#SpaceAsAService: The Trillion Dollar Hashtag - Version 2
Pieter Brueghel the Younger's "The Outdoor Wedding Dance" (c. 1610) | Private Collection
“‘space as a service is moving from being a tactic to a strategy’”
In January 2019 I wrote a long article for Propmodo, entitled ‘#SpaceAsAService: The Trillion Dollar Hashtag’ - Three years later I would like to update it.
I had been writing about the impact of technology on the real estate industry since 2013 and specifically about #SpaceAsAService since early 2017. By 2019 it seemed to me that what I perceived to be the inevitable direction of travel was about to slip in to gear and gain traction. And broadly speaking I was correct. The article was fortunate enough to garner a lot of attention and since that time usage of the term ‘space as a service’ has gone exponential. Today you hear it everywhere. It’s become part of the real estate lexicon.
Has it though really become part of the real estate industry? Are we now an ‘as a service’ industry. Do we now operate ‘as a service’?
The answer I think is yes, and no. The core underlying thinking behind #The TrillionDollarHashtag has permeated the inner workings of the industry but not taken hold. Lip service is everywhere but the actualité is somewhat different. The backwaters are filling up rapidly but the dam is yet to burst. Instead, as I write this today, I am struck by a Bloomberg headline: ‘U.S. Office Buildings Face $1.1 Trillion Obsolescence Hurdle’ that demonstrates that the message of that original article has not been taken seriously enough. I am not saying that had it been this headline would not have been required but I will most certainly hypothesise that there will be many more such if the industry does not get to grips with the fundamentally different business environment it now lives amongst.
The core message of this Version 2 article is first that we must double down on the space as a service mindset and secondly that, due to events that have occurred over the last three years, we need to push our thinking harder. Perhaps the changes we are about to see are bigger, stronger and more pervasive than we could have imagined three years ago, and we need a beefed up response. In a sense space as a service is moving from being a tactic to a strategy. A part of the business plan to the business plan. A thought to a philosophy.
“‘relentless acceleration in the capabilities of technology, especially in the ‘learning’ form of AI, is the accelerant of the ‘space as a service’ world.
Because it is refactoring the nature of ‘work’ itself.’”
Where are we with technology today?
Let’s update the premises behind the ‘Space as a Service: the #TrillionDollarHashtag’ and then add in the new factors that have arisen over the last three years.
First off was the point that the speed of technological development was increasing and that the tools at our disposal would continue to grow at an exponential rate. Which was why we had 100,000 transistors on a CPU (the ‘chips’ in computers) in 1980, 100,000,000 by 2000, and a seemingly immense 10,000,000,000 by 2016. Bringing this up to date we now have data centre specific chips with 2.6 trillion transistors, and in mid March 2020 Apple released their M1 Ultra chip, designed for high end but personal computing, that has 114 billion transistors. So that’s a personal computer with more than 10 times the processing power of the best enterprise CPU in just six years.
We talked about the ‘Trinity of Transformation’ where we were able to leverage this huge increase in computing power with access to more and more data together with rapid advances in algorithms, especially within the subset of AI called Deep Learning. This has continued, with the amount of data created, captured, copied and consumed rising from some 41 zettabytes in 2019 to 97 zettabytes today. On the algorithm side, the ground breaking AlphaGo, developed by Google’s Deep Mind AI research arm in 2016, was beaten 100 to 0 by its follow up Alpha Zero just a year later. By July 2021, DeepMind had made available, for free, AlphaFold, which was their solution to the 50 year old grand challenge in biology, the ‘protein folding problem’.
This triumvirate was summed up as having ‘Consequences’, which were that we were moving to an ‘AI Everywhere’ world where ‘machines’ were going to be involved in more and more everyday transactions. In particular we saw how in the fields of computer vision (the ability of computers to understand the contents of photos and videos) and in natural language processing (the ability of computers to understand text and speech), there were already systems that bettered human level performance.
Three years later, Computer Vision is a US$48 billion a year industry, and making big strides into real estate. For example, OpenSpace, that provides AI powered next-generation 360° construction photo documentation, raised US$102 million at a US$902 million valuation, in March 2022.
Natural Language processing is developing equally fast, with notable gains from a language model named GPT3 which was trained using 175 billion parameters (essentially it read and analysed ‘everything’) that is capable of producing human-like text, and even writing software code in response to verbal instruction. Those software programmes you might have used, or heard of, that will convert audio to text, or that can mimic an individuals voice, are down to advances in natural language processing.
Are we at the stage of machines writing Macbeth yet: no, but there is an awful lot of utility to be had on the way there. It’s certainly a great deal easier today to handle large documents or leases than it was five years ago. Read and summarise is getting very good.
As is voice recognition. Whilst the growth in smart speakers such as Amazon’s Alexa has not been as stellar as was predicted three years ago, it is perhaps telling that if you are lucky enough to own a Tesla, you can control many of the cars functions just by issuing voice commands.
Combine these two super strengths of AI with three more, automating processes, optimising complex systems and making predictions, and we are witnessing more and more tasks historically mediated by humans being taken on by ‘the machines’.
This quotation, from Version 1, is worthy of being repeated and must not be ignored. It is by the AI ‘superstar’ Kai-Fu Lee, from his 2018 book ‘AI Superpowers’:
“‘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.’”
Six years on from this quotation one hears less about ‘all jobs will be automated’ and much more nuance around individual tasks, rather than complete jobs. But the key point, that ‘machines’ are substituting for humans in more and more tasks, is more valid than ever. And will only ever get more so.
Regardless of any other drivers of change, this relentless acceleration in the capabilities of technology, especially in the ‘learning’ form of AI, is the accelerant of the ‘space as a service’ world. Because it is refactoring the nature of ‘work’ itself. Simply put, the work we, as humans, do today is increasingly diverging from what we did as humans yesterday. The inputs to our ‘jobs to be done’ are changing, and this means what we do, and where we do it, will change as well. All else staying the same, this trend is unstoppable. And of course, all else is not staying the same.
All Change, All Change - The impact on Real Estate
In 2019 we looked at how technology, through taking over our work tasks that were ‘structured, repeatable, predictable’ was changing the nature of the work that we humans do, and highlighted the need for our places and spaces to catalyse human skills. We needed environments conducive to quiet work, collaborative work, reading, thinking, resting, events, learning, podcasting etc. In other words creating. What is striking today is the commentary around the ‘creator economy’. More and more emphasis is being put on ‘man as the measure of all things’ and our individual capabilities to create. Especially within the context of the Web3 movement, individuals as creators is growing rapidly as a societal trend, and more and more tools are being made available for them to utilise and leverage. Podcasting and the use of video has exploded since 2019 and specialist spaces and equipment to create these is becoming commonplace within ‘space as a service’ buildings.
We also discussed other factors driving a changing pattern of real estate supply, such as the rise of on-demand services, the inexorable growth in outsourced or contract employment, the decades long trend towards shorter lease lengths and the fundamental shape of modern economies with small or medium sized companies (say 250 in the UK, 500 in the US) representing an employment share of upwards of 60% (in the UK) and 77% in the US. Large companies may be responsible for a large share of GDP (50% in the UK) but the vast majority of individual business are small. This has not changed, and indeed is looking like becoming even more pronounced in the future. Not least of all because the digitisation of business enables much more efficient supply/demand matching. It is both easier for companies to find the skills they need when they need them, and for skilled workers to mix and match who they choose to sell their skills to. The balance of power between employer and employee will wax and wane (today, in the West at least, it is an employees market) but rigidity of employment is not coming back. Fluidity is the name of the game.
So what is still true?
Critical to faith in the #TrillionDollarHashtag were two phrases: First that
“’The Real Estate Industry is no longer about Real Estate’ ”
and secondly that
“‘Businesses don’t want an office, they want a productive workforce’. ”
They sprang from a realisation that real estate skills were still necessary, but no longer sufficient, to meet the demands of customers, and that the industry needed to focus on what those customers actually wanted, rather than what the industry had to sell. Leesman Index data (amongst many other sources, such as the annual Gensler surveys) was showing us that offices were extremely badly utilised on average, and that circa 40% of office workers did not consider their workplace as being somewhere that enabled them to be productive. To rectify this before customers ‘left the building’ required much more than plain old fashioned real estate skills. As it turned out pretty much all customers did ‘leave the building’ anyway, from early 2020, due to Covid-19, but now the emphasis is on how to get them back rather than keeping them from leaving.
Eight factors were posited as being critical to succeed in providing spaces and services appropriate to the ‘job to be done’ of every individual, as and when they need it. I.e #SpaceAsAService.
Let’s review these and see what is still true.
1. Are you a Chicken or a Pig?
From the joke about ‘what is the difference between a chicken and a pig in a bacon and egg sandwich? The chicken is involved but the pig is committed’. Do you really want to be in the space as a service business, or do you want to stick to your knitting and focus solely on the physicality of real estate? Either answer is correct. The only stipulation is that you must choose. Do you see your business as being about selling or leasing a product, or delivering a service?
I see some who have made the choice, and committed to being pigs but I see also a lot of chickens around who think they are pigs. Many larger landlords have created their own ‘space as a service’ offerings but only in a tiny percentage of their space. Having 1% of your portfolio as space as a service reeks of not making a choice. And heading for failure. A modern prime building needs at least 10%, preferably 20%+ to be available as space as a service.
This question is not optional, but as of today many are ducking answering it.
2. From Rent Collector to Service Provider.
Under this heading we talked about new customers and new competitors. The new customers representing the need to provide space that most of your customers employees liked, and the new competitor being not the building next door, but no office at all. Both were a bit hypothetical in 2019 but today are paramount considerations. The pandemic blew away any resistance to the idea that only an office was a suitable venue for work, and now landlords are faced with persuading their customers that they want to come to the office, even though they no longer, mostly, need to. We are all service providers now. Or will be come the next lease event!
3. New models for valuation… and new KPIs.
In a space as a service world, income, not rent, becomes the measuring tool. This is now accepted wisdom, though the methodologies for valuation are still in flux. That said, several of the larger professional service firms have put out guidance, as has the RICS. The bottom line seems to be settling on capitalising different income streams individually, whilst also paying far more attention to how an asset performs across criteria such as flexibility, productivity, wellness and sustainability. It’s safe to say that valuation is not a settled science today. It perhaps never was, but current variables are murky at best. Over time it seems inevitable that few assets will continue to be valued as if they were Bonds, whereas the default will be to look at an asset as a Business and value accordingly.
It is a very moot point amongst the investment community, with many still holding to real estate as a long term stable income producing asset when all the evidence points elsewhere. That said, as with Hotels, evidence will develop over time as to how operating an asset in a space as a service manner pans out. What looks more risky today (lots of short term contracts) may well have more resilience than is currently allowed for. What does seem a certainty though is that risk is increasing regardless. A modern economy is a highly tuned beast, prone to more or less unexpected upheavals.
The upside of course is that this applies to every investment category, and real estate still provides a rare opportunity to deploy capital at large scale, mostly free of any risk that it will self combust and drop to zero.
4. Human and Machine Wins.
3 years of technological development (1-2 cycles of Moore’s Law) has emphasised just how true it is that machines on their own will not rule the roost, but neither will humans on their own. The future belongs to humans and machines working together and each leveraging the particular skills of each other. As has been said, AI will not put Radiologists out of business, but radiologist working with AI will put those who don’t out of business.
All across real estate we are seeing new tools develop that augment us humans. From automated lease abstractions systems, to cameras mounted on construction workers helmets that constantly monitor progress, the industry is adopting a human plus machine ethos. This is particularly important within the space as a service market as designing a great customer user experience is a mashup of human skills and granular, ongoing and pervasive data.
5. Embracing multi-modal occupation
This was such a strong trend pre pandemic in 2019; everywhere you saw people working in traditional offices, flex spaces, coffee shops, hotels and other ‘third spaces’. But in March 2020, or thereabouts, all of this stopped as 95% of knowledge workers moved to working from home. And two years later this is still the case for very many people.
It will resume though. With much more hybrid and distributed working (an absolute certainty) we’ll find people working ‘anywhere’. Key for space as a service operators will be going where the customers are, not where they used to be. Local spaces, suitable for working near home, are mushrooming in response. If just a few percent of work moves out of CBDs then supply will run out, so expect to see a lot more of it. En masse, we are not going back to the office five days a week. Most likely not even three days.
What we will start to see more of is platforms for aggregating on-demand spaces, and informal to formal networks of operators working together to ‘own the relationship’ and offer their customers optionality. If my customers need space somewhere I don’t have any it’s better to help them via my network than let them escape out of my ecosystem. Relationships matter.
6. Brand Building - from B2B to B2B2C
Traditional real estate was mostly a business to business matter. In fact in the commercial sphere it was really about B2I, business to investor, because an office’s customer was really the investor the developer hoped to either fund the development, or purchase the end product. In a space as a service world the asset needs to please the actual users of the space. Returns will flow fastest to whoever can create a user experience that sets a space apart, is designed specifically with a certain type in mind, and that functions so well for each and every user that utilisation, occupancy and satisfaction levels are dozens of percentage points higher than historically the case. So instead of 50% occupancy and 50% satisfaction, we need to be achieving 70%+ occupancy and 70%+ satisfaction.
And Brand is critical in this equation. People will buy into real estate Brands as they buy in to luxury cars. There will be Brands to suit Audi, BMW or Mercedes fans. Or whatever. The point is that the Brand is designed, constructed, monitored and optimised around a set of Brand Values that are distinct, tailored and empathetic to the target market sought out as customers.
Ultimately, the UX of a space, the user experience, will equal the Brand and the Brand will ultimately represent the value in that space. To maximise the returns on real estate now necessitates considerable, committed and ongoing input from the operator of that real estate.
Has the industry brought in to this? Yes and no. There are some operators who now have very strong Brands, or are in the process of building their Brand. Deliberately, with focus, energy and persistence. But there are others who have taken a more traditional real estate industry approach to Brand. And that is, (and I am sure many of you have experienced this) where the client sees the Brand as the logo, the font, and the colour scheme.
It’s a similar issue to the Chicken and Pig scenario. Are you involved, or are you committed? Building a strong Brand is a long term and hard process. In the same way there are many chickens who think they are pigs there are many who think they have created a Brand whereas really they have just created a letterhead.
And this is not entirely a function of money. One well known service provider spent $60+ million on creating a Brand only to find that they didn’t have the capabilities to do it as well as necessary, and ended up buying a stake in a true Brand for some $200 million instead.
Which segues neatly to
7. Property Management: From Zero to Hero
In 2019 we suggested the space as a service market was a huge opportunity for established property management companies. That they were well placed to be the creators and curators of the user experiences behind new Brands. That by incorporating a new set of skills, some new people and a new mindset they were at a point in time when they could move dramatically up the value chain. PMs usually face intense pricing pressure, and tend to play piggy in the middle between landlords and occupiers. This was a chance to escape that dynamic and gain much more pricing power.
To do so they would need to pull out of their silos the six industries that combined provide the inputs to a great workplace. The six are real estate, IoT networking, Data Analytics, Workplace, Hospitality and HR. They work on the same projects but most certainly do not work together. Each has their own incentives, and each operates on a mostly need to know basis. Instead of operating as a multifunctional team they do their thing and their thing only. Cross collaboration is weak, at best.
This is what we thought the Project Management industry could jump in to and carve out a ground breaking, distinctive and high value add product/service line.
It has not happened.
And lastly….
8. The Office as iPhone
This builds on all of the above and is the essence of what space as a service is about.
The iPhone represents only 25% of the global market for smartphones but captures some 75% of the profits. Why? Because it has an exceptional Brand, and marries hardware, software and services. The overall user experience of an iPhone is so compelling, and popular with customers, because those elements, the hardware, the software, and the services are designed as one. Each element is optimised for the others. So that the UX is smooth, safe, of a piece and attuned to individual need.
What would that look like in an office? Well it would require the operator to know a great deal about three buckets of information. First they would need to understand how the building itself is functioning. Is it responsive to user needs and maintaining excellent environmental conditions? Is this building working as well as it is technically capable of. Then they’d need to understand, in granular and realtime detail, how are people in the building actually using the building? Where are they going, where are they not going, what are they using, when and where? For each moment in time, but also over a time period. What changes day to day, week by week, season by season? And the third bucket, perhaps the hardest to acquire, is an understanding as to what each individual person is using the building for? What are there ‘jobs to be done’? What tasks are they trying to complete.
With these mountains of data available the operator can then start to operate as if the workplace was software. In the tech industry the first thing you learn is that the software development process is a matter of ‘build, measure, learn’. You build something, you get it in the hands of users, you measure how they use it, and you learn from that. Then you tweak the build, and repeat. And repeat. It’s why software is never finished. It is only ever at a stage in its development.
In the real estate industry we stop at Build. We need to iterate. We need to build, measure, learn. We need to define what we are measuring ourselves against and then we need to monitor our spaces on an ongoing basis, and continually optimise them based on what we’ve learnt.
We need to think of ‘workplace as software’.
Because our customers don’t want an office, they want a productive workforce.
Three years on we have many more pieces of hardware, and much software, and quite a lot more services more than were available in 2019. The building blocks of ‘office as software’ are getting there. Some operators are getting close.
“But, and this is a big and fundamental but, as of today we are not thinking big enough and we are not joining up the dots. We have not blown up the industry’s silos and so we are still constrained in what we can achieve.”
What we now need to do is address …..
What is new, and true?
All of the above was true when written in 2019 and is still true. Some factors are being more impactful than others so far but the direction of travel is still correct.
But what has occurred since then, first with the growing awareness around ESG (there are four times as many Google search for ESG now than in 2019) then with the arrival of the global Covid-19 pandemic and more recently with the start of a land war in Ukraine, in mainland Europe, is turning acceleration into revolution.
Each of these factors interlink, each are very powerful and the solutions to each are self reinforcing. The Covid pandemic has forever cut the Gordian knot linking work with an office, as well as making us all realise the importance of environmental conditions within buildings. The ESG movement is making achieving near term more sustainable assets and longer term net zero ones a necessity, and the war in Ukraine, in Europe at least, will lead to a much greater concerted push for renewable power and to become energy resilient.
Between them, these forces will redefine how we use offices, will ensure many become rapidly obsolete, and will see the best finally break down the industries silos and create by far the best workplaces we have ever seen. Space as a service, as a consequence, will move from being a niche to be being the default operational model in the market. People will either make use of spaces run by space as a service operators or will work for companies who operate their own space according to space as a service principles.
The smart building sector will be reimagined and centred around a new north star. A ‘Smart Building’ will be one that helps people be as happy, healthy and productive as they as capable of being and enables them to perform their ‘jobs to be done’’ in the most efficient and effective way possible.
Currently we tend to view ‘Smart Buildings’ through the lens of technology. Air conditioning, water use, waste, energy etc - how do we optimise these through the use of technology. And we see siloed industries working away on each of these. And in many cases developing technology that does work, is realistically priced, and genuinely useful. The problem though is that we are just being better at doing the wrong thing. Building better point solutions. Building features of what actually needs to be one holistic product. We are creating better hardware, better software and better services but are we really creating better buildings? Yes we are, but nowhere near as good as they can be.
“The most important takeaway of this article is that we need to,
and I adapt a well known statement of Steve Jobs here,
‘start with the customer and work back to the real estate’. ”
We need to be zooming out and connecting all the dots in a quest to produce a user experience for our customers that is the sum of every ‘human + machine’ skill at our disposal. We need to re-engineer how we operate so that we take multi functional inputs and craft them into a product that we have designed in advance as being the optimum environment we can offer our customers. So we need to start with the wants, needs and desires of our customers and work back from there. What needs to happen to make this happen? What hardware, what software, and what software, configured in what way gets us there? How do we work as one team, rather than a dozen silos? How do we make those responsible for energy use design their systems around the ‘jobs to be done’ of the people in the building, rather than simply achieve a goal of using less? How do get workplace designers to understand the energy use ramification of their designs. How do we collect data, what data should we collect, and who needs to know what? And so on. Every stakeholder in the creation and curation of a great UX working in parallel, with aligned incentives, and for the long term.
It is as clear as can be that the future survival of offices as an asset class is going to be down to how well we as an industry can create buildings that our customers feel they want to be in. The last two years has shown that, by and large, our customers no longer need our product. Mostly remote working has worked. It has also though become very clear where remote working does not work so well. There are things we cannot do alone and apart, and there are social, emotional and physical needs that we all have that are not met either.
What every company needs to do, and sadly many are not doing, is accept how the worm has turned and work hard to understand what each and every individual in their employ actually wants, needs and desires. Only by understanding, at a granular level, what is required of individuals and of teams, and how these match, or not, the needs of the company, will they be able to devise the best route forward vis a vis their real estate needs.
Every company is going to have different needs. There is no ‘right’ answer. And answers will change over time. The world of business is becoming ever more fluid.
For the Space as a Service industry this is excellent news. But we need to both broaden our thinking, and go deeper. Our market has expanded dramatically. It used to be noted that JLL thought a third of office demand will be for flex space by 2030.
“Given the events of the last few years it is not unreasonable to see the market for flex space being nigh on the entire market. Once our customers move to hybrid working everything has to be capable of flexing. Fundamentally flexibility is needed by every company. The variables may differ but the need for the right space at the right time is now the baseline. Every company needs at least some of their space needs met ‘as a service’.”
The difficulty though….. is the difficulty in providing this. But for the space as s service industry this is a feature not a bug. The complexity is the competitive moat. Those who can develop business models, and capabilities that tick the new, much expanded, list of boxes is in a powerful position. Because what is being asked of you is more than ever before. To deliver on the expanded remit of space as a service will not be easy. Let’s conclude by laying out the big picture:
You have to understand the wants, needs and desires of your customers. Or your target customers. And this means you have to define which customers you are going after. A great UX is customer specific. Generic and great do not mix. You may have multiple Brands designed for different customers, but every Brand has to be able to tell a distinct story.
You have to be able to accommodate your customers in exemplary environmental conditions. As real estate people we cannot make bad companies good but we can make good companies better. What we do know is that environmental conditions impact on people’s cognitive function, so our ‘Brand Promise’ has to include providing space that enables people to function at their maximum cognitive ability. Productivity is a function of cognitive well being. Providing it is a key competitive weapon.
Flexibility of design follows on from the environmental conditions. Spaces have to be able to be reconfigured, with relative ease, over time. Designing for flexibility from the get go is essential. You do not know how people will want to use space, so you have to be prepared
Which means you need to co-design, as best as possible, the systems used by your building that impact on environmental conditions. Ideally all of your customers should be able to control their personal environment. Or have a choice of settings with different conditions. Over time the building needs to be designed to learn individual preferences and adapt accordingly, and automatically.
Which also means impacting on your buildings energy use. There are almost always tradeoffs. Often it is said better ventilation requires more energy, as an excuse to not provide it. But the upsides of better ventilation are so great that that needs to be the starting point and you need to work back from there to see how and where you can mitigate energy use. Insisting on only using renewable energy is a good starting point.
At a macro level the space as a service industry needs to be the industry of sustainable buildings. True space as a service = sustainable buildings. Can you really provide a great user experience in a building that is not sustainable? Space as a service is the flywheel that will speed up the move to sustainability. A great user experience is a ‘Human + Machine’ endeavour but the machine needs to be tooled for sustainability. Regulators, Investors and Customers are pushing hard for sustainability. The consequences of War in Ukraine will strengthen this resolve. A need has become an imperative. The space as a service industry needs to ride this wave with passion. Not only is it essential for the creation of great space, but it is the right thing to do AND it makes strong business sense.
And of course, sustainable buildings are smart buildings, or at least the catalyst for smart buildings. You must start with the customer and move back to the real estate, but whatever UX you aim for will require a sustainable and smart building. Everything is connected. Or should be.
Doing the above requires aligned incentives. Either you need to be a landlord yourself, or work as a partner to one, or failing that sign Green Leases where commitments to sustainability are embedded and mutually agreed.
So this is where the space as a service market is today. Growing fast and doing well but in need of a ramp up in ambition. To date we have thought about the movement in terms of workplaces, but in the future we’ll be thinking about space as a service as a philosophy of real estate. One where every silo is removed and an overarching emotional, social and physical design is conceived and executed. Where the hardware, software and services of real estate are combined to create healthy, sustainable, desirable assets. That thrive because they enable individuals, teams and companies to be as good as they can be.