New Business Models in Real Estate: Space as a Service

Furuyama Moromasa, street scene Tokyo, circa 1700

The following is the transcript of a talk I gave on the 16th May to a select group of Urban Land Institute (ULI) members:

New Business Models: Space as a Service

A confluence of forces, from the supply side and the demand side, are set to impact on the real estate industry in a quite dramatic way.

This is not a matter of the usual property cycle, where we all know what goes up must come down. And vice versa.

This is structural. The very nature of demand is changing and will force fundamental change in the supply side.

Across all sectors. In fact sectors are merging - increasingly we are beginning to think of Live/Work not as being a binary thing but more of a blend. Barriers between the two are blurring.

The net result of this will be that the industry will need to create, refine and adopt new business models.

And at heart these new business models will all be based around the emerging notion of Space as a Service.

 

The Real Estate Business is no longer about Real Estate

And this is because fundamentally “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 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 Why bother to own something you seldom use, that becomes out of date rapidly, or that you really cannot afford.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.

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.

Key though is that this extends beyond spaces rented on-demand; regardless of tenure it will become important to be able to also rent or purchase on-demand all the services one might need to make the most of your space, or to enable the most productive use of that space.

 

5 Tech Megatrends

And 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 cannot be resisted and the Real estate industry needs to co-opt them as friend not foe. 

And they are:

Mobile - we all now have a 1990’s supercomputer in our pocket

Connectivity - That is connected via ever faster, more ubiquitous broadband

The Cloud - Connecting to all our data being stored in The Cloud, giving us access to practically unlimited computing power and all of our data anytime anyplace.

Internet of Things - With increasing quantities of data becoming available as we connect anything worthwhile to the internet, no matter how small or idiosyncratic. Like it or not we are beginning to live in a Panopticon.

And sitting on top of all of this is the fastest growing area of all,

AI and Robotics

It is developing at such a speed that the really important change in the workplace will come from the changing nature of the work we do, rather than where we do it.

In January of this year McKinsey said that

““Overall, we estimate that 49 percent of the activities that people are paid to do in the global economy have the potential to be automated by adapting currently demonstrated technology.”

So that is a lot of work that humans will no longer need to do.

And the slide above explains why these advances in AI are so dramatic. It is because AI algorithms can take advantage of the incredible parallel processing power of chips used in gaming machines - GPU’s, as opposed to what all the rest of us rely on in our computers CPU’s.

What is extraordinary though is the advances in GPU’s - these two lines at the bottom, with their seemingly meagre growth, represent CPU’s and chart growth based on Moore’s Law, where computing power has roughly doubled every two years for the last 50.

As you can see Moore’s Law is being trodden in to the dust by the growth in power of GPU’s.

Which means, AI is going to become a very big thing for all of us in a very short time.

As I say, the robots are coming.

Which explains why when we look at Image recognition, the machines are now on a par with humans

In 2010, computers failed to recognise about 28% of objects, or faces, they were shown. This is now down to about 5%, which is on a par with humans.

28% is effectively useless - 5% is endlessly useful.

So are we talking Human/ Machine Parity?

Err... no

Because a computer can recognise 200,000 images simultaneously in real time. 

Natural Language Processing

A similar story can be told about natural language processing, or speech recognition

We judge how good this is through the word/error rate, and humans make about 5.1 errors per 100 words. Currently computers make about 5.9, so we are getting very close to human level performance here as well.

In 2010 computers made about 16 errors per hundred.

Again we have effectively gone from a technology that wasn’t really much use to one with huge utility.

And knock on effects for work and the workplace

The Changing Nature of Demand

And these technologies are going to profoundly impact both where we work, and where we live.

• The nature of ‘Work’ is changing. It’s not change in the ‘way we work’ that matters but the ‘nature of work itself’ -

• We really do not NEED offices anymore, we really do not NEED shops anymore. In fact we really do not NEED an awful lot of real estate. That is not to say we don’t WANT these spaces, but what we do in them will change.

• If 49% of tasks today could be automated, then it seems clear to me that we need to start concentrating a lot harder on the things humans are good at, and computers are not. As tech becomes exponential, we need to foster exponential humanity. All of which leads, I think, to a need for what I call ‘The Imaginarium’: space that allows our human skills to flourish. Places we go to to do what humans are good at. 

• Then we have the changing look of the enterprise - the seemingly relentless rise in freelancing & the contingent workforce.

• In their report, “Workplace 2020” last year Google wrote that ‘Flexible working will be the defining characteristic of the future workplace.’ and the bigger the company the more so. In companies of over 6000 employees 66% will work flexibly by 2018

But most companies are small.

• The City of London for example is not what you thought: 80% of companies there have fewer than ten employees. Half the occupied units are less than 5,000 sq ft

• 72% are less than 10,000 sq ft.

• 99% of London companies employ less than 50 people

So a large percentage of occupiers very suited to flexibility.

• Which will bring us I think to thinking about “The six modalities of occupation: It will not be uncommon for each company to split up their office footprint to be a bit of each of these — Central office, Hub space, serviced office, co-working space, client office or home.

• And then you have the rather big unknown of where people will decide to live, in an AI powered world. Perhaps with the rise of autonomous vehicles many may choose to live a considerable way away from where they work, as the commute would be standard working time, once you do not need to drive. Bain wrote a report suggesting this last year. Against that you have Richard Florida’s Creative class idea that Cities are just too exciting for people to resist.

Either way ‘All Change’ are the best two words to sum up the changing nature of Demand.

The Changing Nature of Supply

So how will all this change supply?

Well you have people who:

• Prefer services over products

• Don't need to go to an office to work

• Are used to on-demand 

• And are uber connected with vast computing power in their pocket.

The answer, to me, has to be #Space As a Service - space that takes account of these four trends. Space that is specifically designed to allow humans to do what they are good at.

And that take advantage of all these technologies to remove friction wherever possible and enable discovery.

Friction in the sense of making anything one needs to do to be as friction free as possible. How does this space enable me to do that? How easy is it ‘get stuff done’ in this building?

And Discovery in the sense of being able to find, or access, anything I need to do my job, or make the most of ‘the space around us’.

Where does this lead?

• It means Landlords moving from being Rent collectors to service providers

• It leads to Physical space alone being considered as ‘dumb’ - it is the ‘digital layer’ of data driven services that makes it smart

• It leads to the user experience of your space being what defines your brand - and your brand being what defines your value

• And to create a great user experience you need Great Data + Great tech +  Great Humans - all three. Two out of three IS bad.

• And it leads to a far more important, pivotal even, role for Property Managers as they become the curators of the user experience. So the days of that industry always working down to a price are, hopefully, coming to an end.

Culturally this is going to be hard for the real estate industry. In fact I see it as the biggest challenge. Are real estate people really the best people to operate real estate?

It’s a serious question, that three recent events underline.

First, Alibaba the e-commerce company, bought a large shopping centre/department store owner in China earlier this year.

Secondly, IBM - yes IBM - have just sublet an entire building in New York from…. WeWork. Just shows it is not plain real estate they were after.

And thirdly, Google have just submitted an application to develop a 12 acre site in Toronto.

This is not going to be easy….

But…

Space as a Service IS the Future of Real Estate

Retail in 2017 - the year offline and online merge

Gustave Courbet - Bonjour Monsieur Courbet - Musée Fabre 1854

On the 2nd March 2011 Steve Jobs was on stage launching the iPad2. During his presentation he made the case for why Apple was not just another computer company. “It is in Apple’s DNA that technology alone is not enough — it’s technology married with liberal arts, married with the humanities, that yields us the results that make our heart sing.”

In 2017 you could transpose this quotation to read “It is in the Retail Markets DNA that the liberal arts, married with the humanities is not enough - it's by adding technology and data that yields us the results that make our heart sing.”

Yes the product is still of primary importance, and it is artistic and intensely human skills that are required to create goods people want to buy, but these alone are no longer enough. All of us need to know our customers better; who they are, what they like/dislike, what they buy, what they crave, when they shop, where they shop, and most importantly of all, what makes their 'heart sing'. That's a tough ask isn't it? 

Historically it has been nigh on impossible to understand our customers this well, at least since the era of Supermarkets and Shopping Centres put paid to people shopping in the same local shops every day and being served by the same person, who was probably a neighbour anyway.

Now, apart from understanding our customer deeply, we have to contend with the great elephant in the room, the online, virtual world. The old shibboleth of 'people like to touch things' has proven to be wishful thinking. Amazon is now the 4th largest clothing retailer in the US, online sales are growing multiples of times faster than in store, and it is likely that 20% or even more of all sales will be online in the UK by 2020. 

We have to acknowledge that most people, for most products, do not HAVE to come to a store to shop. Yes Click & Collect drives a fair amount of traffic to stores but this is just a temporary windbreak until the likes of Amazon crack same day delivery at scale. In the US Amazon have depots within 45 minutes of 25% of the population. Certainly within major cities, very fast delivery will be a solved problem within a few years.

So what do we do with physical retail? The answer is two part; first, the experience of shopping has to be exciting, stimulating and very agreable. The aim must be 'the liberation of dopamine'! This is the liberal arts and humanities side. Great product, environment and service. A friction free sensorial treasure hunt. An experience that cannot be replicated offline.

The second part is that we need to use technology, data and networks to understand our customers in such depth that we can personally tailor the experience our shops and centre deliver to each and every visitor. But how? Well in 2017 it is not 'Go West, young man' but 'go East', and look at China. In particular look at the incredible online behemoth Alibaba, who are involved with more than 80% of ALL online shopping there. 

In January they bought Shopping Centre Owner Intime, who run more than 30 mid-to-upscale department stores across mainland China for $2.6 billion. "Today we cannot just separate online and offline" said Alibaba CEO Daniel Zhang. This is like Amazon buying Hammerson and is a huge signal that big change is afoot.

Why would they buy, outright, 30+ shopping centres? Because they have realised online isn't enough and retailers need shops? Absolutely not. They have realised that the future of retail is where online and offline merge into one offering for the public. Zhang describes it as a networked distribution channel, that is a closed loop and data driven. E-tailer and retailer come together to be one. 

Imagine how accurate the profiling could be with the e-tailers knowledge of what people are buying locally, what the retailers have in stock, and the profiles of millions of individual users. Bolt on online payments in store, shared warehouses and a battle hardened logistics operation, and you have a 'data platform' that facilitates exceptional customer experiences.

This is Systems Thinking on a grand scale, optimising the entire value chain. Perhaps it is only Alibaba in China who are in a position to do this, but the underlying strategic imperative to create an end to end offering that is soft and flexible enough to cater for any number of whimsical customers is an idea to take to heart.

If you know what a customer wants, and also what is available, then you are in a position to create compelling reasons to visit your shop or shopping centre. To the shopper the experience is very human, very soft and pleasurable, but under the hood it is all about data. The more data you have and the more you understand the four V's about it (Volume, Variety, Velocity and Veracity) the greater the experience you can provide your customers.

Online and offline are merging to create something better than we have today. It turns out that technology and the liberal arts, just as Steve Jobs said, not only need each other, but together really can make 2+2 = 5.

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And how does this impact Agents?

So how does this merging of Offline and Online impact on Agents. If their Retail Property clients are morphing from being ‘Property’ people to ‘Data’ people how is that going to impact relationships? Will they even understand each other? Where does PropTech figure in all of this?

The answer lies in what PropTech, in fact all technology, is really there to do: remove friction and enable discovery. Wherever there is a kink in the road, or a bottleneck, that makes doing X harder than it should be (or you’d like it to be) then PropTech’s job is to remove that blockage. Where too much time is spent trying to find out Y, or the answer to Z, then you have a ‘discovery problem.’ You might put this down to information overload but what you are really experiencing is filter failure; the inability of your systems to break down your data, to understand it, and to return to you exactly the information you need, when and wherever you are.

Truth be told, PropTech is about making your company a technology company. In a similar way to how Alibaba boss Jack Ma says ‘We are a data company, not an e-commerce company’ Property Agents have to become, at heart, data companies. Sure, they can retain and exploit all their human skills, but what is their actual purpose? Buying, selling or leasing property is what they are paid for. And to do that they need to understand exactly what their asset is (far more than bricks and mortar), who they are likely to transact with, and why that entity is going to deal with them as opposed to someone else.  It should not be an accident that an agent introduces this property to that retailer. Serendipity needs to be engineered.

A great deal of data is in the public domain nowadays, but much of the really valuable data is in the hands of agents, even if many/most of them either do not realise this or do not have the tools (or inclination) to make best use of it. 

PropTech startups are desperate for the sort of data that agents leave lying around. At the moment agents are largely protected from ‘disruption’ because startups don’t have access to the data that could rearrange the real estate value chain. That though will not maintain. It is an ‘unknown unknown’ but something will occur to upend the apple cart. In business it always does. Either a data owner (one of the big surveyors) will partner with a startup to leverage their own data or they will build the capabilities in house. And when they do, this newly fangled technology company, that happens to operate in the real estate sector, will be enormously powerful and dramatically more competitive than the bulk of market players. 

The company that understands that they are in the data business, and that augmenting the human skills of their most capable employees is the way to out-compete their peers, will be a force to be reckoned with.

In my crystal ball disruption to the world of agency will come from within. When PropTech moves from being a niche silo to be being part of an agents DNA, feathers will be ruffled. 

Who will make it happen?

Antony

#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