New Business Models in Real Estate: Space as a Service

Furuyama Moromasa, street scene Tokyo, circa 1700

Furuyama Moromasa, street scene Tokyo, circa 1700

The following is the transcript of a talk I gave on the 16th May to a select group of Urban Land Institute (ULI) members:

New Business Models: Space as a Service

A confluence of forces, from the supply side and the demand side, are set to impact on the real estate industry in a quite dramatic way.

This is not a matter of the usual property cycle, where we all know what goes up must come down. And vice versa.

This is structural. The very nature of demand is changing and will force fundamental change in the supply side.

Across all sectors. In fact sectors are merging - increasingly we are beginning to think of Live/Work not as being a binary thing but more of a blend. Barriers between the two are blurring.

The net result of this will be that the industry will need to create, refine and adopt new business models.

And at heart these new business models will all be based around the emerging notion of Space as a Service.

 

The Real Estate Business is no longer about Real Estate

And this is because fundamentally “The Real Estate Business is no longer about Real Estate”, or at least soon won’t be.

Why? 

Well the answer lies in the twin trends of the move from Products to Services and Ownership to 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 Why bother to own something you seldom use, that becomes out of date rapidly, or that you really cannot afford.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.

And 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.

Key though is that this extends beyond spaces rented on-demand; regardless of tenure it will become important to be able to also rent or purchase on-demand all the services one might need to make the most of your space, or to enable the most productive use of that space.

 

5 Tech Megatrends

And there are 5 technological ‘megatrends’ that are ‘the great enablers’ of all the change heading our way. And each of these are on an exponential growth trajectory. Indeed they are all hitting the uptick of the exponential curve

They cannot be resisted and the Real estate industry needs to co-opt them as friend not foe. 

And they are:

Mobile - we all now have a 1990’s supercomputer in our pocket

Connectivity - That is connected via ever faster, more ubiquitous broadband

The Cloud - Connecting to all our data being stored in The Cloud, giving us access to practically unlimited computing power and all of our data anytime anyplace.

Internet of Things - With increasing quantities of data becoming available as we connect anything worthwhile to the internet, no matter how small or idiosyncratic. Like it or not we are beginning to live in a Panopticon.

And sitting on top of all of this is the fastest growing area of all,

AI and Robotics

It is developing at such a speed that the really important change in the workplace will come from the changing nature of the work we do, rather than where we do it.

In January of this year McKinsey said 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.

So that is a lot of work that humans will no longer need to do.

 

And the slide above explains why these advances in AI are so dramatic. It is because AI algorithms can take advantage of the incredible parallel processing power of chips used in gaming machines - GPU’s, as opposed to what all the rest of us rely on in our computers CPU’s.

What is extraordinary though is the advances in GPU’s - these two lines at the bottom, with their seemingly meagre growth, represent CPU’s and chart growth based on Moore’s Law, where computing power has roughly doubled every two years for the last 50.

As you can see Moore’s Law is being trodden in to the dust by the growth in power of GPU’s.

Which means, AI is going to become a very big thing for all of us in a very short time.

As I say, the robots are coming.

 

Which explains why when we look at Image recognition, the machines are now on a par with humans

In 2010, computers failed to recognise about 28% of objects, or faces, they were shown. This is now down to about 5%, which is on a par with humans.

28% is effectively useless - 5% is endlessly useful.

So are we talking Human/ Machine Parity?

Err... no

Because a computer can recognise 200,000 images simultaneously in real time. 

 

Natural Language Processing

A similar story can be told about natural language processing, or speech recognition

We judge how good this is through the word/error rate, and humans make about 5.1 errors per 100 words. Currently computers make about 5.9, so we are getting very close to human level performance here as well.

In 2010 computers made about 16 errors per hundred.

Again we have effectively gone from a technology that wasn’t really much use to one with huge utility.

And knock on effects for work and the workplace

 

The Changing Nature of Demand

And these technologies are going to profoundly impact both where we work, and where we live.

• The nature of ‘Work’ is changing. It’s not change in the ‘way we work’ that matters but the ‘nature of work itself’ -

• We really do not NEED offices anymore, we really do not NEED shops anymore. In fact we really do not NEED an awful lot of real estate. That is not to say we don’t WANT these spaces, but what we do in them will change.

• If 49% of tasks today could be automated, then it seems clear to me that we need to start concentrating a lot harder on the things humans are good at, and computers are not. As tech becomes exponential, we need to foster exponential humanity. All of which leads, I think, to a need for what I call ‘The Imaginarium’: space that allows our human skills to flourish. Places we go to to do what humans are good at. 

• Then we have the changing look of the enterprise - the seemingly relentless rise in freelancing & the contingent workforce.

• In their report, “Workplace 2020” last year Google wrote that ‘Flexible working will be the defining characteristic of the future workplace.’ and the bigger the company the more so. In companies of over 6000 employees 66% will work flexibly by 2018

But most companies are small.

• The City of London for example is not what you thought: 80% of companies there have fewer than ten employees. Half the occupied units are less than 5,000 sq ft

• 72% are less than 10,000 sq ft.

• 99% of London companies employ less than 50 people

So a large percentage of occupiers very suited to flexibility.

• Which will bring us I think to thinking about “The six modalities of occupation: It will not be uncommon for each company to split up their office footprint to be a bit of each of these — Central office, Hub space, serviced office, co-working space, client office or home.

• And then you have the rather big unknown of where people will decide to live, in an AI powered world. Perhaps with the rise of autonomous vehicles many may choose to live a considerable way away from where they work, as the commute would be standard working time, once you do not need to drive. Bain wrote a report suggesting this last year. Against that you have Richard Florida’s Creative class idea that Cities are just too exciting for people to resist.

Either way ‘All Change’ are the best two words to sum up the changing nature of Demand.

 

The Changing Nature of Supply

So how will all this change supply?

Well you have people who:

• Prefer services over products

• Don't need to go to an office to work

• Are used to on-demand 

• And are uber connected with vast computing power in their pocket.

The answer, to me, has to be #Space As a Service - space that takes account of these four trends. Space that is specifically designed to allow humans to do what they are good at.

And that take advantage of all these technologies to remove friction wherever possible and enable discovery.

Friction in the sense of making anything one needs to do to be as friction free as possible. How does this space enable me to do that? How easy is it ‘get stuff done’ in this building?

And Discovery in the sense of being able to find, or access, anything I need to do my job, or make the most of ‘the space around us’.

 

Where does this lead?

• It means Landlords moving from being Rent collectors to service providers

• It leads to Physical space alone being considered as ‘dumb’ - it is the ‘digital layer’ of data driven services that makes it smart

• It leads to the user experience of your space being what defines your brand - and your brand being what defines your value

• And to create a great user experience you need Great Data + Great tech +  Great Humans - all three. Two out of three IS bad.

• And it leads to a far more important, pivotal even, role for Property Managers as they become the curators of the user experience. So the days of that industry always working down to a price are, hopefully, coming to an end.

Culturally this is going to be hard for the real estate industry. In fact I see it as the biggest challenge. Are real estate people really the best people to operate real estate?

It’s a serious question, that three recent events underline.

First, Alibaba the e-commerce company, bought a large shopping centre/department store owner in China earlier this year.

Secondly, IBM - yes IBM - have just sublet an entire building in New York from…. WeWork. Just shows it is not plain real estate they were after.

And thirdly, Google have just submitted an application to develop a 12 acre site in Toronto.

 

This is not going to be easy….

But…

Space as a Service IS the Future of Real Estate