Commercial Real Estate and Retail: New Business Models

The commercial real estate and retail markets are changing. Both are being impacted by the same technological, financial and societal changes. 

They both need new business models.

The reason being “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 possessions 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 Why bother to own something you seldom use, that becomes out of date rapidly, or that you really cannot afford.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.

And there are 5 technological ‘megatrends’ (Mobile, Connectivity, Cloud, IoT, AI) that are ‘the great enablers’ of all the change heading our way. They cannot be resisted and the real estate and retail industries needs to co-opt them as friend not foe.

These 5 megatrends are enabling us to live, work, and play in different ways. We now live in a world where we do not need offices as places we go to to do our work, and we do not need shops to go shopping. Our demands have fundamentally changed.

And this change in demand will lead to a change in supply. Our customers are starting to prefer services to products, don’t need to go to a shop to go shopping, are used to being served on-demand, and are uber connected with a 1980’s supercomputer in their pocket. 

So we need ‘New’ Retail and ‘New’ Real Estate. And the likes of Alibaba are giving it to us, in the form of O2O, offline to online. In January they purchased Intime, a Chinese owner of 29 department stores and 17 shopping malls. An e-commerce company buying large quantities of physical real estate! Isn’t real estate what the real estate industry does? It seems not. Are we being, in software parlance, deprecated?

Many things in the world are becoming barbell shaped. We see the hollowing out of the middle class, and companies becoming big or staying small with little in the middle. And this applies to retail in spades. Effectively there are two classes today: quick or experiential. Even before the Whole Foods acquisition 45% of the US population lived within 20 miles of an Amazon fulfilment centre. Yet the industry wallows in the supposed attractions of click & collect. As last mile delivery gets faster, the Sword of Damocles hanging over retail gets sharper and sharper. Be fast and cheap or offer a great experience; do neither and Amazon will put you out of business.

The upside, if you think with your off work consumer hat on, is that shops are going to get very much better than they are today. Better brands, better products, better stores, better customer service. Everything about shopping is going to be better. When your customer no longer needs you, you have to try a lot harder at making them want you.

And there are many examples already of brands that are rethinking what retailing means when it is no longer about distribution. Making great use of the same technology that is changing everything else.

Artificial Intelligence is why Alibaba have bought Intime: as they themselves say, they are not in fact an e-commerce company, they are a data company. And retail is the perfect industry to make use of artificial intelligence. From end to end, the dynamics and processes are almost tailor made to take advantage of AI. Which is of course why those who can, will. As mooted above, maybe real estate people are not the best people to manage real estate?

Or rather, real estate is going to have to become a different business, with different business models. No longer will understanding bricks and mortar, and delivering a product suffice. No longer will the customer of a shopping centre owner be the retailers who pay their rent. No, the people that pay are no longer who you need to pay the most attention to. That worked in the Product era, it doesn’t in the Service era.

Marc Andreessen, who wrote the first web browser, coined the term ‘Software is eating the world’. It has already eaten the music, film, taxi and hotel industries. It is now coming for retail.


This is a summary of the presentation I gave as part of the Bayfield Training course on 'Shopping Centre Investment'.