THE BLOG
Work, The Workplace and Covid-19
The Triumph of Death - Pieter Bruegel, The Elder, 1562. The Prado, Madrid
““There are decades where nothing happens; and there are weeks where decades happen.”
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There are going to be history books written with titles like ‘The Calamitous 3rd Week of March 2020’. For that was most certainly a week that fitted Lenin’s aphorism. When, at least for us here in the UK, Coronavirus, or more correctly Covid-19, launched a tsunami of change across society. In many ways, it is not hyperbole to say the world will never be the same again. For real estate, the implications are intense, profound and epochal. There was real estate BC, and there will be real estate AC. Before and after Covid-19.
The future of Work, and therefore the workplace, is however perhaps not such a mystery. For in reality what the current circumstances are doing is compressing the time it will take for trends that were already underway to become mainstream, and the norm.
One of the interesting things to watch about this crisis is how hard most people have found it to understand the implications of exponential change. When things double in short order, very small, seemingly insignificant things suddenly become very significant indeed. It’s how we have gone from a single infection to hundreds of thousands in no time at all. Without understanding the power of exponential, it is hard to grasp the underlying speed of change. Now the tech industry (based as it is on Moore’s Law) is hard wired to understand exponential change. Which maybe explains why Silicon Valley companies were amongst the first to institute remote work for all their staff; they knew what was coming. They also were ‘prepared for the future’ with their data in the cloud, fast broadband de rigueur and high spec, up to date laptops. Working anywhere is not hard when you are tooled up for it.
The lack of technological infrastructure in so many companies is leading to a mistaken belief that remote work will be jettisoned as soon as we can all return to the office. True, working with young children around, or in homes with insufficient space is no long term solution, but the answer to this is by no means a return to commuting one to three hours a day to an office. More importantly, though, bad decisions are going to be made because we are doing the equivalent of asking people who cannot drive what the future of the car is. Your company may not be comfortable with, or capable of, allowing work to become more flexible, but your strongest competitors will be.
Furthermore, your strongest competitors will be acutely aware that the purpose of an office has changed. Much of what we do today is being automated away. Leaving us humans with a need to become better at what humans are good at: design, imagination, empathy, abstract & critical thinking, judgement and innovation. The only point of an office will be as places that catalyse these human skills, in collaboration with our peers. Not only will such places take a different form factor, we will only need them 50-60% of the time. The rest will be taken up with solitary, focused tasks.
On top of this, the Covid-19 crisis is showing us the value of sustainable, resilient business models, the importance of environmental conditions, and the necessity of agility and flexibility. We are not going to forget this quickly.
Work is changing, because it can, and it must. Our offices, and workplaces, likewise.
This is a time where innovative thinking is imperative. We need to reset, to re-assess, and to innovate our way to a better industry. The office and remote work are friends, not foes. Each needs the other. Our customers want and need great real estate to work in; we need to rethink what that means. And now is our chance.
This was first printed on the website of the British Property Federation.
Property Perspectives Webinar - 1
A video podcast with Dror Poleg, Susan Freeman, Elie Finegold and Ronen Journo to discuss the impact of Covid-19 on various Real Estate classes. It was pretty interesting. Hope you think so too.
Flex-Space Operational Metrics: Measuring what matters, matters.
Gustav Klimt - Portrait of Adele Bloch-Baue (detail) 1903-1907
The 2010s were about efficiency in the workplace. If we are smart, the 2020s will be about effectiveness.
Every decade has a different vibe, a different zeitgeist. The 2010s witnessed the growth of the flex-space market from a small and scruffy niche to a mainstream sector representing a significant percentage of the total take-up in cities such as New York and London. In short, it became a big deal. What we mean when we talk of an ‘office’ today is fundamentally different from what we meant in 2010. Indeed, the changing nature of the ‘office’ is actually speeding up.
Your smartphone in 2020 is 150 times faster than it was in 2010. By 2030 it will be 8000 times faster. The world feels like it is changing faster than ever before, because it is. The same applies to the workplace.
In the 2000s it is fair to say that, in real estate, no-one really measured anything. In the 2010s this changed to an obsession with ‘data is the new oil’ (a highly misleading phrase but that is by the by). We started to add sensors all over the place and measure workplace occupancy, utilisation of desks, and so on. Now that we have the tools, let’s see how efficient we can make the offices we occupy. With data we can see how much space we really need, reduce our estate, and save a lot of money. Data will show us how to get more from less.
A huge number of companies did just this and for a brief time it seemed like a really clever move. Open plan became the rage and space requirements dropped 20-30%. What a win.
Except of course it was no win at all. The most common theme of workplace commentary by the end of 2019 was how awful open plan offices are, how everyone hates them, and ‘why are our bosses spying on us?’
The mass adoption of technology in pursuit of efficiency has backfired. According to the Leesman Index (an employee workplace satisfaction tool), just under half the 600,000+ individuals they have asked ‘Does your workplace enable you to be productive?’ answered ‘NO’. Combine that with statistics from architects Gensler that the average occupancy of workspaces is roughly 50%, and the reality is that real estate is suffering from a double #Fail. Our customers don’t really like our product and are not actually using it all that much.
All of this of course is a key driver behind the growth of Flex Space, which, on the whole, does try to build better spaces for people and offers a new way of thinking about what an office can, and should, be. But in the 2020s we need to think smarter.
I see the best flex-space as a refocussing of real estate around people. Improving the productivity of people becoming the core value proposition. How do we enable individuals to perform as best they can? How do we move from providing a company with an office, to providing them with a productive workforce?
JLL have what they call the ‘3-30-300 Rule’ – this is that a company spends $3 on utilities, $30 on rent, and $300 on payroll per square foot per year. In the 2010s, the real estate industry pretty much focussed on how to most efficiently manage utilities and rent. In the 2020s the smarter side of the industry will focus on how to design, monitor and optimise space to enable the people who use that space to be as effective as possible. Being efficient is necessary, but not sufficient. You cannot be effective without being efficient but being effective is 10X the more important goal.
So how does this mindset impact on what we should measure in Flex-Space?
First off, the industry has to address the widespread, growing, and important concerns people have with being tracked, and having their personal data captured by third parties. The #Techlash that we are seeing against the huge technology companies, like Google and Facebook, is a result of the breakdown in trust between these companies and their users. Google was supposed to be the ‘Do No Evil’ company and Facebook just a way to connect with friends and family. But it has not turned out like that, and people do not like it.
The real estate industry would be wise to get its house in order before privacy concerns become a big thing in the workplace.
The RED Foundation, led by Dan Hughes, ex head of data products at the Royal Institution of Chartered Surveyors has published a set of Ethical Principles, which are as good a short statement of how to behave as I have seen. They are:
Accountable – Real Estate companies should be accountable for the data that they collect and use. This includes taking responsibility for using the data in an appropriate and secure way.
Transparent – Real Estate companies should be transparent about what they collect and why. Whilst this cannot be expected for every data point, at a minimum a general data policy should be published for each building and company covering what is collected and why.
Proportionate – It is the responsibility of the real estate sector to make sure that not only is data collected within legal and technical requirements, but is also proportionate to the benefit and the expectations of the general public.
Confidential and Private – All activity with data – whether collecting or using – should at all times consider confidentiality and protect privacy; both within necessary legal requirements, but also according to the expectations of the general public.
Lawful – All data should only be used within all local and international laws and regulations.
Secure – Security principles should be built in ‘by design’ into all applications and appropriate steps should be taken to keep data secure.
Abide by these and it can be made clear to you customers (everyone who uses your places and spaces) that your and their interests are aligned. Real Estate does not operate on an ad supported business model so there is no imperative to capture data for any other purpose beyond improving the user experience for everyone.
With those principles in place, there is still a lot of data that needs to be captured to aid in optimising your flex-space.
It sits in three buckets:
About your Building
You have to understand how your building is performing in real time. The four key metrics are Temperature, Air Quality, Lighting and Noise. There is a mountain of peer reviewed science looking at the correlations between these factors and cognitive function. Get them wrong and you impair the cognitive function of your customers. In other words, the buildings performance has a direct impact on their productivity. This data needs to be captured in real-time, and at a granular level, and be available to customers, as well as you.
About its Use
At an equally granular level as above you need to understand occupancy, utilisation, footfall and desire paths within your space. This is what will tell you the reality of how your space is actually being used: who is going where, which spaces are busy, when and on what days? What services are being used or not? How are people moving around? How well does the reality of use correlate with how you thought your spaces are used?
About your Customers
This is the data that I believe will separate the best operators from the pack. This is about understanding what Professor Clayton Christensen (of Disruption fame) describes as the ‘Jobs to be done’ of people. What are the specific wants, needs and desires of people? Everybody in an office has different tasks to perform during the day, and each task, in an ideal world, would best be performed in a space suited for that particular task. The extent to which spaces are available that suit the ‘Jobs to be done’ of everyone in an office, is a strong determinant of how well that space enables someone to be as productive as possible. The more a Flex-Space operator understands the ‘Jobs to be done’ of customers in their spaces, the more that workplace can be optimised. Or alternatively, the more a Flex-Space operator knows about the ‘Jobs to be done’ of the market segment they are targeting or developing space for, the more likely it is that that space will enable future customers to work as effectively as possible.
With all this data it is critical that it is captured regularly and then analysed with the tech world mantra of ‘Build, Measure, Learn’ in mind. In the same way as software is never finished, no workplace can ever be finished. It is going to become increasingly important to design and build spaces that can be easily reconfigured, based on those three core buckets of data. An effective workplace is an iterative workplace.
The bottom line is that measuring what matters, matters. We have to measure the data we need to improve the user experience for all our customers. Without putting the wants, needs and desires of people at the centre of a data strategy you might end up with an efficient space, but you’ll never create an effective space. Creating effective workplaces is hard. Maintaining them is even harder. Which is why they will always sell at a considerable premium. And that really matters.
This was first published on the Essenys blog
Real Estate as a Service: Part 5 - 10 Takeaways
Benozzo Gozzoli: Procession of the Magi (detail) - 1459-1460 Palazzo Medici, Florence
In 1915 the great American poet Robert Frost wrote, in ‘A Servant to Servants’;
“He says the best way out is always through. And I agree to that, or in so far
As that I can see no way out but through”
In this series of articles we have been discussing the fundamental changes taking place, in technology, society and the built environment. Often grouped under the heading of ‘The Fourth Industrial Revolution’, they represent an epochal change. Klaus Schwab, who coined the term, says ‘we live in a time of great promise and great peril’, where the digital, biological and physical world are being merged. 1915 was a similar time, so Frost’s words have resonance today: change is happening, there is no way to avoid it, so the only way forward is to embrace it and push on through.
In the first article we looked at how the very nature of demand for real estate is changing, in the second the technologies of today and tomorrow, and in articles three and four how all of this will impact on investors and landlords.
In this final article I’d like to provide 10 takeaways that distil the key trends, drivers, mindsets and opportunities we have worked through.
1. #SpaceAsAService
Starting at the beginning, just about everything in real estate is being impacted by the rise of the notion of #SpaceAsAService. It is the #TrillionDollarHashtag, and it has two meanings. First, the ability to procure ‘Space’ in an on-demand manner, and secondly the provision of ‘Spaces’ that provide us with the ‘Service’ we require, as and when we need it. In other words, Space that is #FitForPurpose. This applies across all use classes, whether office, industrial, retail, residential or hotel. Each of us has ‘Jobs to be Done’ at any given time. It is incumbent on the Real Estate industry to provide us with the spaces and services we need to fulfil those ‘Jobs to be done’. Not only will this improve the user experience of the places and spaces we inhabit, but will make more efficient and effective use of them. In doing so, it will enable us to charge considerably more for them. #SpaceAsAService promises a world where we consume less but better real estate. And both sides win. The zero sum nature of ‘old’ real estate is coming to an end.
2. The Workplace
The Workplace is changing, fast. We all know that, on average, offices are neither used very efficiently (often at less than 50% occupancy) or provide individual occupiers (our future customers in a #SpaceAsAService world) with somewhere they feel enables them to be productive. According to the Leesman Index, after 500,000+ interviews with individuals, only around 55% say their workplace adequately supports their personal productivity. Offices are a #DoubleFail. Mostly because they represent a ‘System’, whereas they are managed as a series of standalone components.
To make offices work properly for our customers, we need to merge the knowledge, skills and mindsets of five currently separate industries. A great workplace requires great real estate skills, together with great technology, workplace, HR and hospitality capabilities. Workplace needs to be thought of as software, where we ‘Build, Measure, Learn’. In real estate today we stop at ‘Build’.
The ‘Office as iPhone’ is the goal: where a combination of Hardware + Software + Services working together, designed as one, provides an optimised user experience that will command a significant premium.
3. User Experience
Who becomes responsible for creating and curating great user experiences for our customers is currently a known unknown. There is no company today that merges those five areas above. This is virgin territory, up for grabs. Who will grab it? It could be Landlords, or FM or PM companies, or 3rd parties. Or perhaps companies will do it all themselves, at least the large ones. Either way, this new type of company will have a much stronger relationship with customers, and by owning this relationship, will move right to the top of the value tree. Quite possibly the landlord, currently very much King or Queen of the Castle, could find themselves relegated to just the low margin provider of commoditised ‘dumb boxes’.
4, Valuations
Which brings us to the thorny question of Valuations. Across the industry the structural changes we are discussing will, inevitably, impact on valuations. Retail clearly needs a reset: all around us we see a rise in empty shops, and just waiting for the cycle to turn will not refill them.
The retail market is now shaped like a barbell. Either you provide cheap, everyday items, that are not worth shipping to customers, or you provide a retail experience that entices people to visit, explore, engage and interact with physical environments. For everything in the middle, frankly, Mr Bezos has you covered. Retail spaces need to better and/or cheaper. There are physical retailers out there, a great many of them, but at current price points they cannot afford to operate. Something has to give; at the moment vacant stores are taking the hit, but going forward it will be values. Either way, technology has much to offer to help retailers across the entire life cycle. Personalisation, optimisation, and localisation are the key words. Improve on any of them and you have a good business.
In the office sector a similar dynamic applies. Historically the sector has had bond like characteristics. Long Leases, with strong covenants = Bonds. Change to a #SpaceAsAService world and all that changes. The key stakeholder in this world is the Operator of space. It is the Operator who will maximise income, and much of that income will not be rent, but services in various forms. We are moving from valuations being bond like to valuations being business like. How much income can this asset generate, gross and net? And that changes everything.
Many real estate people say this cannot occur because without security of income offices will not get financed. As of today that may be true, but markets are dynamic and eventually they always adapt. If the customers of real estate do not want, or need, the product the industry is offering them, then sooner or later the industry will have to offer what they do want.
Given the reality of markets it is a solid bet that the office sector will look much more like hospitality within a few years. Within a decade the change is certain. Which is fine: the best Operators will manage their assets much better than most are today, and probably generate significantly higher income out of them. But, and it is a big but, yields are certain to rise to be more like they are in hospitality. The result? Office valuations will fall unless owners fully commit to adapting their business models so that they optimise for user experience. Offices that provide a great user experience will maintain or increase their value, those that don’t face a severe financial penalty.
All of which is, of course, a perfect market for PropTech companies that help with any aspect of this change, to operate in.
5. Merging of Use Classes
Increased utilisation of space is a prime area for PropTech companies to look at. Given the cloud, connectivity, and mobile computing (laptops, tablets, smartphones) for many of us where we work is optional. Go in to any central London hotel during the work and the ground floor will be awash with people working away. No doubt the same applies in most major cities, and beyond. All manner of spaces are now available on an on-demand basis for activities that are not their core. Restaurants that double as co-working spaces between serving periods. Residential buildings that sit atop flex space. Hotels that have members clubs with workspace. Parking lots that double as home for ‘dark kitchens’.
Use Classes are merging; the driver is our ‘weighlessness’ - we can work anywhere. And we, as humans, actually like mixed use space. The division of cities into areas where we ‘work, rest, and play’ separately is a relatively new phenomenon. But it is dying out; Smart Cities will be mixed Cities. Technology has, as a second order effect, led to this change and technology, as a first order tool, will be at the heart of understanding how this will reshape the world around us.
6. Value of Data
“Without data, you're just another person with an opinion.”
W. Edwards Demming
Engineer, statistician, professor, author, lecturer, and management consultant
Demming wrote this over 60 years ago, but it has never been more true. Everything we have discussed in this series of articles is predicated on having data to work with. The modern world does not work without good data. Rule No 1 is get to grips with the Four V’s of your data: Volume, Variety, Velocity and Veracity.
To repeat: nothing works today without good data.
Any PropTech that helps people or companies with those Four V’s is standing on solid ground.
7. Artificial Intelligence
Artificial intelligence, especially machine learning, is the most important general- purpose technology of our era.
Erik Brynjolfsson & Andrew McAfee (Harvard Business Review, 2017)
General Purpose Technology’ are the key words in the above. Like electricity, the internal combustion engine, and the Internet itself, Artificial Intelligence is a technology that will be available, and pervasive, throughout the entirely of business and wider society. It will impact everything. I have written much elsewhere about where in real estate AI has applications, but the bottom line is that it will be relevant in every area. If you take it that anything ‘Structured, Repeatable, or Predictable’ WILL be automated you will soon realise just how embedded in our lives AI will become.
Rule No 2, after sorting your data out (see above) is get to grips with what AI is, what it is not, where it might apply within your business, where the value is, and how to measure it.
Truly, this is the most important technology of out age.
8 Digital Twins
All of the above leads towards the rise of Digital Twins, those technologies that allow you to simulate, in a virtual world, the real world. As use classes merge, data becomes ubiquitous, AI a commodity, and valuations increasingly driven by the operation of space rather than mere ownership, Digital Twins are going to allow sophisticated players in real estate to understand the dynamics of the build environment in a hitherto unimaginable way.
This technology is available, to an extent, today but it will take the wider digital transformation of the real estate industry to take hold before it really comes in to its own. It requires end to end digitisation, entire system thinking, to reach its full potential. Companies like the Softbank backed Katerra are trying to force the issue by becoming end to end operators themselves but they are outliers.
Digital Twins are perhaps not the first priority for PropTech to adopt, but give it 10 and every leading real estate company will have Digital Twins at the heart of their business. Using a Model to explain how space is working, and a simulation to predict how it will adapt to any given input. Add on Virtual & Augmented, or even Mixed reality, and we have a set of tools that will give us no excuse if we don’t create great spaces.
9. Micro Mobility & Autonomous Vehicles
We have not much discussed exogenous technologies that will impact dramatically on the built environment, but it is certain that micro mobility (such as the fastest growing technology of all time, the electric scooter) and autonomous vehicles will transform, in subtle and not so subtle ways, our cities.
Over 60% of car journeys in the US are less than 2 miles. It’s that distance that’s just a bit too long to quickly walk, but that really does not warrant a car journey, but that’s what happens. Enter electric scooters, whose optimum range is under 2 miles. Then think what that means to where is considered a good location. Today, a mile from a main centre is off-pitch, because it takes too long to get from A to B. But on a scooter it’s no time at all; suddenly the off-pitch becomes core. And voila, you have many areas in many cities that become ripe for regeneration. Simulate the impact using AI and a Digital Twin and a wealth of opportunities arise. This will happen.
Autonomous vehicles will have similar impact. Forget the idea that the centre of London, or Paris, or New York, or Tokyo will within a few years be devoid of anything but electric, autonomous cars. That will not happen. But there are endless use cases where an autonomous vehicle would be the optimum solution. It’s not just about getting a human from one place to another, but getting something to that human. Delivery of something to your home, or work, is perhaps more likely than the delivery of you to a shop or restaurant. A drone is also an autonomous vehicle, and whilst the idea of drone delivery in the West is largely scoffed at, in China it is already commonplace. Given the right use case, and the right environment, these technologies will take hold fast. With AV’s we do not have to wait until they are perfect; good enough will be good enough.
Both these areas, micro mobility and autonomous vehicles, are complicated, nuanced subjects, but anticipating how they will impact real estate is important. The development of railways created more real estate than railway billionaires; autonomy will likely be the same.
10. Where to Invest?
In the light of everything we have discussed, what technology should one invest in? And what real estate types will emerge as the best investments?
The tech to invest in:
1. Focussing on the end users of real estate is the really huge market. Yes, selling technology products and services to the real estate industry itself is a decent market, but everyone on the planet uses real estate. There is no bigger market than that.
2. Anything that enables offices to be used effectively, efficiently and productively is a massive opportunity. As JLL have said, think of 3, 30, 300. Utilities cost $3, rent $30 but people $300. Improving the productivity of people should be the core value proposition.
3. Within retail, anything that makes physical shopping a great user experience will have great value. From site selection, to design, to localisation, optimisation and personalised recommendation. The future retail winners will invest heavily in all of these functions.
4. We need to build more efficient, more sustainable housing. AI driven generative design will play a large part in this, as will modular construction. A true Smart Home will be a Service, not a Product. It might well also be delivered by a non real estate Brand. Apple Homes anyone? Cross laminated timber, solar panels (or roof tiles) plus battery storage will all become big industries. Tesla has been having trouble with solar and batteries for the home, but someone will crack it. And it is of course a vast market.
5. Build to Rent, as an institutionalised asset class, has great potential to be the front runners in creating Smart Homes, with strong Brands and tech enabled services providing unparalleled living experiences.
6. And across the industrial sector, the key will be anything that makes same day delivery easier. Figuring that out and providing ‘Logistics as a Service’ will be a powerful proposition.
It all boils down to space utilisation, data & analytics and tech enabled operations. And ultimately how these three areas interact.
The Real Estate to invest in:
1. Location still matters. An on-demand world needs density. For the unit economics of dark kitchens, or Uber, or Scooters, or delivery services to work a certain density is required. Scale matters with physical items. Spotify, Netflix, Facebook need no density as everything they sell is entirely weightless, but for all these services that we humans enjoy in the real world, enough customers in close proximity is vital. The lifestyle one can enjoy in a dense major City is not replicable out of town, so invest in density.
2. That said, great connectivity can simulate density. When autonomous vehicles do become commonplace, the unit economics of delivery will change, so perhaps we will be able to have everything a great city enjoys whilst living somewhere beautiful and quiet? Where might these places be? Follow broadband; wherever has excellent broadband today is likely to develop these other services tomorrow.
3. Just as ‘The modern world does not work without good data’ the modern world will not flourish without a lot of human brainpower. Invest where there are excellent universities. Always has been a good bet, it will only get better.
4. The age of single use space is coming to an end. Technology is making it unnecessary. The future belongs to mixed use.
5. The key KPI’s of the future will be different, and there are six that really matter. Connectivity, Density, Flexibility, Productivity/Pleasure, Wellness and Sustainability. Only invest in assets that score highly against all six.
I hope this series of articles has proven useful. PropTech has come of age, and we are beginning to understand that ‘All Change, All Change’ really is what is occurring. The joy of being in the real estate and the tech industry is that the former impacts on every single individual on earth and the latter enables us to make it better.
Go and make it better!
This was first published on MIPIM PropTech in 2019
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