THE BLOG
#SpaceAsAService and its consequences
JLL recently stated that they believe ‘up to 30 per cent of corporate real estate portfolios will include flexible space by 2030.’ I applaud them for saying something much of the industry does not want to hear, but I believe their prognosis is not nearly aggressive enough. For me, the numbers are likely to be closer to 30% by 2022 and 40+% by 2030.
Why? Because the commercial real estate industry is undergoing a structural change that will affect every facet of the market and reshape the entire ecosystem that has existed for 50 years or more. This change is not just a function of the natural, cyclical real estate cycle but a set of structural, fabric changes that are the by-product of a world where technology is leading to fundamental changes in how businesses operate, the work people do, and especially how and where they do it.
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 are the ubiquity of 1990’s SuperComputers (aka SmartPhones) in everyone’s pocket, pervasive high speed connectivity, cheap and abundant Cloud Computing, billions of IoT sensors connecting anything that can usefully be connected to the Internet, and the rise of AI and robotics.
Combined these are reshaping demand. The very nature of the work we do is being reshaped to the point that we no longer NEED an office to ‘work’, or indeed a shop to shop. We may desire them, but we do not need them.
Which means the nature of employment is changing, and on-demand or in some other form, contingent work is becoming the norm for many people (perhaps up to 40% by 2020 say Intuit). In their Workplace 2020 report last year Google wrote ‘Flexible working will be the defining characteristic of the future workplace.’ and the bigger the company the more so. Companies employing over 6000 people will be 66% flexible by 2018’.
In this world, purchasing flexible space, Space As A Service, becomes an obvious response for individuals and companies. And just as it is technology that changes behaviour, not the other way round, so it will be that this demand leads to a change in the nature of supply. Put simply, the real estate industry is going to be forcibly moved from being a rent collector, to a service provider.
And that changes everything. The changing nature of what an office is for (the robots will do anything rote or predictable, so we need places that catalyse human skills), and the fact that they will often be operated ‘on-demand’ will lead to a lot of space being no longer fit for purpose.
The necessity for our buildings to become much ‘Smarter’ will transform what it means to be a property manager. Short leases, or rather the death of the lease, changes notions of valuation, financing and asset management.
The really big change though, the fundamental, maybe even existential challenge for the real estate industry is that the business of real estate will no longer be real estate. Rather it will be all about Service, Data and Brand.
In a #SpaceAsAService world your customer will be everyone who enters into and/or works in your building. The value you are able to build around your physical asset will be a reflection of the user experience, the UX, that you can provide each and every one of them. Because in an on-demand world they can simply go somewhere else.
How do you build a great UX? By using data in a way the industry has not even touched upon to date. You need to know who your customer is, their needs and desires, how they wish to work, what services they require, and what it is about your space that they engage with. Then you need to understand how your space is being used at a much more granular level than most do today; not only to allow you to move from preventative to predictive (on-demand) maintenance but to analyse, and A/B test new layouts and configurations.
Put all that together, the services and the data, and that will be your Brand. And in this world Brand really is everything. It is your Brand that will attract users, enable you to maximise revenue, and build a waiting list for your space. There will be a large yield gap between the best Branded spaces, and the rest.
So the consequences of #SpaceAsAService go far beyond a bit more co-working. Physical assets are going to need to become smart by default, property managers are going to need to re-focus from operations to user experience, Landlords are going to need to become experts in AI and data analytics. on top of morphing from Product to Service companies.
If demand does indeed make all the above come to pass, it strikes me that we’re looking at a very different industry, providing a better 'service' to a happier customer and probably (some at least) making more money into the bargain. Do you think we are up to the job?
Antony
Estates Gazette: Tech Talk Radio
I sat down with Estates Gazette Deputy Editor Samantha McClary last week to chat about Data, Brands and #SpaceAsAService in Commercial Real Estate - aka The Future of Real Estate.
Here is the full episode: http://www.podbean.com/media/share/pb-nfxb6-69db7c
Antony
Real Estate Developer 2020: What does that look like?
The Nobel Prize winning Physicist Niels Bohr famously said “Prediction is very difficult, especially about the future”. Not being either a Nobel Laureate, or a Physicist, I won’t be making any predictions below. However 2020 is but four years away, and whilst Mr Bohr was of course correct about prediction, such a short timescale only demands extrapolation, and that is something I am happy to take on.
“The future is already here, it’s just not very evenly distributed” is a more apposite quotation for discussing 2020, because as William Gibson so eloquently pointed out, technology moves in waves, and what the Innovators are up to today, will be adopted by the majority some years down the line. And for Real Estate, the trends are quite clear.
Society is moving very rapidly from a world of Products to one of Services. We are becoming much less bothered about acquiring 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, Neflix instead of DVD’s, and Airbnb instead of Hotels. And the number of on-demand services we patronise in vast numbers grows and grows. Takeaways, Dry Cleaning, Household Chores, Clothes, Gadgets etc. We are buying what we need, when we need it; access is trumping ownership. With a 1990’s supercomputer in our pocket, and software that enables gratification in just a few clicks, the technological die is cast. We can have what we want when we want it, and funnily enough, we all like that.
And Real Estate and the world of work will not be immune from this trend. Just as we can buy almost any software we want ‘as a service’, so it will be with Real Estate. Space, as a service, is the future of Real Estate. On demand, and where we buy exactly the features, and services, we want, whenever and wherever we are. The Real Estate industry is moving from being about a physical product, to a service; in essence a provider, and seller, of User Experiences. And the developer that provides the best User Experience, to the largest number of people, will be the winner.
Increasingly the value of a Real Estate company will be tied up in the User Experience that company provides its customers with. The best will be known by the User Experience they provide, and that User Experience will be their Brand. And by 2020 Brand will really matter.
All of this will be pulled into existence by technology, but it won’t seem like it. What will happen is that businesses will find that the actual work they need their employees to do will change, as new technologies slowly, then suddenly, enable much rote work (which exists at all levels) to be offloaded to ‘the machines’. And this will have two major consequences. First, it will unbundle work from being something one has to do in an office, and secondly, and more importantly, will change the type of places we need to spend time in. With more and more value being added through the application of intensely human skills, such as design, imagination, empathy and social intelligence, the workplace of the future will, of necessity, be somewhere that catalyses those skills. Simply put, in a technologically advanced world, what humans have to offer is their humanity, and that only thrives in intensely human environments. I dub these spaces ‘Imaginariums’.
It sounds like a lot to ask for in just four years doesn’t it? The reality though is that this is a trend that has been developing for many years, at least 6, so we are talking about a decade of change, and as is the way with such things it is in the last couple of years that change really takes hold. So many aspects of the world today are changing at an exponential pace, and the Hockey stick shaped growth curve that creates always leads to dramatic ruptures. Nothing much changes year to year but everything changes over a decade. The iPhone is not even a decade old but smartphones truly have changed the world.
For Commercial Real Estate, all this technological change, and resultant behavioural change will lead to groundbreaking developments: the demand is coming for a new product, and that product will come wrapped as a service. And it will be very different from what we have all become used to. In many ways.
The best developers will work much more closely with their customers. They will know more about them, more about how they like to operate, how their space requirements ebb and flow, in scale and in usage, and what they need from ‘the space around us’ to support their business. They will be able to provide core permanent space, and then flexible on-demand space to top up as required, or for specialist uses. They will offer a wide range of services, on top of base rent, that their customer most likely could not procure on their own and will willingly pay a premium for. And on top of all this, they will be building a network of peers that will facilitate knowledge sharing, mutual support and commercial exchange.
In this services world, Real Estate becomes a genuine two sided market, where each side enhances the value of the other. Where we move from a hierarchical relationship to a genuine network. The network is the User Experience, and the User Experience is the Brand.
So in summary, I believe we could be entering a golden age of Real Estate. As technology upends the supply/demand equilibrium of generations, our understanding of what real estate is for, and the form of space itself, it could, paradoxically, be enabling a built environment that better serves everybody.
Now, is that prediction, or extrapolation?
Antony
Know what you know, and what you do not
I am often asked by people in the industry ‘What PropTech should I buy or invest in?’. To which my reply, which irritates those looking for easy answers, is that that is the wrong question. What you should be asking is ‘What do I need to know, to know what PropTech I should buy or invest in?’
So, what do you need to know?
Who is your customer? Sounds simple doesn’t it? Well, if you want to create new value and differentiate yourself you maybe need to think about who your customer is differently. For example, in a workplace world where the percentage of people working ‘flexibly’ is growing each year, and Space as a Service (no lease, purchased by the hour, day, week or month) is the new normal, who is an office owners ‘Customer’? It’s clearly no longer the, most likely, CEO or CFO of some corporate entity. No, the customer is now the individual, and you have to engage, inspire, interact with and sell to each and every one of these individuals who uses your space. That is, for most people in property, a new game and requires different tools and a new mindset.
If you are a retail property owner the same applies. It might be your retailer tenant that pays the rent, but really your customer is each and every person that walks into your shopping centre, or store. Retail property owners must own the relationship with visitors to their space. Without data, space is just a commodity. Alibaba have not bought a chain of Chinese shopping centres because they want to get into the property business.
How does your customer want to interact with you? When you can book an Uber in 30 seconds, make bank payments from your phone, order anything from anywhere in the world and have it delivered tomorrow, why on earth is any form of transaction in the property world so utterly painful? Why is it so slow, why isn’t the information you need available immediately, why can’t you access documents in a readable format on your phone, and why oh why do you have to wait till office hours to get anything done?
What part of your job could be done by a robot? Mckinsey say 49% of all tasks performed at work could be replaced by technologies that exist today. You might not like the answer but do you know enough about the technologies that are available today to dispute this? And in your case is the actual figure higher or lower than 49%?
What data do you have access to? Think of the four V’s of data: Volume, Variety, Velocity and Veracity? The digital world is built on data: knowing what you have, what else you need and where you could get it from is essential.
How well do you understand your market and your competitors? Have you considered that like Alibaba above, they might no longer be from within the property business? You might be being smart and following Wayne Gretzky who famously said ‘I don’t skate to where the puck is, I skate to where it is going’, but what if the game is no longer Ice Hockey. Kodak wasn’t put out of business by a better film maker.
All of the above is what you need to know BEFORE you ask about what PropTech to use or invest in. Because you need to understand clearly what is the pain point that needs relieving, what gains you are trying to achieve, and what is the job that needs doing. You should not touch any technology until you understand what the value proposition is.
If your job, or big chunks of it, is under threat from the robots, what can you do about it? What technology can you utilise, or co-opt, to fight off this threat? How could you turn this severe bug into a feature, and by embracing the robots, enable them to augment your skills and make you dramatically more productive than before. Being brutal, when you and your colleagues are up against the robots, it is not the robots, but your colleagues, that you need to outrun.
There are methodologies (de rigour in tech startups) that help you dig deep into your value proposition and business model, and these are very useful in answering all the above questions.
Once you get to this stage you should have a clear understanding of what technology (PropTech or otherwise – the nomenclature is not important) you need, and clarity as to how these new tools will catalyse innovation throughout your business.
The days of IT are over: every business is a technology business. The differentiator going forward is knowing what technologies you can use to compliment your human ingenuity, skills and creativity in the service of a robust, solid and scalable business. Knowing the right questions to ask is a good start.
Antony
Property Managers: From Zero to Hero
January 2017
OK, the zero moniker is unfair, but Property Managers are very much the last to be credited and first to be vilified players in the real estate industry. No-one notices them when properties run smoothly, but come any sort of problem they are the first to be blamed. Whenever a budget needs tightening they are at the front of the queue. They are the poor cousin to the dashing developer/owner.
Their world though is about to turn upside down, and as an industry, if they play their cards wisely, Property Management can move from Zero to Hero. Conversely real estate owners, long secure in the solidity of their assets, are about to see their world do the opposite. The certainties of real estate, reliable and upwards only income streams, are about to become a lot less certain.
All because ‘the Real Estate industry is no longer about Real Estate’. A few years ago this was easy to scoff at, and many did, but today the reality is sinking in. Business for asset owners is set to become as predictable as a Deliveroo riders income.
Why? Because the purpose, the point, the utility of real estate is changing, and changing fast. We really do not need shops anymore, and we most certainly do not NEED offices anymore. Or at least not for the reasons we used to.
Amazon is now the 4th largest retailer of clothing in the United States (remember all those property people saying ‘you need to touch clothes before buying them’?), and the smart physical retailers are speedily turning their stores into ‘experiences’. At the bottom end shops are serving much the same function as before (too cheap to ship) and at the top end the Apples of this world are configuring their spaces as brand building lust factories. The middle though is being hollowed out; desperately hoping click and collect is enticing enough to get people into their stores but not distinct, or profitable, enough, to find their life anything but tough. The crashing footfall of this year’s Boxing Day sales is a precursor of where this market is going. Ceteris paribus*.
In the office market, an amalgam of forces is impacting the demand side. The rise of the ‘gig’ economy, both full on freelancers or the ever increasing hordes of ‘Contract’ workers, working for one or more ’employers’ on a daily, weekly, monthly basis is reducing the need for permanent desks. Companies are moving to one or other end of the ‘barbell’, either huge and mightily powerful (such as Facebook & Google swallowing 85% of online advertising last year!) or small, nimble, and highly skilled. The SME (50-250 staff) market in the middle is dying. It always staggers people to hear that there are only 205 companies that employ more than 250 people in the City of London and 80% of all companies there employ less than 10 people**.
And the reason for all of this is technology. Whilst most people concentrate on ‘new ways of working’ the real action is in the changing nature of the work we do. Simply put, technology is moving further and further up the ladder of competencies and as McKinsey demonstrated last year***, ’45 percent of work activities could be automated using already demonstrated technology’. And this attack force is gaining power faster than ever, with advances last year in machine learning, computer vision and natural language processing that surprised, if not shocked, many in those industries. Google Generative Adversarial Networks for a taste of this.
This though is now well know and much commented on; how can it take Property Management from Zero to Hero? The answer lies in what the real estate industry is now about, if not real estate. And that is ‘Services’, in the broadest sense. Along with much else throughout society we are moving from a world that is focussed on ownership, to one all about 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. 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.
There is though even more to it than that. Regardless of whether you do actually occupy your space in an on-demand fashion, you will be using it in a different way. The robots really will remove the need to deal with any task that can be algorithmically defined. Which leaves us humans to do what we do best, and that is anything that requires social intelligence, is unique in character (empathy, design, innovation, imagination, creativity) or that requires us to interact with complex objects in an unstructured environment. This is the world of Moravec’s Paradox: “it is comparatively easy to make computers exhibit adult level performance on intelligence tests or playing checkers, and difficult or impossible to give them the skills of a one-year-old when it comes to perception and mobility.”
Now imagine what types of spaces we are going to need, and what types of services we are going to require to engender all this human creativity and collaboration. It’s going to be much more flexible, fluid, and customisable, with multiple types of spaces being available on-demand, with varying configurations of seating, facilities, desks, screens etc, etc. Atria and other ‘common parts’ or communal spaces will be much more intensely utilised, probably by many more people on a daily basis, but with many of them coming and going as they congregate or disperse as networks come together and interweave with each other. Think of a social network as opposed to a traditional organisational hierarchy.
This ‘Space as a Service’ requires an entirely different Property Management approach. This is much more Human Management than anything else. Yes, the physical asset still has to be maintained and function effectively and efficiently, but the robots will help with a lot of that anyway. What is required now is people with all the skills required to enliven a space, and make the ‘User Experience’ of that space special. For it is the ‘User Experience’ a space delivers that will determine the financial results physical assets deliver. A great ‘User Experience’ will help create a great ‘Brand’ and for an owner, it is their ‘Brand’ that will be their asset. This is not to say that the physical space itself is not important anymore, but it will no longer be the defining variable in value terms. Ultimately, it is the data about a space (UX can be quantified), rather than the space itself, that will matter.
Who can deliver this? Yes, exactly – the Property Management team. That’s how you get from Zero to Hero. Simply put, without great Property Management (whose remit will necessarily expand to fulfill the new requirements) a physical asset will decline in value. And vice versa. And if it is your business that can make that difference? Well, expect to be paid handsomely to make it happen. Asset owners have never had to provide ‘Service’ like this before, and that upends current business models. The real estate value chain is being reconfigured.
The downside? This is and will be hard to pull off. As much from the owner’s perspective as the management team. Moving from rent collector to service provider is, frankly, going to be hard for many owners. The cultural change required is profound. And building the necessary soft and technical (there is a lot of tech in all of this) skills that will be needed to fully exploit this opportunity is not going to be easy either. The prize though is great. The ‘Brands’ that pull it off, and build networks of delighted customers, will find that a world where each of us uses less space, for less hours a week than we do now, is paradoxically much more lucrative than it is today.
Try to imagine the real estate equivalent of Apple, who take the lions share of profits in the smartphone market because their combination of hardware AND software is so compelling they can charge a substantial premium for it. That’s what we are after; real estate hardware AND software.
A challenge for the year ahead.
Antony
PS In case you think the above is nonsense this was reported today: ‘Alibaba is buying Chinese mall operator Intime for $2.6B to modernize offline retail’. https://techcrunch.com/2017/01/10/alibaba-intime-2-6-billion/
The acquisition is all about “a new form of retail in China powered by internet technology and data”.
* Ceteris paribus: All things of course are unlikely to stay the same. The question is whether real estate people change the right things.