Off the shelf, managed, highly sophisticated AI powered services. No capex, no long delivery cycle, just go.

5. In the future will we all have personal AI’s that do our shopping for us? That understand our needs, wants and desires so well they just order what we want before we even ask for it? Do we even need shops in that world?

There is a meme going around the internet that a future Amazon service will be one where they send you two boxes each month. One is full of all the things that they ‘think’ you need or want, and the other is empty.

You simply keep what you want and put the rest in the empty box.

Pre-emptive shopping. They ‘know' you, so just give you what you want. And if it is your husband's birthday they will also give you a selection of presents that they ‘know’ he would like.

Now tell me that that is not a service that a large percentage of people would buy in to. Sure, there is also a large percentage of people for whom it is the devils work and they would hate it. But that is the point.

In an AI powered world we will start to know the difference between people and how they want to shop. Our job is then to give each party exactly what they want.

6. Thinking about the role of technology and AI what characteristics of a retailer should we pay attention to? How can we know who needs what type of space, and will they be able to pay the rent?

The starting point from a real estate perspective is to get to grips with what types of retailer one has in one’s portfolio and to make a judgement as to whether they are providers to group 1 or group 2 in the answer above? And then ask, are they setup for their market?

Knowing how well the retailers in your portfolio are ready, willing and able to make the most of this coming world is a key risk factor. Some will not be, in which case they are a bad bet, whereas some others are fully aligned and should be aided and abetted in their efforts in whatever way the owner of their stores can help.

AI is becoming more and more central to the operations of retailers, either handled by themselves, or provided by ‘SaaS’ providers like b8ta.

I would contend that where these types of retailers, and technology providers, operate is where the successful retail of the future will be. Online or offline is now irrelevant, everything is one. Online behaviour feeds offline and vice versa. And much of this data needs to come from the physical environments these companies operate in, be it a single store, or a giant shopping centre. The physical environment has to be able to be analysed, and has to be responsive. Data will increasingly inform how we setup, manage and optimise our physical spaces. They have to be equipped to enable this.

In summary then, AI is profoundly impacting the retail market because it is changing the capabilities of retailers to provide better products, services and experiences. And that is raising the bar for everyone. Owners of physical assets need to be fully au fait with the new needs the best retailers will have. Ideally they will work in partnership, as the often confrontational nature of landlord/tenant relations is damaging the ability to satisfy the end user.

The bottom line is that shoppers do not need shops to go shopping. They need to be made to want them. AI can help make that happen. 

Ultimately human + machine wins! 

Antony

Space as a Service: The Trillion Dollar Hashtag

The changes coming to the world of real estate, encapsulated by space-as-a-service (affectionately and somewhat ironically described hereafter as #SpaceAsAService), represent a trillion dollar-plus opportunity. Everything we are familiar with about how we design, build, occupy, manage and value all the spaces and places around us will change fundamentally over the next ten years. And this will happen whether we like it or not; these changes are being driven by technological advancements that are rewiring the world around us. They have very little to do with the real estate industry per se, but the real estate industry will have to bend to their will. The genie is out of the bottle, and there will be winners and losers. Many winners and many losers.

I intend to explain “what” is happening to cause the period of rapid change we have recently entered and that will persist for as much time as we can realistically predict. Then I will answer the question “so what”—what will the consequences be? Thereafter I will address the “now what” puzzle. In short, how do we ensure we are not on the losing end of this societal shift (as many will be), and what are the success factors we need to embrace to be amongst the winners in the coming real estate gold rush?

Please continue reading on Propmodo where this 6,500 essay is shown in full.

How should Landlords respond to Flexible Workspace Demand? Are you a Pig or a Chicken?

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CBRE Research recently put out a report titled ‘UK Landlords & Investors Embrace the Flexible Revolution’. In it they write, ’77% of survey participants are currently considering some form of flexible space provision’. Whilst UK centric one suspects the results would be similar elsewhere, especially in the US.

My first thought? Wow, #SpaceAsAService is now rapidly moving into the mainstream.

My second thought was about bacon and egg sandwiches…

‘What’s the difference between the Chicken and the Pig in a bacon and egg sandwich?’

‘The Chicken is involved but the Pig is committed!’ 

Knowing who you are as a Landlord is vital with #SpaceAsAService.

‘We’ll do flexible space ourselves’ is something one hears a lot from Landlords. According to the CBRE report some 35% of Landlords say they intend to self operate their flexible space. If any of those 35% are Chickens they will fail. The problem is that making #SpaceAsAService work is as much about mindset as a real estate problem.

Do you REALLY want to go from being ‘a rent collector to a service provider’? REALLY? The former is a very different type of company to the latter. Product companies are organisationally, financially, culturally very different to service companies.

In tech think of Google vs Apple; one is a service company the other a product one. and they have very different busines models, cultures and attitudes. Or take WeWork vs the UK’s largest REIT Landsec - they are from a different planet! Their customers, competitors, networks and ecosystems are all different.

For a traditional real estate company to become a successful #SpaceAsAService company is a HUGE challenge. One cannot be a bolt on to the other. Only Pigs will win in this game. Commitment is everything.

BUT being a Chicken might well be a much better move. This is not a good or bad issue. The point is, you have to understand what you are and what you want to be. If you are a Chicken then fine, but do not kid yourself that you are a Pig.

If you read the phrase ‘Real Estate is no Longer in the Business of Real Estate’ and immediately go ‘Yeah’ then do your own #SpaceAsAService - if not then partner with the best operators you can find.

If you see data analytics, IoT, AI, network effects, BIM, mobile apps, ecosystems, UX, Branding, B2C and hospitality as core skills within real estate then do your own #SpaceAsAService - if not, partner.

If you see your customer as being the name on a Lease, and your billing cycle as being quarterly, and your company is optimised for that, then partner for #SpaceAsAService.

Startups always moan about companies that don’t quickly adopt their products or services. “They just don’t get it” they say. This is almost always wrong. They get it perfectly well but their companies are optimised for their business model. Not the startups. And rightly so. That is why change is so hard; they are operated for business as it is, not as it might be.

Mostly, real estate companies are optimised for being Product/Rent Collector companies. As they should be. That is what has worked for several decades. Build or buy an asset, lease it, keep it or sell it. And many are very good at that; the concern is that many will forget what they are, and think their slick machine will work in a different world. It won’t.

And that is NOT a criticism. Optimising for what you are is what all good management does. But at times like now, when a market is ‘fundamentally’ changing, the chances of value destruction are greater (perhaps) than value creation.

The #SpaceAsAService world we are entering is much more like the Technology than the Real Estate industry, and in tech ‘winner takes all’, ‘monopoly’, ‘market domination’ are the AIM. Networks/Marketplaces are where the value lies. The best space, with no network, will not come out on top.

Successfully networks win because they become the safe, comfortable and painless solution to a need. And they grow exponentially; from no-one knowing anything about them to suddenly being known by everyone. But once established their value grows exponentially as well. People are tribal, we like to belong. Only Pigs will build #SpaceAsAService networks we want to belong to.

There will be many winners in a #SpaceAsAService world, Chickens as well as Pigs.

Just be sure you know what you are.

Proptech in 2018: Are we there yet?

The Avenue at Middelharnis   by Meindert Hobbema.

The Avenue at Middelharnis by Meindert Hobbema.

At the end of last year there was much talk about how 2018 will see mass take-up and implementation of proptech. This was going to be the year the industry leapt into the saddle and galloped off into the future. Proptech to the rescue!

Well, are we there yet? The answer is no. Sorry.

The economist Carlotta Perez has written (in her book Technological Revolutions and Financial Capital) about how investment in technology tends to follow a certain pattern. You see a huge buildup of investment in infrastructure and tools, what she calls the ‘Installation’ phase, and then this is followed by a surge of adoption, what she calls the ‘deployment’ phase. However, between the two there is a lull, usually involving a financial crash and subsequent recovery. She says of this pattern ‘nothing important happens without crashes’.

I think proptech is following this trajectory. We are seeing a lot of investment, and a lot of smart thinking, but truth be told, not that much adoption. Or at least adoption that is enterprise wide, pervasive and integral to underlying business models. Why? Because frankly the real estate market has been so good for so many years that carrying on as before is the modus operandi of almost everyone. And probably rightly so.

So don’t be disheartened by the slow progress. It is relative anyway; compared to 2 years ago proptech is on a rocket ship!

For four reasons I am hugely positive about the future of proptech, or more precisely the use of technology by all stakeholders within the built environment.

First, there is a lot of money sloshing around, looking for a home within this sector. Admittedly a large percentage is being directed at what is really FinTech (buying/financing real estate), and mostly it is outside the EU (China / USA) but nevertheless purse strings are being opened. I worry in the UK that large incumbents have contributed almost nothing to date, but that will be their problem long term. Most likely the UK real estate industry will adopt and implement non UK owned software; the best startups here will prosper anyway. The sad thing is that significant players in the UK will have missed out on a great opportunity. Maybe next year they will wake up. I doubt it, but that will not stop progress.

Secondly, the better industry players have grasped the nettle of tech inadequacy and are actively recruiting people who can bring them up to speed quickly. Those people are often encountering something of a culture shock as they come up against the reality of how real estate operates, but I know they are breaking through and establishing strong foundations on which they can build in the next few years. Sorting out data (really shockingly badly managed almost everywhere) is a priority for many as, to quote W Edwards Deming, without data ‘you are just another person with an opinion’. The major breakthrough is that the industry has acknowledged the issue, and for the first time is bothered about it. A big deal.

Thirdly, I am seeing some serious tech firepowernow being aimed at our industry. From computational and generative design, to computer vision, autonomous drones, modular construction, 3D printing, advanced materials, IoT, sensors, automation, data science and machine learning, we are developing beyond the trivial to the meaningful. A lot of this technology is sophisticated, powerful and game changing. In 2018 I saw the first real moves beyond ‘digitising the past’, and rethinking the entire value chain, workflows and value propositions of the industry. For just two examples, look at Skyline AI, from Israel and the work they are doing automating the valuation of every real estate asset in the US, and here in the UK the great work Gyana are doing in helping us understand the characteristics of locations in hitherto unimagined granular detail.

And fourthly, irrespective of our narrow interest in proptech and the real estate industry, technology in the widest sense is transforming the nature of demand from our customers, as well as the definition of who our customer is itself.

Flexibility is the defining characteristic of the future workplace (all workplaces), and much of that will be procured on-demand or via short term leases. Retail is bifurcating into a sector where you are either cheap and convenient or an experience or you are out of business. The vast middle of retail will be taken care of by Mr Bezos and friends. Industrial ‘sheds’ are becoming super high tech, robotic wonderlands where just a handful of people direct thousands of machines. And residential, driven by cost, is seeing the birth of what will be a huge new service sector, Build to Rent.

We are moving from a world where access is more important than ownership and services more desired than products. Witness Netflix, Spotify, Airbnb, Lime, Rent the Runway and Uber. This is of huge import for the real estate industry and proptech; these trends are changing the behaviours of all of society and the dynamics and drivers of location. Everything is being reimagined in Cities; needs must as urbanism grows, but technology is allowing all of us to live our lives in different ways.

Regardless of the desires of the real estate industry (notoriously good at thinking about what they, rather than the customer, wants) there is no area of the world around us that is not being changed by technology. And as it is, the marketplace for hardware, software and services that make the built environment a better place is growing dramatically.

So worry not that 2018 was not the year proptech really took off. The momentum is growing, the pressure increasing, for profound change. The reality is proptech is much smaller than we like to think today, but will be much larger than we can even imagine. Just hold on; we probably need that crash to catalyse real change, but it is coming.

CREtech Futures… What If?

The Geographer, J Vermeer, 1668-1669

The Geographer, J Vermeer, 1668-1669

You know that phrase ‘It’s different this time’ don’t you? And it never is, is it?

But what if, just once, within our industry, it turns out that it really is different this time?

What if all this talk about #SpaceAsAService and the real estate industry moving from being one focussed on selling a Product to one built around delivering a Service actually comes to pass?

What if, over the next 5-10 years flexible working really does become the defining characteristic of the office market?

What if a majority of companies employing less than 250 people opt for buying their occupational needs ‘as a Service’ and don’t sign Leases as such?

What if a majority of companies that employ over 250 people no longer expect them to turn up at the same office every day, but instead provide a wide range of spaces and places they can work from that are specifically tailored for the particular ‘jobs to be done’ of each and every person.

What if ‘the customer is right’ and that’s what they want, and if you cannot provide it, well they really can survive without signing a 10 year Lease?

Someone will give them what they want. Demand always induces Supply.

If this comes to pass, who wins, and who loses? The same people and companies as now, or is the apple cart about to be upset?

Could this be a change in market dynamics that blows up the existing order and lays down the foundations for an entirely new industry?

In my mind, the answer is yes. Marc Andreessen was right when he presciently wrote ‘Why Software is Eating the World’ in 2011. Smartphones, ubiquitous connectivity, Cloud Computing and Artificial Intelligence, just being the most prominent of a wide range of new technologies, are transforming every industry. And in so doing are fundamentally changing the nature of Demand for Real Estate.

The reason flexible working is growing like topsy is because the very nature of the work we do, and the way the economy is structured, is being redefined by technology. Things change when the barriers to change are removed, and technology is removing a whole heap of barriers.

So who wins? Paradoxically, it will not be those with the greatest grasp of the new technologies. That will be necessary, but not sufficient.

No, the real winners in this new world will be those who marry an understanding of exponential technology with highly developed human skills, and the knowledge and capability to leverage one to enhance the other. It will be people and companies who understand that they need to know far more than they do today about how their buildings are performing, how people are actually using them, and who exactly their customers are. And their customers will be everyone who enters their properties.

The winners will be those who can combine real estate knowledge with technology, data, analytics, empathy, anthropology, design and hospitality. This new breed of real estate company will be able to create exceptional customer experiences, and these will transfer into compelling, enticing, sticky Brands, and in those Brands will lie the next generation of real estate fortunes.

Antony

This first appeared, on 21st August, as a guest blog post on www.cretech.com - with thanks to Michael Beckerman