Property Managers: From Zero to Hero

January 2017

OK, the zero moniker is unfair, but Property Managers are very much the last to be credited and first to be vilified players in the real estate industry. No-one notices them when properties run smoothly, but come any sort of problem they are the first to be blamed. Whenever a budget needs tightening they are at the front of the queue. They are the poor cousin to the dashing developer/owner.

Their world though is about to turn upside down, and as an industry, if they play their cards wisely, Property Management can move from Zero to Hero. Conversely real estate owners, long secure in the solidity of their assets, are about to see their world do the opposite. The certainties of real estate, reliable and upwards only income streams, are about to become a lot less certain.

All because ‘the Real Estate industry is no longer about Real Estate’. A few years ago this was easy to scoff at, and many did, but today the reality is sinking in. Business for asset owners is set to become as predictable as a Deliveroo riders income.

Why? Because the purpose, the point, the utility of real estate is changing, and changing fast. We really do not need shops anymore, and we most certainly do not NEED offices anymore. Or at least not for the reasons we used to.

Amazon is now the 4th largest retailer of clothing in the United States (remember all those property people saying ‘you need to touch clothes before buying them’?), and the smart physical retailers are speedily turning their stores into ‘experiences’. At the bottom end shops are serving much the same function as before (too cheap to ship) and at the top end the Apples of this world are configuring their spaces as brand building lust factories. The middle though is being hollowed out; desperately hoping click and collect is enticing enough to get people into their stores but not distinct, or profitable, enough, to find their life anything but tough. The crashing footfall of this year’s Boxing Day sales is a precursor of where this market is going. Ceteris paribus*.

In the office market, an amalgam of forces is impacting the demand side. The rise of the ‘gig’ economy, both full on freelancers or the ever increasing hordes of ‘Contract’ workers, working for one or more ’employers’ on a daily, weekly, monthly basis is reducing the need for permanent desks. Companies are moving to one or other end of the ‘barbell’, either huge and mightily powerful (such as Facebook & Google swallowing 85% of online advertising last year!) or small, nimble, and highly skilled. The SME (50-250 staff) market in the middle is dying. It always staggers people to hear that there are only 205 companies that employ more than 250 people in the City of London and 80% of all companies there employ less than 10 people**.

And the reason for all of this is technology. Whilst most people concentrate on ‘new ways of working’ the real action is in the changing nature of the work we do. Simply put, technology is moving further and further up the ladder of competencies and as McKinsey demonstrated last year***, ’45 percent of work activities could be automated using already demonstrated technology’. And this attack force is gaining power faster than ever, with advances last year in machine learning, computer vision and natural language processing that surprised, if not shocked, many in those industries. Google Generative Adversarial Networks for a taste of this.

This though is now well know and much commented on; how can it take Property Management from Zero to Hero? The answer lies in what the real estate industry is now about, if not real estate. And that is ‘Services’, in the broadest sense. Along with much else throughout society we are moving from a world that is focussed on ownership, to one all about access. Increasingly we are moving to an almost post consumer world where we are less bothered about accumulating more ‘stuff’ and much more interested in being provided with services, experiences and ephemeral pleasures. So Uber instead of Cars, Spotify instead of CD’s, Netflix instead of DVD’s: on-demand this, on-demand that. Why bother to own something you seldom use, that becomes out of date rapidly, or that you really cannot afford. Rent it when you need it. Real estate is not immune from this trend. Just as it is now easy to buy almost any Software as a Service, so it will become with real estate. Space, as a Service, is the future of real estate. On demand and where you buy exactly the features, and services, you need, whenever and wherever you are.

There is though even more to it than that. Regardless of whether you do actually occupy your space in an on-demand fashion, you will be using it in a different way. The robots really will remove the need to deal with any task that can be algorithmically defined. Which leaves us humans to do what we do best, and that is anything that requires social intelligence, is unique in character (empathy, design, innovation, imagination, creativity) or that requires us to interact with complex objects in an unstructured environment. This is the world of Moravec’s Paradox: “it is comparatively easy to make computers exhibit adult level performance on intelligence tests or playing checkers, and difficult or impossible to give them the skills of a one-year-old when it comes to perception and mobility.”

Now imagine what types of spaces we are going to need, and what types of services we are going to require to engender all this human creativity and collaboration. It’s going to be much more flexible, fluid, and customisable, with multiple types of spaces being available on-demand, with varying configurations of seating, facilities, desks, screens etc, etc. Atria and other ‘common parts’ or communal spaces will be much more intensely utilised, probably by many more people on a daily basis, but with many of them coming and going as they congregate or disperse as networks come together and interweave with each other. Think of a social network as opposed to a traditional organisational hierarchy.

This ‘Space as a Service’ requires an entirely different Property Management approach. This is much more Human Management than anything else. Yes, the physical asset still has to be maintained and function effectively and efficiently, but the robots will help with a lot of that anyway. What is required now is people with all the skills required to enliven a space, and make the ‘User Experience’ of that space special. For it is the ‘User Experience’ a space delivers that will determine the financial results physical assets deliver. A great ‘User Experience’ will help create a great ‘Brand’ and for an owner, it is their ‘Brand’ that will be their asset. This is not to say that the physical space itself is not important anymore, but it will no longer be the defining variable in value terms. Ultimately, it is the data about a space (UX can be quantified), rather than the space itself, that will matter.

Who can deliver this? Yes, exactly – the Property Management team. That’s how you get from Zero to Hero. Simply put, without great Property Management (whose remit will necessarily expand to fulfill the new requirements) a physical asset will decline in value. And vice versa. And if it is your business that can make that difference? Well, expect to be paid handsomely to make it happen. Asset owners have never had to provide ‘Service’ like this before, and that upends current business models. The real estate value chain is being reconfigured.

The downside? This is and will be hard to pull off. As much from the owner’s perspective as the management team. Moving from rent collector to service provider is, frankly, going to be hard for many owners. The cultural change required is profound. And building the necessary soft and technical (there is a lot of tech in all of this) skills that will be needed to fully exploit this opportunity is not going to be easy either. The prize though is great. The ‘Brands’ that pull it off, and build networks of delighted customers, will find that a world where each of us uses less space, for less hours a week than we do now, is paradoxically much more lucrative than it is today.

Try to imagine the real estate equivalent of Apple, who take the lions share of profits in the smartphone market because their combination of hardware AND software is so compelling they can charge a substantial premium for it. That’s what we are after; real estate hardware AND software.

A challenge for the year ahead.

Antony

PS In case you think the above is nonsense this was reported today: ‘Alibaba is buying Chinese mall operator Intime for $2.6B to modernize offline retail’. https://techcrunch.com/2017/01/10/alibaba-intime-2-6-billion/

The acquisition is all about “a new form of retail in China powered by internet technology and data”.

* Ceteris paribus: All things of course are unlikely to stay the same. The question is whether real estate people change the right things.

** 2015:https://www.cityoflondon.gov.uk/business/economic-research-and-information/research-publications/Documents/Research-2015/Future-workstyles-and-workplaces-in-the-city.pdf

*** http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/four-fundamentals-of-workplace-automation