Innovation in Real Estate: It’s now or never

Productivity isn’t everything, but, in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.
— Nobel Laureate Paul Krugman, 1994

And where does productivity growth come from? Largely it is from Innovation, though of a particular type. According to the National Bureau of Economic Research in the US ‘there are substantial positive impacts of product innovation on revenue productivity, but that the impact of process innovation is more ambiguous’. 

This explains why, despite the nationwide UK level of productivity being substantially below trend since 2008, the picture at the micro level is very different. There are many companies whose productivity, and growth, has risen dramatically. If you look at these companies, and they are mainly technologically sophisticated companies (if not necessarily ‘tech’ companies) you will see that they have innovated aggressively in developing new products, rather than refining existing processes. 

Again this is not surprising; any student of Clayton Christensen or Charles Handy knows about the innovation ’S’ curve and the difference between sustaining and disrupting innovation. Refining processes is for those in the top right of the ’S’ curve, commodity or monopoly providers of mature products to large audiences. The downside here of course is that that road is a dead end and Handy’s ‘Second Curve’ will eat you up. It is only a matter of time.

And where is the establishment commercial real estate industry? Sadly, up there, top right, innovating away, but only in refining processes, most likely by ‘digitising the past’. In other words, going nowhere, suffering from either valuations at huge discounts to asset value or running out of ideas and falling back on buying back their own shares.

Meanwhile, where is the ‘new’ commercial real estate industry? Creating new products (though really these new products are mainly services) and creating new and considerable value.The poster child is of course WeWork, which has gone from zero to $20 Billion in just seven years, but there are others like investment startup Cadre who’ve raised $113 million to date, or meeting room/hospitality company Convene who’ve raised the same. VC fund Fifth Wall has raised $240 million. Any company raising nine figures is anticipating creating 10 figures of value. Will they all succeed? Probably not. Will they Innovate process? Definitely not. Will they create new Value Propositions, with new Business Models? Absolutely.

Do these companies pose a threat to the incumbent mainstream real estate companies? The conventional wisdom today is no, in fact it is not at all uncommon to hear WeWork be dismissed as ‘a fad’. Wiser voices though are starting to be heard: Cain International Chief Executive Jonathan Goldstein was recently quoted as saying. “Currently landlords like us are doing lease deals with them (WeWork). But I am convinced that within two years they will turn around to people like us and say they want to do management deals, and because they will be such big occupiers they will be able to dictate the terms of the market. Landlords will have to think about whether they are willing to deal on that basis.”

And that is just the start of it. Agency faces a deeply problematic future: besides the rising tide of ‘flexible’ space being taken largely directly from operators, there is increasing use of AI, feasting on astonishing computing power and tsunamis of data, being used to algorithmically match demand with supply. 

An RICS report in the summer suggested that 88% of a Surveyors work could be automated within 10 years. McKinsey say that 49% of ALL work performed today could be automated using ‘currently demonstrable technology’ and this technological ‘take-over’ is fundamentally changing the nature of the office space people need. Much that exists today will become obsolete or requiring of major overhaul. 

In turn the very nature of who are the real estate industries customers and competitors is changing. The reality is, and this is definitely not accepted wisdom, every single person who enters your space IS the customer, and your competitor is either the existential worry that your product is no longer ‘fit for purpose’ or, as the industry becomes ever more technology driven, the major technology companies. When real estate becomes conceived, designed, built and constructed primarily via software and hardware (robotically) who do you think understands that world best? Well….

All the above could be taken very negatively but in reality, for the company that has ‘Carpe diem’ in their DNA, this is the best time ever to be in the real estate industry. Sheer scale and financial muscle is no longer the be all and end all; brains, attitude, agility and a ‘startup spirit’ have outsized power today.

Innovation is the key to productivity growth, and within real estate will be the single biggest differentiator between those companies falling down, and those rising up, the value chain.

How one builds an innovation culture is for another post but for now wouldn’t it be great if I could have used UK, rather than US, examples of large, significantly funded commercial real estate startups?

It’s time to get serious about innovation. It really might be now or never.