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

Real Estate and technological denial

 Hunt of the Unicorn (Tapestry, circa 1500) Stirling Castle

Hunt of the Unicorn (Tapestry, circa 1500) Stirling Castle

The real estate industry is setting itself up for a mighty fall by failing to understand the implications of technological change.

What is a tech company? Well, if you are in the real estate industry you most likely would not use that moniker for your own company. You would also though not describe a TV as a colour TV. But describing any company as a tech company is as anachronistic as talking about colour TV’s. All TV’s are colour TV’s and all companies are tech companies. In 2018 it is time to get one's head around that.

In early 2017 McKinsey wrote that:

‘Overall, we estimate that 49 percent of the activities that people are paid to do in the global economy have the potential to be automated by adapting currently demonstrated technology.’

Not tech from the future, tech that is available today. The best companies are already way down this path to automating the automatable. And have the commensurately high productivity that comes with that. People, augmented by and working in tandem withgreat technology can be hyper productive. Yes, many of these are companies whose products or services are software or hardware, but many are not. Take a look at the share price growth of Domino’s Pizza to see how embracing technology can impact on ‘analogue’ businesses. Faster than any of GAFA since 2010. 

domino.png

CNBC wrote about them in December 2017:

 “President and CEO Patrick Doyle turned the chain around so successfully, for one, by heeding the public's criticisms and making better pizza. But, more importantly, he invigorated focus on digital innovation and amped up their delivery service. Domino's now employs more people in their IT department than anywhere else in the company, reports CBS News, and over half of their sales come from digital platforms.”

So please tell me Domino’s isn't a tech company? And they sell pizzas! Now tell me a real estate company, say British Land or Hammerson, cannot or should not be a tech company. The CEO of the former has specifically said they are not and I was told earlier this week that ‘it is ridiculous’ to suggest Hammerson be a tech company.

This is denial of the highest order. There is no real estate company that will thrive over the next ten years that does not operate based on data and technology designed to optimise the products and services they are selling. And I deliberately wrote ‘and services’ rather than ‘or services’ because there is no real estate company that will not be selling hybrid product/services within 10 years. 

In offices you will be selling ‘productive workforces’ not lettable space. In Industrial you will be selling on-demand fulfilment ecosystems, and in retail you will be co-creating immersive experiences, frictionless fulfilment and ‘the pleasure of leisure’.

Everywhere you hear about the value of great workplaces and the importance of experiences in retail; the real estate press talks endlessly of Wellness and raising standards across the built environment. And you also hear much about #PropTech and the benefits it can bring to real estate. What you, sadly, also hear repeatedly is how the ‘#PropTech people need to talk more to the Real Estate people’. It might as well be ‘East is East, West is West, and never the Twain shall meet’. What you don’t hear much about is any really substantive productivity improvements coming from the embracing of new technologies. Plenty of ‘that’s good’ but almost never ‘Wow that is amazing’.

Why is this? Because the real estate industry cannot get to grips with ‘every company is a tech company’. Where tech is embraced it is almost always as a bolt on, an addition, or a stand alone innovation unit. Or worse still, what IT are getting up to. 

Real Estate and IT is a Battenberg cake whilst it needs to be an Eton Mess. 

And anyway, who is in the real estate business? Amazon spent $13 billion on Whole Foods and Alibaba have spent $9.3 billion on physical real estate, including Intime, the owner of 29 department stores and 17 shopping centres in China. Are they real estate companies? I have seen Alibaba’s acquisitions described as just ‘fascia for their online empire’, as if the offline retail exposure was just a necessary inconvenience. Is this right?

I think not. Alibaba themselves talk much about what they describe as ‘New Retail’, in the sense of blending the online & offline world in order to create a dramatically better user experience for all their customers. Their entire focus is on understanding their customers in a very granular way, what their needs, desires and aspirations are, and then applying that learning to how a physical outlet is configured, stocked and experienced.

80% of all e-commerce flows through one or other Alibaba entity, and millions of retailers sell online through their marketplaces. As such, by merging online and offline data they are able to optimise their ‘commerce’, online and offline. The key point is they are using data, from as many sources as possible, as the foundation on which to build great user experiences. Data and technology is not a bolt on to existing operations, but the sun around which everything revolves. Nothing is not touched by technology.

To be a great, human centred company you have to start with data. In a world of exponential technology, we are reaching a point where the technology itself disappears and the only thing that matters is the human engagement, empathy and understanding that we can offer our customers. Being human is the No1 asset, and skill, today. The real estate industry loves to say that the technology is not the point, and that we must not remove the human touch from our businesses and our dealings with customers. And I completely agree, but unless all the touchpoints we have with customers, colleagues, partners and suppliers are supported by accurate, up to date and insightful data we cannot hope to be the best humans we are capable of being.

A human + a computer trumps any human or computer on their own. But also, as Gary Kasparov has explained so well (in his book Deep Thinking - https://amzn.to/2Ojm9rk), a human who understands how to create processes that leverage the complimentary capabilities of computers will outgun a more accomplished human with weaker process skills. In the context of real estate we have to be concerned about whether the tech industry will learn real estate faster than real estate learns tech. At the moment real estate is losing, and badly. But still the industry ‘sticks to its knitting’.

MIT professor Erik Brynjolfsson recently put the scale of technological change coming down the track very well. Talking about the rise of AI he says:

“machine learning is an example of a “general-purpose technology”. These are innovations so profound that they trigger cascades of complementary innovations, accelerating the march of progress and growth — for example, the steam engine and electricity. When a GPT comes along, past performance is no longer a good guide to the future.”

He wrote this in an article entitled ‘Artificial Intelligence and the Modern Productivity Paradox’ (https://bit.ly/2LXjDp5) and it describes the real estate mindset very well. He discusses how so many people comment on how national productivity is not rising despite all this new technology, and that the conclusion is drawn that the techno enthusiasts are over hyping change and that, truth be told, the world is not changing all that fast, or that much. But then he goes on to explain how the new technologies have been massively increasing productivity, but only in those companies that have adapted their business models and processes to take advantage of the new capabilities that are out there. For example, Facebook, or Google, or WeWork, or Amazon or Alibaba. All creating huge value per employee and achieving huge scale very rapidly.

Every ‘Unicorn’ is a deeply tech enabled company. Every one is designed around what technology enables.

Retail real estate is a hard, tricky business, involving multiple skill sets and great attention to detail. But as it stands none (I'd be happy to be wrong in being so definitive) has embraced technology as a really core, 'part of our DNA', driver. Certainly not like Amazon or Alibaba have. Because, 'they are tech companies, we are not'. And that is a major, potentially value destroying way to look at things. Forget offline and online being different worlds; they are not. Ultimately we are all striving to give our customers what they want; and what they want will win. My point is; who knows more about what their customers want will also win. And that company will be a 'tech company'.

Antony

Incentives, #SpaceAsAService, and the coming Golden Age of Real Estate

  The  Meagre Company  , an Amsterdam  militia group portrait  or  schutterstuk  by  Frans Hals  and  Pieter Codde  (1633-37)

The Meagre Company, an Amsterdam militia group portrait or schutterstuk by Frans Hals and Pieter Codde (1633-37)

Incentives matter. As every practitioner or student of business knows, the way we operate our companies is largely driven by the incentives that our business models dictate. Where you are on the classic S curve of business maturity really matters. 

At the bottom left of the curve you have little competition, but not many customers, and as you move up the centre of the S you have more competition but enough customers to keep everyone pushing on and profitable. By the time you get to the top right of the S you have all the customers you are ever going to get but masses of competition. You start in an agile, constantly iterating world and end up in a static, commoditised one. 

During that business lifecycle your incentives vis a vis boosting revenues or cutting costs change entirely. There is a reason why you often get great service and value from a startup but rotten service and poor value from a utility. One is incentivised to get you to buy into their brand, in the hope of becoming a repeat customer, and the other is just incentivised to exploit their monopoly power and extract as much money from you as they can.

The upside of this process is that as one S curve reaches the top right, the seeds of the next S curve are bubbling away, and the monopolist relatively quickly gets ‘disrupted’. Technologies change, innovations occur and, as consumers, we find we get offered something better, cheaper, faster. It is the very point of capitalism.

In real estate though this process has never really worked. The office building has not, fundamentally, changed very much over many decades. Barring notable exceptions they have been all much of a muchness; grey decor, grey desks, grey computers and black chairs. You had posh versions of dreary offices and ordinary versions of dreary offices. And this worked beautifully for the industry; all the incentives pointed towards doing the same as your competition. The sheer dullness of corporate offices was a feature, not a bug. In short this setup worked, and worked well. At least it did for landlords.

That world though is about to be blown apart by the rise of #SpaceAsAService, and all the incentives the real estate industry has worked to for decades are about to be changed.

And this is a great thing.

The two biggest changes are around customers and product. First, the most important feature of #SpaceAsAService is that the customer of a landlord morphs from being the name on the lease and the person who signs the quarterly rent check, to every single person who enters into their property. 

When occupancy is on-demand, or at least by way of short term leases, the incentive to keep on pleasing the users, day in day out, suddenly becomes of paramount performance. In a long lease world the incentives are to let as much space as you can, for as long as you can. And thereafter your incentives are to not spend a cent more than you have to to fulfil your lease obligations. In a #SpaceAsAService world these incentives are turned inside out; you really want to lease less space, per person, and in many cases for as little time as possible. 

Completely on-demand space carries a significant price premium so in an ideal world, if you maintain high occupancy with a high % of on-demand usage, your returns would be optimised. Obviously that price premium reflects the higher risk to the landlord, but again the incentive then is to minimise this risk by providing the greatest possible user experience. For the specific type of customer segment you are targeting.

And that is why product is the other great change, alongside the nature of the customer. Only the best spaces, the ones that really do provide the product or service that a user needs as and when they need it, will pull off this business model. They will need to understand exactly how their buildings are operating (environmentally as much as anything else), how exactly they are being used (which areas are quiet or busy, popular or underused etc) and also exactly who their customers are and what are the ‘jobs to be done’ that they need appropriate space to help them get done.

In short, in a #SpaceAsAService world all the incentives for a landlord are aligned with providing fantastic workplaces where the user experience of everyone who enters their properties is so perfectly attuned to their needs that they keep coming back, and are prepared to pay a premium for.

This is why we are entering into a golden age for commercial real estate; everyone is now incentivised to be better than everyone else. And that is quite a flywheel.

Antony

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

fir.jpeg

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.

Antony