Incentives, #SpaceAsAService, and the coming Golden Age of Real Estate

  The  Meagre Company  , an Amsterdam  militia group portrait  or  schutterstuk  by  Frans Hals  and  Pieter Codde  (1633-37)

The Meagre Company, an Amsterdam militia group portrait or schutterstuk by Frans Hals and Pieter Codde (1633-37)

Incentives matter. As every practitioner or student of business knows, the way we operate our companies is largely driven by the incentives that our business models dictate. Where you are on the classic S curve of business maturity really matters. 

At the bottom left of the curve you have little competition, but not many customers, and as you move up the centre of the S you have more competition but enough customers to keep everyone pushing on and profitable. By the time you get to the top right of the S you have all the customers you are ever going to get but masses of competition. You start in an agile, constantly iterating world and end up in a static, commoditised one. 

During that business lifecycle your incentives vis a vis boosting revenues or cutting costs change entirely. There is a reason why you often get great service and value from a startup but rotten service and poor value from a utility. One is incentivised to get you to buy into their brand, in the hope of becoming a repeat customer, and the other is just incentivised to exploit their monopoly power and extract as much money from you as they can.

The upside of this process is that as one S curve reaches the top right, the seeds of the next S curve are bubbling away, and the monopolist relatively quickly gets ‘disrupted’. Technologies change, innovations occur and, as consumers, we find we get offered something better, cheaper, faster. It is the very point of capitalism.

In real estate though this process has never really worked. The office building has not, fundamentally, changed very much over many decades. Barring notable exceptions they have been all much of a muchness; grey decor, grey desks, grey computers and black chairs. You had posh versions of dreary offices and ordinary versions of dreary offices. And this worked beautifully for the industry; all the incentives pointed towards doing the same as your competition. The sheer dullness of corporate offices was a feature, not a bug. In short this setup worked, and worked well. At least it did for landlords.

That world though is about to be blown apart by the rise of #SpaceAsAService, and all the incentives the real estate industry has worked to for decades are about to be changed.

And this is a great thing.

The two biggest changes are around customers and product. First, the most important feature of #SpaceAsAService is that the customer of a landlord morphs from being the name on the lease and the person who signs the quarterly rent check, to every single person who enters into their property. 

When occupancy is on-demand, or at least by way of short term leases, the incentive to keep on pleasing the users, day in day out, suddenly becomes of paramount performance. In a long lease world the incentives are to let as much space as you can, for as long as you can. And thereafter your incentives are to not spend a cent more than you have to to fulfil your lease obligations. In a #SpaceAsAService world these incentives are turned inside out; you really want to lease less space, per person, and in many cases for as little time as possible. 

Completely on-demand space carries a significant price premium so in an ideal world, if you maintain high occupancy with a high % of on-demand usage, your returns would be optimised. Obviously that price premium reflects the higher risk to the landlord, but again the incentive then is to minimise this risk by providing the greatest possible user experience. For the specific type of customer segment you are targeting.

And that is why product is the other great change, alongside the nature of the customer. Only the best spaces, the ones that really do provide the product or service that a user needs as and when they need it, will pull off this business model. They will need to understand exactly how their buildings are operating (environmentally as much as anything else), how exactly they are being used (which areas are quiet or busy, popular or underused etc) and also exactly who their customers are and what are the ‘jobs to be done’ that they need appropriate space to help them get done.

In short, in a #SpaceAsAService world all the incentives for a landlord are aligned with providing fantastic workplaces where the user experience of everyone who enters their properties is so perfectly attuned to their needs that they keep coming back, and are prepared to pay a premium for.

This is why we are entering into a golden age for commercial real estate; everyone is now incentivised to be better than everyone else. And that is quite a flywheel.