Real Estate's Four Great Challenges - Part 5
Wanderer above the Sea of Fog - Caspar David Friedrich - 1818- Hamburger Kunsthalle, Germany
Conclusion
To recap, the ‘Four Great Challenges’ we have discussed in this series are:
Decarbonising real estate
Adapting to the impact of the move to hybrid, distributed and remote working
What to do with a flood of obsolete buildings
Saving our cities from the consequences of the above
Each, on their own, would trouble the capabilities of the real estate industry, but together they represent the start of an industry defining era. To have these ‘in hand’ by 2030 will necessitate a level of technological capability, imagination, commitment, financial prowess and skill that is not yet on display across the industry. There is a big step up required to match these challenges. By 2030, if it succeeds, the industry will be a very different place to today. As we’ve repeatedly said, this is the time for the creative, the innovative, the visionary, to step forward.
To add to the load there is, to plagiarise the best Apple keynotes, ‘one more thing’. And that is the cambrian explosion currently underway around AI, in particular Generative AI.
Generative AI has been a technology bubbling away since 2017, when a team of researchers at Google published a paper entitled ‘Attention Is All You Need’ which introduced a new network architecture, the ‘Transformer’, that reinvented and dramatically improved natural language translation AI. From there on the technique has been built on and expanded in scope until with the launch of Open AI’s ChatGPT, on the 30th November 2022, it exploded into the public consciousness by providing a layman friendly interface to extraordinary computational power. AI had moved from ‘Non coders need not apply’ to the simplicity of typing text. As if by magic, anyone who wants them has been given ‘superpowers’.
And in just two months, 100 million people had tried it out. The fastest growing technology of all time.
Fast forward to March and a much improved version, ChatGPT-4, was released, and in May ‘Plugins’ were added than make the core technology extensible, enabling the easy addition of new capabilities and functionality.
Whilst not a ‘challenge’ like the other four it is a certainty that Generative AI will have a profound impact on the supply and demand side of real estate. How we design, build and operate real estate, and how our customers occupy and utilise real estate, and to what purpose, has a new set of inputs that will ‘transform’ many existing norms.
I would like to emphasise two things.
First, that this is not tech bro hyperbole. In March 2023 Bill Gates wrote that:
‘The development of AI is as fundamental as the creation of the microprocessor, the personal computer, the Internet, and the mobile phone.
It will change the way people work, learn, travel, get health care, and communicate with each other.’
Genuinely, what is going on IS of real consequence.
The second point is that we can learn from history a good lesson in how to leverage technology to raise productivity.
In 1881, Thomas Edison built the first electricity generating stations at Pearl Street in Manhattan and Holborn in London. Within a year he was selling electricity as a commodity, and a year after that electric motors started to turn up in manufacturing plants. But little progress was made for many years. By the turn of the century just 5% of factories were using electric motors, and it wasn’t until the 1920's that electric motors completely took over from steam power, and productivity saw a huge boost.
Why do it take so long? Simply put because the steam powered factory represented a ‘system’ where replacing the power source made little difference to how the system worked. The factory still consisted principally of one giant drive shaft powering a myriad of pulleys, chains and belts. Changing from steam to electric changed almost nothing.
It wasn’t until factories themselves were redesigned, and tasks divided up into different areas, each powered independently by smaller electric motors, that the ‘system’ itself could be rethought and the advantages of the new technology leveraged. Everything needed to change to make changing anything worthwhile.
Now, Generative AI is easier to integrate into the ‘white collar factories’ of today but it will be those who redesign their ‘systems’ who will benefit the most from its use. And of course, an office is nothing if not a ‘system’. So we need to be thinking hard about what this new technology will mean for the work we do, how we do it, and therefore what products and services, and what environments we’ll need as it gets rolled out and improved.
Not least of all, are our customers going to be using AI to remove labour, or augment it? Amongst the more financialised, and those whose incentives push them, we are certain to see much displacement of labour. But might we also see much augmenting of ‘human resources’ by smart and forward thinking companies looking to build a bigger pie? This is not a topic for here, but the answers will further add to real estate’s challenges, one way or the other.
Now back to the conclusions relating to our ‘Four Great Challenges’.
First off, sustainability is a ‘Killer App’. It will create & destroy value at an unprecedented rate. Effectively the need to make assets sustainable is an imperative of the highest order. They will very simply be hard to finance, or sell, if they are not so. ‘Green Premiums’ will disappear as being sustainable becomes the norm amongst assets that anyone wants to buy or occupy, but ‘Brown Discounts’ will grow rapidly amongst assets that no-one either wants or is willing or able to occupy. And as valuations eventually catch up to how to determine what is sustainable or not we’ll see a lot of the mispricing in the market disappear. Many assets are overvalued because their sustainability is not fully understood or priced in. As markets become more sophisticated these errors will disappear. Quite possibly, very quickly. Beware. And be aware.
And 2030 is a ‘Killer Date’ for much the same reason. The regulations implicit in that date will act like a ‘forcing function’ for the industry. As we said, it’s not to be thought of like any other date, but rather as a brick wall we are hurtling towards. Unless you are convinced governments and other authorities will blink as the date gets closer and let people off of complying with what is currently planned you need to be moving fast to position your portfolio.
There is no question of hybrid, remote & distributed work being anything other than here to stay. For the majority of occupiers, a very large percentage, there will be no return to five days a week in the office. It didn’t exist even before Covid, and the inefficiency and ineffectiveness of full office centricity is so obvious to all but the wilfully blind that at least one part of the future is clear. As with the year 2030 this will act as another ‘forcing function’ within the market. And it will benefit those who understand what the market wants, and gives it to them, and will punish hard those that don’t. There is no single ‘office’ market anymore. Plenty will rise as others fall. We are not all in the same boat.
It is not just workplaces that must change though. Companies need to change. They need to update, edit and rewrite their own operating procedures to benefit as they can, and should, from new ways of working. You cannot run a hybrid work policy if your company is designed to be office centric. It does not, and will never work. Many are finding this out now, and mistakingly issuing ever stronger mandates for employees to ‘RTO’ but they are fooling themselves. That will only lose them their best employees. They need to change their ‘system’. They need to redesign the factory.
And in very many cases adopting the principles of #SpaceasaService will be the answer. It will be the defining characteristic of the modern ‘place of work’. Some will outsource their requirements to 3rd party operators but many will also run their own real estate in this fashion. Enabling people to be as ‘happy, healthy and productive’ as they are capable of being is the required output. Whatever it takes.
All of this will mean that obsolescence will be everywhere. Either through the inability to achieve sustainability or through simply not being fit for purpose. Not being able to provide customers with what they want. And the scale of this will be huge. Very little office real estate ticks both boxes. Very little.
Which of course is either a massive bug or a massive feature. It will either wipe you out or is the opportunity of a lifetime. There is unlikely to be all that much in the middle. Great space is good. Cheap space is good. Average, middle of the road space is …… nigh on dead.
Most likely we’ll be seeing a lot of refurbishing and repurposing. Refurbishing when the asset is intrinsically attractive, or characterful or a place where people simply like to be, and repurposing when the office days are over. But whatever happens assets will need to be designed for people (or very specific purposes like urban farming). The 7 trends we discussed in Part 3, of what people actually DO want, need to be adhered to. It’s a myth that we do not know what people want. We do. This isn't rocket science. But they do require effort, imagination and a sense of purpose to achieve. What someone wants does not happen by chance.
Everything above just emphasises that our Cities ARE vulnerable. Entering into a vicious circle, a doom loop, won’t actually be that hard. Unless Cities double down on what makes them ‘special’, and just about every City has something that makes it special, they’ll find themselves in a very bad place. If a doom loop sets in it could be decades before things recover. Some Cities never recover.
So it is essential that those in power work exceedingly hard to understand what their ‘customers’ want and then work back to what is required to give it to them. Factors like sustainability, community, innovation, technology, culture and recreation will be front and centre of all this. All the while though the paramount thought needs to be 'what does it feel like to be in a great, human-centric City'. Because if you cannot create this the only way is down.
And finally, for those in PropTech, all these great challenges represent a boom time. PropTech, alongside other technologies, is needed ‘everywhere’. Technology is necessary but not sufficient. Alone, without a great amount of qualitative, human input, it’ll achieve nothing much. But together….. there is no upper boundary.
The only thing left to say is that these challenges make one realise that the real estate industry is bigger than real estate. We sit at the centre of everything, and impact on everything. If you want to change the world, then real estate is the industry for you.
But. These challenges are real, and 2030 really is a brick wall we’re hurtling towards. This is serious, and as the great American poet Robert Frost wrote…..
‘The only way is through’
Good luck!