Real Estate and technological denial
Hunt of the Unicorn (Tapestry, circa 1500) Stirling Castle
The real estate industry is setting itself up for a mighty fall by failing to understand the implications of technological change.
What is a tech company? Well, if you are in the real estate industry you most likely would not use that moniker for your own company. You would also though not describe a TV as a colour TV. But describing any company as a tech company is as anachronistic as talking about colour TV’s. All TV’s are colour TV’s and all companies are tech companies. In 2018 it is time to get one's head around that.
In early 2017 McKinsey wrote that:
‘Overall, we estimate that 49 percent of the activities that people are paid to do in the global economy have the potential to be automated by adapting currently demonstrated technology.’
Not tech from the future, tech that is available today. The best companies are already way down this path to automating the automatable. And have the commensurately high productivity that comes with that. People, augmented by and working in tandem with, great technology can be hyper productive. Yes, many of these are companies whose products or services are software or hardware, but many are not. Take a look at the share price growth of Domino’s Pizza to see how embracing technology can impact on ‘analogue’ businesses. Faster than any of GAFA since 2010.
CNBC wrote about them in December 2017:
“President and CEO Patrick Doyle turned the chain around so successfully, for one, by heeding the public's criticisms and making better pizza. But, more importantly, he invigorated focus on digital innovation and amped up their delivery service. Domino's now employs more people in their IT department than anywhere else in the company, reports CBS News, and over half of their sales come from digital platforms.”
So please tell me Domino’s isn't a tech company? And they sell pizzas! Now tell me a real estate company, say British Land or Hammerson, cannot or should not be a tech company. The CEO of the former has specifically said they are not and I was told earlier this week that ‘it is ridiculous’ to suggest Hammerson be a tech company.
This is denial of the highest order. There is no real estate company that will thrive over the next ten years that does not operate based on data and technology designed to optimise the products and services they are selling. And I deliberately wrote ‘and services’ rather than ‘or services’ because there is no real estate company that will not be selling hybrid product/services within 10 years.
In offices you will be selling ‘productive workforces’ not lettable space. In Industrial you will be selling on-demand fulfilment ecosystems, and in retail you will be co-creating immersive experiences, frictionless fulfilment and ‘the pleasure of leisure’.
Everywhere you hear about the value of great workplaces and the importance of experiences in retail; the real estate press talks endlessly of Wellness and raising standards across the built environment. And you also hear much about #PropTech and the benefits it can bring to real estate. What you, sadly, also hear repeatedly is how the ‘#PropTech people need to talk more to the Real Estate people’. It might as well be ‘East is East, West is West, and never the Twain shall meet’. What you don’t hear much about is any really substantive productivity improvements coming from the embracing of new technologies. Plenty of ‘that’s good’ but almost never ‘Wow that is amazing’.
Why is this? Because the real estate industry cannot get to grips with ‘every company is a tech company’. Where tech is embraced it is almost always as a bolt on, an addition, or a stand alone innovation unit. Or worse still, what IT are getting up to.
Real Estate and IT is a Battenberg cake whilst it needs to be an Eton Mess.
And anyway, who is in the real estate business? Amazon spent $13 billion on Whole Foods and Alibaba have spent $9.3 billion on physical real estate, including Intime, the owner of 29 department stores and 17 shopping centres in China. Are they real estate companies? I have seen Alibaba’s acquisitions described as just ‘fascia for their online empire’, as if the offline retail exposure was just a necessary inconvenience. Is this right?
I think not. Alibaba themselves talk much about what they describe as ‘New Retail’, in the sense of blending the online & offline world in order to create a dramatically better user experience for all their customers. Their entire focus is on understanding their customers in a very granular way, what their needs, desires and aspirations are, and then applying that learning to how a physical outlet is configured, stocked and experienced.
80% of all e-commerce flows through one or other Alibaba entity, and millions of retailers sell online through their marketplaces. As such, by merging online and offline data they are able to optimise their ‘commerce’, online and offline. The key point is they are using data, from as many sources as possible, as the foundation on which to build great user experiences. Data and technology is not a bolt on to existing operations, but the sun around which everything revolves. Nothing is not touched by technology.
To be a great, human centred company you have to start with data. In a world of exponential technology, we are reaching a point where the technology itself disappears and the only thing that matters is the human engagement, empathy and understanding that we can offer our customers. Being human is the No1 asset, and skill, today. The real estate industry loves to say that the technology is not the point, and that we must not remove the human touch from our businesses and our dealings with customers. And I completely agree, but unless all the touchpoints we have with customers, colleagues, partners and suppliers are supported by accurate, up to date and insightful data we cannot hope to be the best humans we are capable of being.
A human + a computer trumps any human or computer on their own. But also, as Gary Kasparov has explained so well (in his book Deep Thinking - https://amzn.to/2Ojm9rk), a human who understands how to create processes that leverage the complimentary capabilities of computers will outgun a more accomplished human with weaker process skills. In the context of real estate we have to be concerned about whether the tech industry will learn real estate faster than real estate learns tech. At the moment real estate is losing, and badly. But still the industry ‘sticks to its knitting’.
MIT professor Erik Brynjolfsson recently put the scale of technological change coming down the track very well. Talking about the rise of AI he says:
“machine learning is an example of a “general-purpose technology”. These are innovations so profound that they trigger cascades of complementary innovations, accelerating the march of progress and growth — for example, the steam engine and electricity. When a GPT comes along, past performance is no longer a good guide to the future.”
He wrote this in an article entitled ‘Artificial Intelligence and the Modern Productivity Paradox’ (https://bit.ly/2LXjDp5) and it describes the real estate mindset very well. He discusses how so many people comment on how national productivity is not rising despite all this new technology, and that the conclusion is drawn that the techno enthusiasts are over hyping change and that, truth be told, the world is not changing all that fast, or that much. But then he goes on to explain how the new technologies have been massively increasing productivity, but only in those companies that have adapted their business models and processes to take advantage of the new capabilities that are out there. For example, Facebook, or Google, or WeWork, or Amazon or Alibaba. All creating huge value per employee and achieving huge scale very rapidly.
Every ‘Unicorn’ is a deeply tech enabled company. Every one is designed around what technology enables.
Retail real estate is a hard, tricky business, involving multiple skill sets and great attention to detail. But as it stands none (I'd be happy to be wrong in being so definitive) has embraced technology as a really core, 'part of our DNA', driver. Certainly not like Amazon or Alibaba have. Because, 'they are tech companies, we are not'. And that is a major, potentially value destroying way to look at things. Forget offline and online being different worlds; they are not. Ultimately we are all striving to give our customers what they want; and what they want will win. My point is; who knows more about what their customers want will also win. And that company will be a 'tech company'.
Antony