Real Estate as a Service: Part 4 - Invest Wisely

Benozzo Gozzoli: Procession of the Magi (detail) - 1459-1460 Palazzo Medici, Florence

In 1962 Arthur C Clarke wrote an essay entitled ‘Hazards of Prophecy: The Failure of Imagination’. It contained his ‘three laws’, the third of which states:

“Any sufficiently advanced technology is indistinguishable from magic”

In 2018, I bought an iPhone XS, and to unlock it all I have to do is look at it. That is Magic. Isn’t it?

Well magic is exactly what it felt like for the first week or so of having the phone. After that, as is always the case with magical new technologies, it was something I no longer thought about. It was just how I opened my phone. Big deal. Yawn. We humans are very hard to please, for long. This, in a nutshell, is why the real estate industry is changing so very fast.

There is a ‘Trinity of Transformation’ underway, involving massive increases in the data we have available to us, the scale of the computing power at our disposal and significant advances in Artificial Intelligence, especially around the sub-set of Deep Learning. Combined, this Trinity is remodelling how we work, live and play.

All around us, to a degree already that most people are unaware of, artificial intelligence is performing a ‘software update’ to society. The renowned Chinese AI venture capitalist Kai Fu-Lee wrote last year:

“AI algorithms will be to many white collar workers what tractors were to farm hands: a technology that dramatically increases the productivity of each worker and shrinks the total number of employees required.”

This will, absolutely has to, have a major impact on all real estate asset classes, and will pose both a significant threat and opportunity to investors. All the drivers we have discussed in the previous three articles in this series are obstacles, or flywheels, that investors need to avoid, or leverage, across their portfolios.

It is true that the market for trader developers will not change that much. Buy an asset, add some value through planning or repurposing and get out, is still a game that the technologically unsophisticated can play, and play successfully. A very wealthy investor recently told me he has no interest in PropTech, as ‘they’ve said tech will change everything for ten years and nothing has changed’. So long as he sticks to real estate as a Product business, trading physical assets in short order, he is probably right. But this is a game of musical chairs; as the move to being a Service industry picks up pace, the necessity to become far more technologically aware, and data driven, will gradually intensify. Anyone in the medium to long term real estate asset business needs to be cognisant of genuine structural change. You don’t want to be the one left with no chair to sit on.

We have seen how the nature of the office is fundamentally changing with #SpaceAsAService becoming the norm. Whether in terms of on-demand space, or as space that helps enable a productive workforce, flexible working is, as Google wrote in their research report ‘Workplace 2020’, set to become ‘the defining characteristic of the workplace’.

Offices are going to be used differently, as catalysts for human skills and, in the context of CBD space, less as five day a week work locations than meeting and collaboration venues, where teams go to do what they need to do together, before retiring to places and spaces more conducive to singular, focussed work.

We know the direction of travel, but the exact route is hard to define. So any office investments need to be stress tested for flexibility. How easily, and cost effectively can this space be repurposed? This has to be the starting point; inflexible space can only really decrease in value over time. Add in the fast growing importance attached to sustainability, and we are certain to be looking at a significant amount of obsolete office space within a few years. You might not need to be technically advanced, but your assets have to be. As more building performance data becomes publicly available we are bound to find many #PropTech solutions helping buyers avoid space no longer ‘fit for purpose’.

But what makes for a good investment, in this new world? How will space be judged, valued? It looks likely that the notional rental value will become less relevant, as the aggregate of income potential becomes a more accurate measure of value. Given an operator capable of creating a great user experience, what total income might this space generate? And of that, how much will go the operator themselves, in return for successfully monetising the space? Service costs.

Above this though, new KPI’s, new ways of judging the quality of an office asset, will emerge. Principally ‘Productivity, Wellness and Sustainability’. How suited is this space for creating a productive workplace, how well does the environment support the health and wellness of users, and how sustainable is the asset? Scoring highly against these three criteria is going to become the driver of medium to long term value. Partly because regulatory changes will carry a carrot and a stick to force improvement across the board in the built environment, but also because our customers are simply going to demand we deliver better real estate. A world aware of ‘Extinction Rebellion’ knows exactly how large an impact on the environment real estate has, and is not going to tolerant indifference in the years ahead. Best practice will be smart practice. Virtue will be rewarded. Doing the right thing need not damage the bottom line. Being a Service industry does have advantages, for everybody.

Alongside all of this is the rise of the real estate Brand. Historically the real estate industry has had no interest in brands and branding. It was a supposed truism that ‘you cannot brand a building’. However, as landlords and investors get better at creating definable user experiences, tailored to the particular wants, needs and desires of their target customers, Brands are going to develop that have real value. You may scoff at WeWork’s supposed $47 billion valuation but you cannot ignore that much of that is wrapped up in the WeWork Brand. Savvy investors will be developing standalone Brands that have real value in parallel to the physical assets they are ‘applied to’. Adding X Brand to Y asset could, will, have an impact on the value of that asset.

And that’s just offices, what about other asset classes?

You may or may not believe in the ‘Retail Apocalypse’ but it seems clear that this is an industry in turmoil. Following the developments in technology one would conclude that physical retail has to be one of the following: a ‘destination’, a proxy fulfilment centre or a supplier of cheap and everyday purchases. Being highly tuned to local particularities is becoming essential, and doing all of this based on highly granular real time data equally so.

How many retailers are good at this? And how many real estate people really care? Not lip service, but really care, in a deep and meaningful way?

The better investors are going to become very skilled at understanding the value and power of data in retail real estate. Partly for their own use but also as a way to identify the best retailers to try and attract as customers. So they are going to embrace ‘KYC’ in a rich way, moving beyond basic data points to a deep knowledge of the demographic, psychographic and socio-economic profile of their market. They are going to use mobile phone data, and other non traditional real estate data sources such as credit card and transaction data, local event and physical conditions data to understand patterns of behaviour, footfall and customer characteristics in new and insightful ways. They are going to embrace geospatial and AI driven analytics to help them know where to buy, where to sell, where to scale up and where to refurbish. And above all they are going to target retailers who actively exploit the three ‘superpowers’ that Machine Learning is enabling in retail; personalised product recommendations, assortment and pricing optimisation. The best retailers are technologically sophisticated and in an apocalypse it is wise to back the best.

The industrial market is the ugly duckling of real estate. Not that long ago this was a sector all about dumb ‘sheds’. Today industrial is perhaps the most highly technical real estate asset class. Stuffed full of robots, planned to enable the online retailers nirvana of same day delivery, increasingly vertical rather than horizontal, and nodes in new ‘logistics as a Service’ marketplaces.

Increasingly the industrial real estate market is going to be about matching short term demand. The growth of companies like Stowga point to a fluid, dynamic market that waxes and wanes, with a multitude of different players, each with requirements that if they can be fulfilled are lucrative and therefore high paying. All retailers, but especially the online breed, are obsessively trying to achieve ever faster delivery, which means ‘the last mile’ becomes hugely important. Who can help me get my goods to my customers faster? Who can provide me with this ‘logistics as a Service’? Even the largest industrial REITS are small in the context of the size of the industrial market, so an increased focus on networks and ecosystems is likely. Today industrial landlords think little beyond letting their ‘sheds’, but in the future the smartest will endeavour to build complete ‘solutions’ for their customers. Every retailer has logistics problems, but only the largest have the capabilities to really solve them. As with office operators concentrating less on letting an office and more on enabling a ‘productive workforce’, the best industrial operators will be delving deeper into the real ‘jobs to be done’ of their customers and seeing how real estate can fit in to the equation, beyond being a ‘dumb shell’.

And residential? Build to Rent, Co-living, Multi-function and mixed use are all growing fast. As the number of people renting rather than buying grows inexorably, this sector is awash in new business models. Residential developments designed for singles, for young families, for retirees, for business travellers, or digital nomads are all popping up. Each is designed for the particular needs of different types of people, with different layouts, features, amenities and attached services. Each is created and curated using strong human skills but in all cases it is, as we have seen before, a ‘Human + Machine’ game.

Particularly in the US the largest investments are going in to the ‘iBuyers’, those companies that will buy your home pretty much immediately. Billions of dollars has been invested in the likes of Opendoor, Zillow, Offerpad and Knock. Predicated on the hypothesis that with enough data one can buy and sell algorithmically, these investors are looking to make a lot of money by taking a small cut of a very large pie. How this pans out is one to watch, but it certainly provides an outlet for those investors looking to, or needing to, deploy a large amount of capital.

Across offices, retail, industrial and residential their is clearly much change ahead. The pitfalls are not hard to see.

Neither are the opportunities. Avoiding the former, and seizing the latter, is not a trivial, or easy, task. The one certainty though is that those who navigate these markets successfully will be highly skilled in much more than real estate alone. Data, technology, behavioural science, human psychology, anthropology and ethnography will all play their part. Above all they will be great learners. The tech industry lives by the mantra of ‘Build, Measure, Learn’, whereas in traditional real estate we largely stop at ‘Build’. This is set to change.

For investors, the next 10 years will be complicated. They have to navigate the change that technology is bringing to how we all use the various asset classes. When people do not need an office to work or a shop to go shopping it fundamentally changes the dynamics of the office, industrial and retail markets. When residential property becomes too expensive for a significant percentage of people to buy it not only changes the nature of tenure (rent over buy) but where people wish to live. If you cannot afford to buy then you may as well try and live in the best areas you possibly can. Urban centres are more alluring to young renters than buyers. All of this means some assets are going to become significantly more valuable, but also some assets might well lose a significant amount of value. Quite a lot of real estate is going to simply become obsolete in its current form. Navigating these changes will require large doses of human intuition, judgement and imagination, but even larger quantities of data will be needed to really understand the patterns, correlations and causations in the market.

Beyond understand the changing dynamics of the underlying market new technologies and data sources are going to be a major aid in investment supply/demand matching. Richer data should allow us to match the right operator with the right property, the right tenant with the right space, and the right investor with the right asset. If you know enough about both sides of a market, efficient and effective match-making should be possible. Complete automation is unlikely but dare I suggest that only the best human participants should feel comfortable about the future?

The smartest, most successful investors will be technologically astute, and armed with data and analytics that today would look like science fiction. Arguably this is where #PropTech could offer the most value.

This was first published on MIPIM PropTech in 2019

Real Estate as a Service: Part 3 - Landlords aren’t what they used to be…..

Benozzo Gozzoli: Procession of the Magi (detail) - 1459-1460 Palazzo Medici, Florence

In Part 1 of this 5 part series we looked at the changing nature of demand within the real estate industry, and in Part 2 we looked at how as an industry we need to become better informed about new technologies, and how the winners of the future will be those who marry Human + Machine skills. In this article we will look at how all of this change will impact on Commercial Office Landlords.

We’ve seen how it is likely that ‘Flexible working will be the defining characteristic of the future workplace’ (Google, Workplace 2020). JLL have stated they believe 30% of the market will be flexible by 2030, but this seems too conservative. According to Hong Kong based research company MingTiandi, by March last year, 56% of Asia’s top 200 occupiers were already using flexible workplaces in some capacity, and 91% were considering using them. If you look beyond just the workplaces that are procured on a flexible basis (co-working, short term leases and the like) and include all the workplaces that are adopting flexible working practices, irrespective of tenure, then it would not be outlandish to think a large majority of the market, especially the top end, will be effectively #SpaceAsAService space by 2030.

And that means the ‘Operators’ of all that space will first of all be highly important to the revenue generating capabilities of an asset, but secondly, will represent a significant cost. A well operated building, providing a great user experience, will definitely be generating considerably more revenue than a standard lease would have enabled, but how much of that additional revenue will flow through to net earnings and who will be benefiting from it?

Who will the ‘Operator’, the creator and curator of that user experience, actually be? Will it be the Landlord, the Facilities or Property Manager (ignore the names - these companies will morph into new entities with new, more appropriate nomenclature), 3rd party companies (WeWork, TOG, Knotel etc), or some combination of all three?

The answer will determine what the value tree looks like: today the Landlord is very much King or Queen of the Castle, but in this new world they could easily become little more than the providers of commoditised ‘dumb space’

The office landlord’s biggest strategic question to answer today is ‘Am I a Chicken or a Pig?’ Referring to the joke about ‘What’s the difference between the chicken and the pig in a bacon and egg sandwich? - the chicken is involved but the pig is committed!

In the future world of offices the operators are the pigs and none will be a success unless they are fully committed to being the service oriented companies that are essential to creating great spaces for customers. No company actually wants an office, what they want is a productive workforce. In old school real estate we have focussed on the former, but in the #SpaceAsAService world it is the latter that matters. And performance will be judged against new KPI’s such as sustainability, wellness and productivity (more on this in Part 4).

But delivering this is complex and hard so whoever manages to repeatedly pull it off will be much in demand, and expensive. The pie is getting bigger but there are more slices.

In an ideal world landlords would smoothly transform themselves from Product to Service companies, hire a wide range of new employees, with a rich diversity of new skills, and see off the challenge of the likes of WeWork. In so doing they would capture all the new value being created. In the real world it is more likely that WeWork and others perform the reverse trick and remove Landlords from the equation entirely by owning buildings themselves.

The argument against that happening is ‘they don’t do that in the Hotel business - they use an ‘OpCo/PropCo’ strategy’.

Well yes, but in an advanced #SpaceAsAService world the physical asset is going to be continually modified or adapted to reflect the data driven insights about customer wants, needs and desires. In that sort of environment the operator needs near total control over the property in order to maximise utilisation, and therefore revenue. Being an owner/operator has significant benefits. So the tradeoff is complicated, but the answer is relatively clear. IF you are a major landlord, with a Pig mentality and culture, you should do it all yourself. They are few of these around. Those that do exist will be great investments, as they represent the optimum solution. Mostly though landlords will not be able, or desirous, of changing to this extent, in which case their best move will be to partner, very tightly, with an operator or operators. This partnership though cannot be a standard hierarchical client/supplier type arrangement; this has to be about one coin, with two sides. A Team of Teams, with aligned interests and incentives.

The alternative solution is for landlords to ‘stick to their knitting’ and simply sign long leases with a 3rd party operator, knowing it will be leaving money on the table. Being a rent collector not a service provider is no crime. For certain types of companies it will be absolutely the right thing to do. But be in no doubt, this is no way to generate large returns. Low risk, low reward is the game here.

There is a big question left though, and that is about who owns the Brand associated with any #SpaceAsAService operation.

There is a strong argument that the User Experience = Brand & Brand = Value. Whoever ‘owns’ the customer relationship is in the best position to embrace new revenue generating opportunities.

As one builds a large network of customers, the potential to develop an ecosystem of mutually supporting companies who co-create new products and services specifically designed for the particularities of those customers is great. In the tech world one talks about the ‘TAM’ (total addressable market) and ‘Adjacent markets’ (complimentary offerings to one’s core business - think Uber and Uber Eats). If one goes back to the idea of ‘the real estate business is no longer about real estate’ then these adjacent markets, that expand the total addressable market, become very interesting. WeWork of course is the poster child for this; already they are tapping the adjacent markets of co-living and education with WeLive, WeGrow and the Flatiron School. And they have a large and growing ecosystem of partners addressing the needs of their ‘members’. You cannot do this unless you own the relationship.

Does owning the relationship matter? I think it does. The recent history of the US based Events/FlexSpace operator Convene is instructive. They typically work closely with landlords of Prime offices to install a ‘Convene’ as an amenity to people in the building. They started by providing great Event spaces, with quality catering and other services but have now expanded their offering to include flexible workspaces, meeting rooms and quiet zones. They then started offering all of this as a ‘White labelled’ service that a landlord could Brand as their own, which seemed a neat way to expand their distribution and service more customers. Recently though they have pulled back from this so that if you want a Convene type service in your building then you have to have a ‘Convene’ space. They are continuing servicing their existing white labelled spaces but are no longer offering it as a service.

What I think this demonstrates is that the power, and value, of Brand is growing fast in real estate. And becoming a key differentiator.

We’re back to the value tree; who’s going up, and who down? In the past, one ‘Prime’ office was pretty much the same as another. Beyond the marketing brochure it was all the same. High quality, but just the same. Today, two identical buildings are likely to become differentiated by the services on offer, and by who is offering them. The total user experience will define them, and represent how customers think about them. For the likes of Convene being the Brand that makes that difference really matters.

Where that leaves an ‘un-Branded’ landlord is hard to say. It will all depend on what sort of scale ‘Operators’ end up achieving. Who needs who more is a function of size. If landlords find that their customers demand X or Y operator be in their building as an amenity then they’ll lose a lot of power. If enough other customers exist that aren’t so bothered then landlords can breathe easily. Either way we are moving beyond the primacy of ‘location, location, location’. The power of Place is giving way to the power of Service. This is a critical juncture; it is likely that several very powerful Brands, with particular user experiences, designed with great insight into customer needs, will develop over the next five years, and these will sit solidly at the top of the value tree. If I was a major landlord I would be developing my own Brand or Brands (not necessarily to be self-operated, more likely in a partnership of sorts) but also buying stakes in all the key operators. Remaining a straight, no frills, real estate landlord feels somewhere between a dead end and very risky.

All of the above is an open door for PropTech companies, as any successful strategy will necessitate an understanding of end users (customers) that currently does not exist. Where to buy or build, what to buy or build, will increasingly be informed by a prior understanding of who a landlords customers are, or who they wish their customers to be. A users’ needs & expectations will be particular to their type of customer; they are building, designing for them, not to a standard, generic specification. Whether they are doing it themselves, or in partnership with an operator, they, as the landlord, need to define what their Brand stands for, what differentiates it, and why people should pay them more than they hoped they would have to, to occupy their space.

What is it about the user experience of their space that is compelling?

That does not sound very ‘techie’ does it? But actually it is, very. Because the best tools you can enlist to help you work this out are sensors, data and analytics. There are three things we need to know about a space, be it a City, a neighbourhood, a building, or a meeting room, in order to personalise, optimise and localise the experience of that space.

#1 we need to understand how the physical space is functioning, in terms of light, noise, temperature and air quality? That tells us if the infrastructure is performing as it should and whether or not this is a pleasant place to be.

#2 we need to understand how the space is being used, if people are loitering in certain areas, avoiding others, by how many and when are spaces being used, and what are they doing there?

#3 we need to understand who is using any given space. what are they doing, what do they need, and why?

Putting all of these data points together is a prerequisite for creating great spaces that deliver a great user experience. Using artificial intelligence to then seek out correlations and causations between how a space is functioning, how it is being used and by whom is the power tool that will take placemaking and workplace design to a new level. This is where PropTech will go as it gets more serious. This is where the next generation of real estate winners will go. Deep understanding leading to a better built environment.

Much of the above was unthinkable 10 years ago; in 10 years time it will be old hat. In the meantime it leaves landlords in a difficult, potentially dangerous position. Changing technology is changing demand and exactly what is required, and the value of the new, is not yet clear. But standing still isn’t an option. If this trend is as strong as I am suggesting, there is much to lose. But also much to gain.

My advice? Be a Pig!

This was first published on MIPIM PropTech in 2019

Real Estate as a Service: Part 2 - Human + Machine; because technology is not enough

Benozzo Gozzoli: Procession of the Magi (detail) - 1459-1460 Palazzo Medici, Florence

In Part 1 of this 5 part series we looked at the changing nature of demand within the real estate industry and concluded that everything boiled down to customers demanding, as they do in other walks of life, a great user experience. They are no longer content to simply buy the Product we offer them, but rather demand we deliver to them a Service, a supporting suite of physical and digital features and functionality to help them make the most of the places and spaces where they live their lives.

Delivering a great user experience though will not be easy, and will require a mix of skills the industry does not currently have, and a grasp of the technology trends that few have. What these are, and how to acquire them, will be the subject of this article.

Human + Machine; because technology is not enough.

‘The Real Estate industry is no longer about Real Estate’

The starting point for understanding the skills that will increasingly be required within the real estate industry is that all the real estate knowledge, capabilities and experience you have today will be just as relevant, and important, in the years ahead, but whilst they will remain necessary, they are alone, no longer sufficient. As the industry moves from ‘Product to Service’ we all need to up-skill if we wish to remain competitive.

The second fundamental point is that in depth PropTech, or technology skills in general, are also necessary but not sufficient. Despite what one hears so often, humans cannot live by STEM knowledge alone.

The future belongs to Human + Machine. In an age of exponential technology we need to become exponential humans. Better versions of ourselves, augmented by technology not replaced by it.

Picasso once said “Computers are useless: they can only give you answers”, and he was right, despite 50 years of Moore’s Law since saying it. We may now be able to put 10 billion transistors on a computer chip, and the infrastructure available to run advanced programs may have increased in scale 300,000 times between 2012 and 2018 (yes, 300,000X in 6 years), but speed is not everything. Machines are good at what machines are good at, and humans likewise.

The way to think about the advance of technology is that anything that is ‘Structured, Repeatable, Predictable’ WILL be automated. It is only a matter of time. Likewise, as Dr Pippa Malmgren has written, anything ‘dull, dirty or dangerous’ will become the province of machines. 

A McKinsey report in 2017 stated 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’. 

Note they talk about activities rather than jobs, but that 49% relates to daily tasks that are ‘Structured, Repeatable, Predictable’. Something cannot be made ‘Structured, Repeatable, Predictable’ though until it has been created in the first place, and computers are pretty much useless at creation. Unlike us humans. We may not all have the genius of Michelangelo, or Shakespeare, or Mozart but the human brain is designed to be creative. When we think of human skills we think of everything that ‘the machines’ are not: Design, Imagination, Inspiration, Creation, Empathy, Intuition, Innovation, Collaboration, Social intelligence, Judgement. These are what humans are good at and whereas the ‘Structured, Repeatable, Predictable’ tasks we have traditionally been paid to do are definitely going to disappear, as of now (and for probably a good few decades into the future) no machine is capable of replacing us for ‘human’ work. 

So that’s alright then? We’re safe…. 

Actually no, having strong human skills is not enough. Because the future really does belong to Human + Machine. Picasso may have been right about the uselessness of computers, but give a computer the right question and they do have a fabulous utility in returning an answer faster or cheaper than a human can. 

The point is that there is a two way bargain to be had between humans and machines. We can help ‘train, explain and sustain’ a machine (Paul R. Daugherty CTO of Accenture has written extensively about this) but a machine in turn can amplify dramatically our own capabilities. For example we need to decide on the data inputs we feed into an Excel spreadsheet, and define the formulas we wish to calculate, but once done the computer can handle millions of such calculations every second. A trivial example, but the same fundamental merging of capabilities scales up in the most truly awesome way when we start talking about the capabilities of artificial intelligence.

Neither a human or a machine alone will be able to compete with a human + machine working in well designed collaboration. Gary Kasparov, in his book Deep Thinking, has shown how if you combine a human with a chess computer program a “weak human + machine + better process was superior to a strong computer alone and, more remarkable, superior to a strong human + machine + inferior process.” Human + machine trumps any human alone, but the real winner is pairing a human and a machine with a sophisticated understanding of how the two can best exploit each others abilities.

We have complimentary skills; those individuals and companies that can meld the two will have an almost unassailable advantage over those who cannot, or simply do not.

The better PropTech companies will aggressively pursue this merging of human and machine capabilities. And the smarter real estate companies will be working with them, in partnership, to exploit these new tools.

Let’s look at how this might evolve.

Starting with what is easily available today, it is remarkable how much second rate equipment one sees in use within real estate. Without powerful laptops, desktops (if you must) and smartphones much of PropTech, and technology in general, will be inaccessible to you. Because any smart company combines quality personal hardware with the data centre scale hardware available on-demand from the likes of Amazon AWS or Microsoft Azure. Linking almost infinite processing power, with ‘all the data in the world’, via high speed, ubiquitous connectivity is one powerful user experience that automatically differentiates winners from losers. This should be table stakes; sadly it is not. Yet.

Going forward, all our real estate will become cognitive, in the sense of being able to tell us in real time, through the use of pervasive sensing, how it is both performing (think lighting, temperature, noise, air quality) and being used by our customers. Real estate today is largely run on hunches; educated (or not) guesses on performance and usage. Perhaps the most important PropTech of the next few years will be dedicated to enabling us to understand our real estate assets in a way that is vital to efficient and effective use, but that is largely missing in the industry today. 

In the tech industry there is a default position when developing new software. ‘Build, Measure, Learn’ is rule No 1; put a product in the hands of a user, measure how they use it, and then iterate, iterate, iterate, as usage demands. In real estate we stop at Build; we don’t measure, we don’t learn and we don’t iterate. This has to end. It works for a Product business (once they’ve signed that lease….) but it is death for a Service business. We have to use all the technology at our disposal to understand how our real estate operates at a granular level. And then use our real estate skills to interpret that data; we may be able to make a lot more computer driven predictions about how our buildings are working in the future but we need highly developed human judgement to do the right thing in response. Human + Machine wins.

So beyond our existing real estate skills, we need to layer on top ‘modern’ hardware, high speed connectivity and cloud computing. All of this as a platform for designing the data science and analytics the best real estate operators will apply to the multitudinous real-time data points emanating from the Internet of Things networks they will become skilled at rolling out, across their portfolios. Into the mix will also be woven Generative Design, BIM. Digital Twins, Drones, 3D printing and Virtual and/or Augmented reality. And then on top of all of this the real winners will be making extensive use of what Harvard Professors Erik Brynjolfsson & Andrew McAfee describe as the most important general-purpose technology of our era, Machine Learning. (More on that in part 3)

None of this will be particular to the real estate business. Throughout all industries these digital skills will increasingly become standard operating procedure. Initially a lot of outsourcing to specialist providers will take place but over time, more and more skills will find their way into all businesses. Either through specific hiring policies or by the ‘continuous learning’ of existing employees (can anything be more vital?). It is annoyingly common to hear ‘we are not a tech business’ within the real estate industry, because like it or not every business will be a tech business in the future. And we’ll all think nothing of it, as we no longer think anything of having in our pocket a smartphone hundreds of times faster than a 1980’s Cray Supercomputer. We become blasé about the magical very quickly.

Yet even with all the above we still won’t have the full compliment of skills the future real estate company will need. Because the other side of the coin to all this exponential technology is vital as well. And that is the highly developed human skill of User Experience design.

User Experience design is about how something works, not how it looks. It is about removing friction and enabling discovery. Removing friction in the sense of making it as easy as possible to do the things we need to do, and enabling discovery in the sense of making available to us all the information we need to do whatever it is we are aiming to do, wherever we are.

Think about this in real estate terms; how easy is it to get in and out of your office, to book a meeting room, to book an event, to adjust the heating or lighting, to register a helpdesk request, or book in a visitor? After more than 500,000 Leesman Index employee surveys have been completed, only 57% of office workers say they believe their workplace enables them to be productive. Clearly there is much to be improved. Similar ‘user experience’ issues apply within residential and all other asset classes. It just goes on and on; endless repeated ‘jobs to be done’, issues to be resolved or information to be sourced. Real estate is often one long irritation of an industry to deal with. So much is harder than it should be, and so much is simply unknown, or unknowable.

Solving this is the remit of User Experience design. And the PropTech industry should be obsessing over every single irritation, looking for solutions. As should real estate companies. Preferably together. BUT, almost nothing will be resolved unless we deploy multi functional teams in addressing these problems. We need teams who can ‘Think, Feel, Do’ (see the Harvard Business Review article ‘The Ultimate Marketing Machine’ for the genesis of this idea.) and work together to combine technical, empathetic and pragmatic inputs to design solutions that work across all dimensions. A great User Experience feels like nothing to the person experiencing it, but it only happens as the result of great care and attention, from diverse teams. For real estate this critical capability will likely be developed by bringing in people with a hospitality mindset, but over time the industry must develop these skills internally. Either way, the industry will look very different in 5 years time. More diverse, more skilled, more customer focussed, more technologically capable and above all, more human.

Technology is changing society, and the nature of business. PropTech will change the real estate industry. But not, as we have seen, perhaps in the way many expected. The great paradox is that as technology increases inexorably in power and capability, our human skills are becoming more, not less important. We can build a better built environment, but only by being better humans, and then by understanding how technology can help us get there. 

Human + Machine Wins.

In Part 3 we will look at how all of this impacts on Real Estate Companies and  Service Providers. If the industry is changing as much as suggested, where does that leave existing business models and strategies?

First published by MIPIM PropTech in 2019

Real Estate as a Service: Part 1 - The Changing Nature of Demand

Benozzo Gozzoli: Procession of the Magi (detail) - 1459-1460 Palazzo Medici, Florence

In 1997 Steve Jobs returned to being CEO of Apple, having been summarily dismissed from the company he founded some twelve years earlier. The company was in a mess, within weeks of going bankrupt. What had once worked so well no longer did. Past successes now meant nothing. Something new was needed, something big. Or else the company would die.

At a public event shortly after returning Jobs faced a hostile questioner who said he ‘did not know what he was talking about’ and Apple no longer had a future in ‘modern computing’. Jobs’ response was that it was not computing that mattered:

“You have to start with the customer experience and work backwards to the technology”

And in those 14 words he tells us all exactly where the future of PropTech, and Real Estate, lies: With our customers.

In this and four articles to follow I will be explaining how our industry is changing fundamentally, driven by the changing nature of demand. How new technologies are enabling new behaviours and catalysing new wants, needs and desires. Occupiers, Real Estate Companies and Investors will all be impacted. Value chains will be upended, new business models will develop and old certainties will fade away. The end point, a better built environment, is clear but the roadmap to get there is not. The future will not be a mere extrapolation of the past and there will be many, substantial losers. But there will also be a wave of new winners, creating better products and services that the losers will not know how to compete with, but customers will delight in.

The best new companies (PropTech driven but no longer confined within the restrictions of that term) will co-create with all their stakeholders customer- centric products and services that match user expectations in a way that seems improbable today. But then, in 1997 it seemed improbable that Apple would be the most valuable company in the world 22 years later.

THE CHANGING NATURE OF DEMAND

Real Estate is an industry that historically has mainly talked to itself. And from the top down. At the top of the tree stood the Capital Markets. Everything sprang from what could be financed. No finance equalled no development. No real estate. Sell or Lease, the entity that signed the cheque was really (though we hate to admit it) the only thing that mattered. Real Estate as Bond was/is how the market worked.

Over the next 10 years this is the fundamental about real estate that will change more than anything else. Obviously finance is important, it always will be, but a la Steve Jobs, the customer is even more important. Real estate is moving from an industry with Bond like characteristics to one where value will be found in the operation, and optimisation, of businesses. Income, not rent, will be the bottom line.

This matters, a lot. It is commonplace for PropTech companies to bemoan the lack of innovation, and unwillingness to actively embrace new technologies, amongst real estate companies. This though is to misunderstand the dynamics of the industry. The successful real estate companies are not run by fools, rather they are run by managers who are optimising their businesses for their market. And the current and historic market has insisted on stable long term incomes, low expenses, no shocks and no surprises. These are mature Product businesses, top right of the Charles Handy ’S’ curve, where six sigma is nirvana and perfecting the past is the business model.

Above: Simon Wardley

The future of real estate is the opposite. Top right is low returns and slow death. Bottom left to the vertical middle is where value will be created.

Why? Because real estate is moving from being an industry that sells a Product, to one that delivers a Service. And that means the dynamics of the market, and the industry, will undergo significant change, dislocation even.

Organisationally, financially, culturally Product companies are different from Service companies. The former is set up to create a physical object and then sell it, a one off or minimal touch transaction whereas the latter is about developing an ongoing, meaningful high touch relationship with one’s customer. The internal corporate requirements are entirely different. How these are managed going forward will be interesting to watch, as there are three strategies to choose from, which we will cover in a later article.

Why is this happening? What is driving a structural shift of this magnitude? It sounds a bit dramatic; is all of this for real?

I believe it is, because it is not something specific to real estate. All industries are grappling with the same shifting sands, and almost everything can be bracketed under the banner of the move from valuing access above ownership. We are becoming a society where we are less bothered about accumulating more ‘stuff’ and more interested in having access to whatever we want, on-demand, when and wherever we want it.

So you have Netflix for film, Spotify for Music, Airbnb for accommodation, Deliveroo for food deliveries, Uber for transportation and, growing faster than any other category, the likes of Lime scooters for micro mobility.

With a £25 million 1980’s supercomputer in all of our pockets, giving us access both to ‘all the world’s information’ but also a sort of universal remote control, we all have the ability to summon up what we want, when we want it. As the world around us has become more and more digitised our lives are becoming increasingly lightweight. We simply do not need physical objects in the way we once did. And judging from the enormous, and global, take up of these new virtual services, it seems we are largely very happy with this new way of living.

So how could we think that real estate will be immune from this trend? Why shouldn’t people want ‘Space as a Service’? Frankly who would not want to be able to access the spaces, and services, they want as and when they want ed them.

Margaret Thatcher famously said ‘you cannot buck the market’, and she was right. Companies across many walks of life are raising the bar as to the features, functionality and services we are all becoming used to. There is an absolute certainty that real estate will have to do the same. Across all asset classes.

There is a saying in the tech industry that there are two ways to make money in tech; bundling and unbundling. And whilst it sounds facetious it is a strong point; as everything becomes digitised it is easier to create a wide range of new products and services by assembling different mixes of functionality aimed at particular needs or market segments. And this will come to pass in real estate, as assets start to be joined together in new ways. ‘Work has left the building’ and so has shopping. Few people now NEED an office to do their work, or a shop to do their shopping. They can just as easily do either from their home, or from a co-working centre, or from a Hotel lobby, or in fact anywhere there is a solid, reliable internet connection. The key now is where do people WANT to work, or shop, or live? Why is shopping found in one part of a city, and work in another, whilst we live somewhere else entirely? We have designed all of our spaces around particular needs that required certain services to be possible, but in a lightweight digital world this is no longer necessary. We can pretty much do anything anywhere. And we can mix things up; retail within an office building is as likely as an office within a shopping centre. Or a co-working space attached to a co-living one. Bundling and unbundling. Refactoring space to be monetised in the most effective combination of uses, which might even change dependant on the time of day, or year.

None of this would be possible without new technologies, and PropTech is but a layer on top of other infrastructure and capabilities we now have easy access to. And there is no going back; once we have the technological ability to do certain things you can guarantee they will be done. Societal behaviour changes as a result of new technological capabilities, rather than the other way around. We demand things that are possible, and we demand more and more of those things we like.

Once the real estate industry gets to grip with being in the Service, not the Product business, there will be an explosion of new business models and variations of service offerings. Instead of flexibility in everything being considered a burden, the smarter operators will realise that the demand is out there, ready, willing and able to pay for something better than they have now. A great user experience, in a great building, is what people want. Why wouldn’t they?

Delivering that great user experience though will not be easy, and will require a mix of skills the industry does not currently have, and a grasp of the technology trends that few have. What these are, and how to acquire them, will be the subject of the next article.

First published by MIPIM PropTech in 2019

20 changes in the 2020s

Saint Jerome in his Study (detail) - Antonello da Messina - 1475 - National Gallery, London

How Real Estate will finally join the 21st century

The ‘Roaring Twenties’ was the first real decade of the 20th century. The years when we escaped the Victorian Age, when consumer goods started to become a ‘thing’, when automobiles started to be thought of as motor cars and the airline industry was born. During the 1920s the US economy grew 42% and the world had a new ‘superpower’.

Starting as a time of peace and great prosperity the ‘20s were a decade of two halves and the fun and games was well and truly over by 2025, when Churchill reintroduced the Gold Standard. The US kept firing on all cylinders right up until the Wall St crash of 1929 signalled the start of the great depression.

So let’s hope history does not rhyme as Mark Twain wrote. Maybe with the crash of 2008, and the years of austerity, we’ve had our ‘big bust’ already.

But is ‘big bust’ the right phrase? The 2010s have actually been the best decade in history. Extreme poverty more than halved, the child mortality rate was reduced by a third and life expectancy across the globe increased by 8 hours every single day. Oh and, 28% of all the wealth mankind has ever created (as measured by GDP per capita) was created in those 10 years.

Progress looks much better if viewed at a global level. We might be thinking the world has gone to hell in a handcart, but it hasn’t. With a wide angle lens, the world is smiling.

So how does the next decade look? TL:DR: Fantastic; if we play our cards right.

Here are 20 changes for the 2020s. Remembering that as Amara’s Law (not Bill Gates’ as commonly thought) states “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”

1

By 2030 no-one will use the term #PropTech, because that would sound as silly as saying ‘Colour TV’. The industry focussed on developing technology for the real estate sector will have been subsumed into the real estate sector. We are going to find that WeWork was the prototype of a modern real estate company, because whilst it is clearly not a technology company, it built, acquired and consumed technology in a manner that was not the norm for a real estate company. How it was, we will all become.

2

Director of UX will become one of the best paid, and most important, roles in real estate. #SpaceAsAService might already have become quite a sizeable niche but in 10 years time it will be the default setting of the office market. Given Moore’s Law (which will still be going strong after another 10 years) our mobile devices will be 100-150 times faster than today, the machines will have automated a good 50% of everything we are paid to do today, and ‘human’ work will be our core competency. Creating great user experiences for customers will be the way to make outsized returns. Those that can do so will be highly prized.

3

Conversely, investment agent roles will be as rare as hen’s teeth, but worth less. As Goldman Sachs traders became a thing of the past (down from 600 in their NYC HQ to…. 2) so will real estate investment agents. Like the old Wall St Masters of the Universe they will be replaced by better, faster, cheaper machines. Sure, there will still be an advisory role to be done, but more as a comfort blanket than an executor of deals. Will anyone miss them? Hard to say.

4

Architects, or at least a subset of the industry, will once again be treated with awe and respect, rather than value engineered out of the way. Together with our directors of UX they will be creating the spaces that catalyse human skills, that help enable people to be the best versions of themselves. A great UX, in a great space, is the wrapper at the top of the value tree.

5

And great spaces require great planning, at a macro and micro level. Fed up with the dystopian environments created over the previous 20 years, the ‘people’ will start voting with their wallets and insist on a faster, more responsive and well-funded planning system. When prices were rocketing, regardless of aesthetic or building quality, no-one cared much about either, but the 20’s are unlikely to be inflationary and we will collectively realise that we are stuck with what we build. So we have to do a better job.

6

Along with better building and aesthetics, a decade (and it may take all of it) should see the digitisation of the entire planning stack. What the Future City Catapult mapped out during the 2010s will become reality in the ‘20s. #PleaseLetThisOneBeRight

7

Securitisation via Blockchain though will be but a memory. Slowly the sheer clunkiness, cost and failure to do what it says on the tin of Blockchain will become apparent to all. The question is whether we go through a boom, bust and scandal phase first. I think we will.

8

Were you mis-sold a Blockchain investment? The PPI farce of the 2020s.

9

A better mousetrap though will enable anyone to buy slices of real estate assets by 2030. With planning digitised, 100X faster devices, and years to work out the regulatory framework this will become as easy as buying shares. And in a world where UX and great spaces are what determine income (and income = value) people will be actively buying stakes in their favourite spaces. Collecting space investments as they collect memorable experiences. If you buy into it, then buy into it….

10

Online residential agents, like online only stores, will have died out. The game only ever did work if you ignored that marketing line in your P&L. Turns out shops were a pretty decent customer acquisition cost. And dealing with their most important investment by a country mile meant humans wanted a human in the loop. The human agents could acquire the technology, but the online agents only ever had half of the pie. Of course the human agents who ignore the technology side of the pie will die alongside their online peers.

11

We will have so many options for how we want to live. #SpaceAsAService is not just something for the office market but will also be pervasive across the residential sector. With so few people able to outright purchase homes a dynamic build-to-rent market will develop with a plethora of brands offering products and services to suit all budgets, age groups and lifestyles. In fact not owning will become a feature not a bug, as the variety, quality and options available to rent will far exceed what any of us could afford on our own.

12

High Streets will thrive by 2030, but only after the analogue powers that be realise that as pure play retail locations they have no future. But as mixed-use, buzzing, dense, work/live/play areas, devoid of stores as distribution channels they’ll become quite the place to be. As we’ll only be commuting into the office a maximum of two or three days a week they will be busy all the time, with the reinvigorated libraries the busiest of all. Having bought into the new concept of education being a pleasurable, lifelong pursuit, these temples of knowledge will have their second renaissance.

13

What stores there will be, and there will be a lot less than today, will be inspiring, innovative and exciting places to be. All our day-to-day shopping will be done online, so the purpose of a store will be to tempt us to buy into the seemingly endless new brands, curated with in-depth knowledge of local preferences, and sourced from all over the world. The old ‘clone High St’ will be a distinct, unpleasant memory.

14

Those brands that remain a constant of the retail world, that win the ‘great network effects’ gold medals will be spectacular. Having sorted out the abusers of our data and placated the public about invasions of privacy, these stores will know so much about us that their directors of UX can work wonders for each and every one of us.

15

Much of our shopping though will be by way of subscription services. Either regular replenishments of our larders, or fridges, but also our wardrobes. We’ll receive two boxes a week, or a month; one full of items, the other empty. We’ll simply keep what we like and send the rest back. Rinse and repeat, rinse and repeat.

16

And most of this will be sourced from a new network of micro warehouses and fulfilment centres dotted around our towns and cities. Using predictive stocking algorithms they will not need to be very large but will still be able to get us pretty much anything we want in an hour or two. The old school industrial real estate agent will now be an ‘as a service’ warehouse, robotics and logistics wizard. By merging real estate knowledge with expertise in a range of value add services the old world of ‘shedmasters’ will be transformed into one of the most tech savvy and lucrative areas of real estate.

17

Some landlords will find the 2020’s very hard. Deciding that they weren’t interested in all this ‘soft stuff’ they will offer nothing but dumb shells, with third parties providing the entire digital layer as a service to their customers. This type of landlord will know nothing about what happens inside their assets, or even who is inside their assets. After centuries of the asset owner being top of the value tree, they will completely miss the warning signs that the returns from assets could be significantly increased but the people adding the value would also be taking the lion’s share of it. But at least they will get to play a lot of golf.

18

Investors themselves will do much better than landlords or (see item 3) investment agents. The smart ones will realise that the days of passive investment are becoming, if not numbered, then the fastest way to low returns. So, they’ll start to fund operators directly rather than through the middlemen, the landlords. With aligned incentives (the happiest, most productive customers will pay the most) they will embrace the as-a-service world and work tightly with operators to create the great spaces and UX mentioned above. Yes, investment management will become a different game to the past, and riskier, but the returns could be exceptional. Especially when there are still trillions of investment dollars receiving negative yields around the world.

19

The real real estate people will have a great decade. They will decide that added value derives from sticking to real estate and exploiting their entrepreneurial development skills. Either building great new assets or repurposing, extending, updating great old assets. There’s plenty of money to be made before you hand your assets over to the service sector. You just need to be clear on what side of the product or service line you stand.

20

Across everything, wellness and sustainability will become hard-wired into the entire real estate industry. No building should do any harm to humans, and every building needs to be designed, built, managed and operated to do as little harm to the planet as possible. Fail to abide by this and see value go up in smoke. The 2020s will be the decade the industry goes seriously green.

Real Estate will become #PropTech and #PropTech will become real estate. The grand silos of the 2010s will be blown up. There is no them and us, no separation of church and state. Real estate will morph into a service industry, powered by technology. Physical assets will become wired assets. Everything become ‘Smart’. And connected. And a node in a giant network, connecting buildings, to campuses, to areas, to towns, to cities. As the place where people spend 90% of their time real estate will take its place at the top table, where what it looks like, and how it works, really matters.

The current #PropTech industry going in to the 2020’s should hope they become as irrelevant as the above foretells. Because if this comes to pass, #PropTech really will have been amongst the very very best places to be over the next 10 years.

#OpportunityKnocks

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This post was first published on the excellent PlaceTech - thanks to them.