With a nod to the excellent book ‘Signals: How Everyday Signs Can Help Us Navigate the World's Turbulent Economy’ by Dr Pippa Malmgren, here are 10 signals the real estate world is facing fundamental change.
Signal No 1: In January the Chinese e-commerce behemoth Alibaba bought Intime, an owner of 29 department stores and 17 shopping centres. Why? Because, as 80% of e-commerce in China passes through one or other Alibaba service, and a majority of physical retailers also sell online via them, they have extraordinary insight in to both the supply and demand side of the retail industry. As such, and as they say, they have become ‘a data company’ and with the insights they can algorithmically generate they can probably operate physical real estate better than any real estate company can.
Takeaway: The real estate industry might not be the best people to own real estate. OR the real estate industry needs to dramatically improve its understanding and utilisation of data.
Signal No 2: Last month IBM announced that they had entered into an agreement with WeWork to sub-let an entire building that they in turn had sub-let in New York, with WeWork designing and managing the space for them.
Takeaway: If a company the scale of IBM can find it preferable to have a ‘service provider’ like WeWork as their ‘Landlord’, rather than a traditional real estate company, then the traditional company has fallen several notches down the value chain. A big question mark is looming over the industry: do you have Product/Market fit anymore?
Signal No 3: Google's parent company, Alphabet, has applied to develop 12 acres of land in downtown Toronto in order to create a brand new high-tech city "from the Internet up.” This is not for their own occupation but as a test bed for a plethora of ideas that have been evolving out of their Sidewalk Labs subsidiary for some time.
Takeaway: The real estate industry needs to reconsider who it is competing with. If Google can build a city, then what is so special about the real estate industry? Maybe they can be, in software parlance, deprecated? The tech industry is highly likely to move into real estate. First off the rise of modular and robotic construction (and Drone site management) plays to their strengths. Secondly as BIM becomes ever more powerful and mainstream the industry becomes ever more software led. If the entire design and build, fit out and operational sides of construction and real estate can be digitised then this is an industry that can fall prey to ‘Software is eating the World’ as Marc Andreessen famously said. In this world, the construction industry becomes a low level commodity player, and traditional developers become, if not obsolete, then a lot less ‘God-like’ than they like to think they are today.
Signal No 4: 45% of the US population live within 20 miles of an Amazon fulfilment centre. And that is the most prosperous, highest spending 45% of the population.
Takeaway: As the 3rd most valuable company in the world, Amazon has the financial muscle, operational brilliance, and data ownership, to predictively supply all of those centres with the right product at the right time. Same day, or even often next two hours, delivery is getting ever closer, for a very large percentage of the market. Physical retailers have taken refuge in ‘Click & Collect’ being a driver of traffic to their stores but if delivery is same day or better how strong do you think that allure is? Exactly.
Only the best, or cheapest, physical retail is going to survive. The UK situation is less pronounced but the US is massively oversupplied with physical retail and this year is seeing the highest number of store closures ever. It is predicted that 25-30% of ‘Malls’ are on death row.
Anyone following the rise of e-commerce would not be at all surprised that INTU, the shopping centre REIT is falling in to the FTSE 250 whilst Segro, who provide warehouse space, has just risen to join the FTSE 100. There are other 2nd and 3rd order consequences of this behavioural shift coming down the track. Eyes peeled!
Signal No 5: Computer Vision, aka Image recognition, now errors at a rate of less than 5%, which is better than humans. Images and video can now be searched and analysed, at scale and in realtime on everything from a smartphone to a supercomputer. The world around us is becoming recognisable, and analysable, to the camera in our pocket. Images can be reconstructed from fuzzy fragments, objects can be recognised at vast distances, and 200,000+ people can be facially recognised, all at once, in realtime.
Takeaway: Why does this matter to real estate people? Because, as Mary Meeker highlighted in her ‘State of the Internet 2017’ report that came out this week
“A lot of the future of search is going to be about pictures instead of keywords”
So residential search will move to be by selecting a series of images, that present themselves in accordance with your previous selection, having understood what that says about your preferences.
Commercial space design will incorporate the use of images to better understand, and more quickly, what it is the client is looking for. The same will apply to finding new offices, so the way agents market space will become far more visual.
There is a huge amount of ‘stuff’ that goes into fitting out the built environment: going forward much of this will be chosen utilising image search.
Signal No 6: Concurrently with computer vision, speech recognition by computers has now surpassed human ability, with the latest word/error rate falling to just 4.9%. Voice search now accounts for 20% of searches on Android Phones, and Siri, the assistant built into iPhones, responds to over 2 billion commands a week.
Takeaway: Increasingly we are going to use our voices instead of keyboards as the interface to our computing devices and in turn we are going to expect our service providers to enable us to do so.
So expect to see a lot more customer service being offered via chatbots, as well as lead nurturing, organising bookings, and setting up meetings.
Property searching via chatbots is already available, and in combination with Signal No 5 above, using computer vision to recommend houses, flats, offices has been shown to be more successful than human agents.
Alongside speech recognition, natural language processing has improved to the extent that we can expect it to be de rigeur for lease abstraction, contract analysis and the likes within a few years. There will be no billable work in this field going forward.
Signal No 7: Google’s Deepmind subsidiary is now the undisputed world no 1 in the game of GO. A combination of new processing chips (TPU’s or Tensor Processing Units) Deep Learning and Reinforcement Learning has given them mastery of a game that has more options than there are atoms in the observable universe.
Takeaway: AI is about to become a very big thing, much faster and probably more pervasively than even most experts thought. Perhaps 60% of the tasks people do within the real estate sector, with a noted bias towards finance & asset management are sitting plum within the crosshairs of what AI is good at. The large incumbents have both the most to lose and the best chance of co-opting ‘the machines’ for competitive advantage. If a major firm suffers in the next five years it will be entirely the fault of their management.
Signal No 8: From every quarter there are signals galore that the world of work is changing. Google, in their Workplace 2020 report, last year said ‘flexible working will be the defining characteristic of the workplace by 2018’. There are an every growing number of freelancers, through choice and through necessity, the ‘millennial’ generation is fast becoming a major component of the workforce, whilst at the other end there are a growing number of older people in the workplace. With 48% of people working for companies that employ less than 50 people, just 12% for companies between 50 and 250 employees, and 40% for larger companies, the world of work is becoming very barbell shaped. Throughout, the work that people actually do is changing fast and how offices are used is changing alongside.
Takeaway: A combination of these factors is leading to the inexorable, and increasingly rapid growth in ‘the six modalities of occupation’ - where a company uses a mixture of: long term leased space, short term leased (serviced offices), membership spaces (co-working, clubs), 3rd spaces (libraries, coffee shops), clients offices and, of course, home. This will change the composition of space required by the market, and the characteristics of that space.
Signal No 9: WeWork, founded just seven years ago, is valued at $18 Billion.
THE REAL ESTATE BUSINESS IS NO LONGER ABOUT REAL ESTATE!
Signal No 10: Apple’s iPhone has just 18% of the global market for smartphones, yet generated 90%+ of all the PROFITS.
Takeaway: The success of the iPhone is predicated on two things. First, the BRAND itself is so incredibly strong that Apple can be the lowest cost manufacturer in the market but have the highest margins, And secondly, the iPhones strength is that Apple control the hardware AND the software of their products. This means they can make each side of the equation optimal for the other. In essence they have the greatest control over the UX or user experience.
The successful real estate companies of the future will do the same with their assets. As the industry moves from selling a Product to providing a Service, being in control of the hardware and software sides of their business will be key. The physical spaces must operate optimally (and the rise of IoT etc makes all this possible) but they must be accompanied by a ‘digital layer’ of services that are curated by a new type of Property Manager whose purpose and role is to make the user experience of each and every person who enters a property as enjoyable and friction free as possible.
This #SpaceAsAService mindset will be what will create great Brands (the expression of the user experience) and in turn determine the Value of an asset. UX is the Brand and Brand is the Value.
As a differentiator the real estate industry will never have seen anything as powerful. But it will be hard to pull off, and as suggested above, maybe will not be something that falls to real estate people to do?
So there we are: 10 Signals. As ever, understanding where they lead is the tricky bit. But you have to try.