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.

My talk at the PropTech, Data & Innovation Summit - London, 27/11/2019

Run by the excellent people at Investment Briefings and hosted by Nuveen in 201 Bishopsgate this is a short 20 minute look at how demand for commercial real estate is changing and the impact this will have on asset management and investment.

Technology, People, Retail & The Future of Shopping Centres

5 decades of Moore’s Law (which states that computing power doubles every 18 months) means that in the 2020’s we will experience change at a pace that makes the current decade seem positively sluggish. A Trinity of Transformation, involving more data, more compute power and more advanced algorithms is underway.

And this will have consequences, for us personally, and for the companies we all work for. How we live, work and shop will change, perhaps radically.

In a world where we all have a €30 million, 1980’s supercomputer in our pocket, where JD.com in China can run a warehouse processing 200,000 orders a days whilst employing just four people, and where we can have products and services tailored to our own preferences, we will see the meaning of ‘Shopping’ transformed. The notion of physical stores being the way we get goods into the hands of consumers will fade away, and whilst it seems clear that many will fail to adapt to this new world, the opportunity to stand apart, to create clear and strong competitive advantage, will be great.

The 2020’s will be the decade when the superiority of ‘Human + Machine’ working together will become clear. The best companies will use technology to capture, process and analyse data at an unprecedented scale, and at a level of granularity not seen before. Artificial Intelligence (designed and guided by Human Intelligence) will allow us to personalise product recommendations, optimise the assortment of goods each store holds, and adjust pricing to maximise sales, and profit.

The 2020’s will see the primary purpose of physical retail becoming a ‘Customer Acquisition Cost’. Stores will act like Media, being places where Brands can demonstrate their values, products, attitudes, and ethos. Compared to the cost of customer acquisition online (where the ‘Facebook or Google Tax’ has to paid) the very best stores and shopping centres will represent great financial value. Inspire offline, service online will become the norm. 

To get a preview of many of the changes coming down the tracks, look East, to China. Jack Ma, the founder of Alibaba, coined a phrase in 2016; ‘New Retail’ he wrote, was all about ‘making it easy to do business anywhere’. On the 11th of November this years ‘Singles Day’, the massive ‘New Retail’ extravaganza took in more than $38 billion in sales. That is nearly 30% up on last year and a triumph of the merging of Commerce, Digital, Media and Logistics. Physical shops were a major part of ‘Singles Day’ but Alibaba’s idea of physical shops is not what we are used to. They are part of a huge feedback loop where each touchpoint with a customer contributes to improving the experience that customer receives.

Different parts of the world are on different parts of the journey but the direction of travel is clear. Retail is not about ‘multi-channel’ or ‘omni-channel’, but is just ‘Retail’. Online and offline serve alternative purposes, but each has its place. Understanding what that purpose is is vital. Globally there are trends as to what works, and what does not. Retail is a very local business, but lessons can be learnt from across the globe.

Lessons can also be learnt by listening to the signals given off by the ‘digital exhaust’, that mass of data that is thrown off by the widespread and pervasive use of Social Media. We can learn a great deal about the wants, needs and desires of people within certain geographic areas. Every time you read a story, like a post, photo or video, you are contributing to a digital fingerprint of an area. By reading the fingerprints we should be able to better match the products and services we stock or provide. Why does something sell better in one area than another, even if the demographics of that area are similar? Because sex, and age and income only goes so far in explaining what people want. We may be similar, but we are not the same. In the 2020’s those differences will be something we can discern, and learn from.

Customers have not changed in many ways; they still want value, variety, and ‘Wow’. And there are a multitude of retailers, Brands, and experience creators who can help to provide a never ending supply of ‘Wow’ moments. Creating the systems, processes and collaboration required to enable this will be a major differentiator of retail real estate companies. The best will provide the physical retail skills many new or growing Brands are lacking. Landlords will be data and space providers, not just suppliers of ‘space’.

A lot of ‘space’ will be repurposed. A shopping centre does not have to be about shopping alone. Asset classes are merging: look out for eSports arenas, VR experiences, residential, co-working, urban logistics, hotels, medical, student housing and community uses. There is always a perfect use for any space. There are always options.

Marketing will also change; with much more, and better, data we can talk with, not at, our customers. Our job is to understand demand, and provide the supply to match it. We will market as if we were a consumer Brand, not a real estate company.

In a world changing as fast as ours is, being average is increasingly hard. There is likely to be a much larger gap between the best and the rest.

Retail Real Estate: Tech, PropTech, Value

Gaspar van Wittel Piazza Navona, Rome 1699

A recent conversation with a large retailer went like this:

‘The market is tanking, opening up some real buying opportunities, do you want to get involved with a distressed asset fund we are putting together?’

‘Are you kidding? We are murdering our Landlords on rents, there is no way we’d buy any retail real estate’.

That’s where we are: the ‘retail apocalypse’ is in full swing. 

In the US some 8,200 store closures have already been announced this year, with an expected shuttering of 150+ million sq ft of space. On top of the 155 million sq ft closed last year.

In the UK a net 1,234 stores shut in the first half of the year, according to the Local Data Company. More than the same period last year and the highest since 2010.

Of course you can, and many in retail Real Estate do, slice the numbers in different ways and argue the situation is not in any way an ‘apocalypse’. For me, ‘we’re murdering Landlords’ rather trumps that Panglossian viewpoint.

What no-one can deny though is that the world of retail, and therefore as sure as night follows day, retail Real Estate, is changing dramatically. The only valid variance of opinion is in the degree of change. In my mind the degree is very large indeed. 

This is why.

First off we have to accept that physical retail is no longer just, or even primarily, about shopping. Historically physical shops were the distribution channel for manufactured goods. As the Industrial Revolution developed, and factories enabled the production of large quantities of identical goods the only way to sell them, at scale, was through physical shops in every village, town and city across the land. Sure there was mail order way back when but that was very slow and useless for anything perishable. Sears had their famous catalogue back in the 19th century (where incidentally one of the best selling items was self assembly homes) but that served a huge market, the US, with very limited infrastructure. Shops were IT … if you had products to sell you HAD to have shops. Lots of them.

Today shops are not needed as distribution channels. There are other ways to get goods into the hands of customers. Shoppers no longer need shops, to shop.

In this world a physical shop has to perform one or more of four functions:

First, you have to be a ‘destination’. Somewhere that is just so exciting, or attractive, or fulfilling, or intriguing, or beautiful that it will attract people of its own accord. This might be in town or out of town, there are examples of both. It might be newly built or old, high brow or low brow, low end or high end. There are many ways to create ‘destinations’. There are also successful and unsuccessful ‘destinations’. Economics still applies; create a ‘destination’ in the wrong place, or where local purchasing power is low, and even the best places can fail. But a great place in the right location is a pretty solid asset.

Secondly, you can be a fulfilment centre, somewhere that helps retailers get over the ‘last mile’ problem. Many retailers still stick to the fantasy that their customers want ‘Click & Collect’ services. They do, but only in the absence of being able to get their orders quickly some other way. Why did Amazon buy WholeFoods? Because their stores get them close to a large percentage of prosperous shoppers. All of the best retailers are working on getting delivery down to as short a timeframe as possible. Shops can obviously help, but they do not need to be open to the public. Urban logistics, vertical warehouses, micro warehouses, car parks, sites awaiting development; all of these are pieces in the fulfilment puzzle. Build a network that offers 2 hour delivery to the largest, richest customers and you have another solid asset.

Thirdly, you can win by having shops particularly well ‘tuned’ to local particularities. These would be areas that are the antithesis of the clone high streets we are too familiar with. Hard though it is is to believe, not everybody wants the same 50 brands. The days of the same old same old are as dead as thinking of stores are distribution channels. Think of a High St more like a smartphone - everyone’s home screen is different. We might well fit in to cohorts of like minded people but we certainly do not all want the same. And critically today we do not have to accept all being sold the same. Personalisation at all levels is the name of the game. Curating places with a deep respect for, and insight into, the locality and the locals is the third way to build solid assets.

And fourthly, you can supply the cheap and everyday needs of people. Either people who do not use online very much, or goods that are fast turnover, or too cheap to deliver. Places where convenience and price trump all else. These are the final solid assets.

Whichever category you choose though, everything you do must be data driven. In conception, design, build and ongoing management there is no success in retail real estate that will not be data driven. And this means real time data, not quarterly reports of out of date information. As Larry Page has said ‘at Google we trust in God, everyone else must bring data’.

The upshot of the above? There is going to be a lot less physical retail, but it is going to be much better retail. Obsolescence will be bountiful in the next 5 years.

There is a wildcard item 5 to the above typology. And that its creating great retail spaces and places, not to generate any great intrinsic growth but to make surrounding residential assets more attractive. Creating and curating really interesting, attractive retail locations as loss leaders to entice people to pay more to live in an area is a valid goal. Clearly this only makes sense when a large owner controls enough real estate to really be able to leverage this strategy, but those places do exist. King’s Cross and Marylebone in London are great example of this.

So where does tech, or PropTech, come into all of this? At a macro tech level it is the development of the Cloud, Smartphones, connectivity, robotics and automation that has propelled the growth of e-commerce and the rise of Amazon, ASOS, Boohoo et al. Infrastructure matters; for years people laughed at how pets.com raised hundreds of millions and then collapsed in the dot com bust of 2000. What they tend to not mention is how chewy.com (essentially the same thing) floated last year and is now worth nearly $10 Billion. Selling pet food online does work after all. But only when the necessary infrastructure enables it to work. 

Physical retail is suffering today because technology, in the widest sense, has enabled all manner of competitors, and competition, to flourish. Mostly the real estate industry has been caught out by this because mostly the real estate industry pays little attention to, and has little understanding of, developments within the technology sector. You cannot see a huge obstacle in the way if you keep your eyes focussed elsewhere.

The flip side to the tidal wave of change largely driven by technology, is the ability of more targeted technology, in the guise of PropTech, to come to the rescue. There is a great deal we can do to build and grow great retail assets.

Let’s start with localisation. KYC is the name of the game here. KNOW YOUR CUSTOMER - nothing works without this. Fortunately we live in a world of ever growing data with rapidly advancing tools to analyse that data. So instead of just profiling a location based on crude (and inevitably out of date) demographic data we can today utilise the following:

• Psychographics enables us to understand consumers based on their psychological attributes, and focuses on activities, interests and opinions.

• Socio-economic data enables us to understand the behaviour of people, through the lens of economic drivers. How does the economy of this location impact on how our customers are likely to behave?

• Data from mobile phones (and just about everyone has one of these and they are ‘broadcasting’ all of the time) helps us understand who shops where, where they live, where they work, the other brands to ours that they visit and the way they tend to move around an area.

• Married with Transaction data, an increasingly rich picture of purchasing behaviour can be developed.

• Whether from retailers directly, or via credit card companies we can build enormously deep Geospatial models based on this transaction, mobility, economic and behavioural data.

And here Artificial Intelligence, and its sub-set Machine Learning is very much our friend. The three areas where AI & ML can, and do, excel are:

• Personalised Product Recommendations

• Assortment Optimisation

• Pricing Optimisation

i.e What are the broad Product categories our customers are most interested in, how can we optimise the mix we stock, and then how can we ensure pricing is set just right. Not too hot and not too cold.

This of course works at the individual shop level, the centre level, the street level and across a wider area.

This use of AI is more likely to occur amongst individual retailers but for the landlord an awareness of the power of these tools is important. When judging the covenant of existing or prospective retailers an understanding of how deeply said retailer is using these tools could be very instructive. Used well they give a retailer great insight, so one should be looking for retailers who are advanced data users. They have a much greater chance of surviving and thriving.

All the above gets us to the new reality of retail real estate. Physical shops are a ‘Customer Acquisition Cost’ not a distribution channel. Sales, per se, are not the point (hence beware the allure of ‘Turnover Rents’). The aim of a shop is to inspire a customer and to learn about that customer. 

This is how the smartest online retailers who are opening offline stores look at them. Unlike the retail real estate industry, which often sees online moving off-line as a vindication and loudly acclaims ‘See, told you they needed ‘proper’ shops’, to online retailers a physical store is a way to acquire a new customer, who they can then service more efficiently and effectively online. An example of this is the US store Bonobos with their ‘Guideshop’ concept. Here you book an appointment to be introduced to their whole range, try on items, and order what you will. Which is delivered online, as the store holds no stock that is not on display. You get a very strong personalised experience while they get to know a great deal about you. With all that data, marketing to you online is cheap and very effective.

Doug Stephens, who writes brilliantly at retailprophet.com, has described this as ‘Shops as Media’ and he posits a different way of looking at the value of a physical store. If you combine the number of people who visit your store, with how long, and then compare this to the cost of being able to keep their attention online, in an immersive experience, then the value of that shop can be looked at in a very different way. How much does it cost to get a customer to watch a 20 minute branded piece of content online? Answer: a lot!

You absolutely have to design, stock and manage a shop in the right way to make the most of this (which is where AI and other PropTech options come in) but if a retailer can think of their touchpoints with a customer in an holistic way, where online feeds offline, and vice versa, then you have a single channel to work with, not an omni-channel one. The problem with ‘omni-channel’ is that today it mostly means multiple routes to customer, segregated in data and fulfilment terms and a morass of duplicating costs. Which explains why so many retailers are losing so much money; their fundamental business model does not, will not, work.

Which gets us to China, Alibaba and ‘New Retail’.

In their book ‘New Retail: Born in China, Going Global’, Zakkour and Dudarenok have this excellent line:

“If you want to see the future of retail, you don’t need a time machine or a multi-million dollar research initiative. You just need airfare to Shanghai and a week to explore”

‘New Retail’ is a term coined by Jack Ma in 2017, and summarised as a way of ‘making it easy to do business everywhere’. As the founder of a company, Alibaba, through which 80% of all e-commerce in China goes, he has extraordinary insight in to supply and demand within the retail sector, across the entire country. Alibaba also own department stores, shopping centres and supermarkets, including the poster child for ‘New Retail’ Freshippo (aka Hema).

The core proposition with ‘New Retail’ is the merging of online & offline. This is achieved by arranging four capabilities into one continuous feedback loop:

• Starting with Commerce, which incorporates social commerce, and marketing tools across B2B, B2C and C2C channels. Whether you are marketing to companies, consumers or allowing consumers to market or interact with other consumers, you have to have capabilities that allow this in a frictionless way.

• Then onto digital capabilities, which includes search and native mobile websites, underpinned by data science and AI, all resident in The Cloud, and ideally incorporating mobile payments and financial services.

• Logistics is next, where you take advantage of automation, unmanned vehicles and warehousing that enables last-mile and cross-border fulfilment.

• And lastly Media & Entertainment, where you have sophisticated teams managing content creation, social media feeds, AR & VR experiences and localised services.

Put this together and you have places like Freshippo where you can buy goods using your phone, pay for them with Alipay, select a live lobster and have it cooked to your preference in store, or simply order what you need online and have it delivered to you within 30 minutes if you live within 3km of the store.

And on it goes. Everything connected to everything else, predictive stocking, automated processes removing all the friction in shopping, and a deep understanding of every customer on an individual basis. Build, Measure, Learn, Build, Measure, Learn …….. 24/7/365.

The question of course if where does the Real Estate industry fit in to all of this? Alibaba largely do it all themselves. But would they if they had the right partner. Is real estate part of their core competence? No. It is necessary, but not sufficient.

In the West we are a long way from this. Walmart & Amazon might have the data to work like this but it is unclear whether they want to. Or need to. However, it IS clear that the service provided to the end customer from a ‘New Retail’ approach is extremely impressive and generates amazing demand. The Real Estate industry needs to move closer to this mindset, regardless of whether or not it wants, can or should develop such deep ecosystems and networks.

In conclusion then, all of this is a big deal. Retail is changing and changing fast. And not in a linear way; we are not digitising the past. It is being reinvented. Technology is changing how we shop, where we shop, and how we want to be served. There is not going to be any great reversion to the norm when the ‘apocalypse’ abates. Much retail real estate is going to continue to lose value, even becoming completely obsolete. Many long established centres, streets and areas will die. Don’t bring a knife to a gunfight: if your retail real estate is not suited to how the market is changing then there is nothing you can do about it. Change the game, or get out.

What the above does show though is that retail, and retail real estate, can be much much better than ever before. We have the tools and technologies (some broad tech, some narrower PropTech) to know far more about our customers, far more about what they want, where they want to go and how they want to be dealt with than ever before. The next ten years is going to see many old name retailers fade away but many new, quite brilliant ones will take their place. Their design flair, and human skills will be in a class apart from the norm today, but they will also be powered by a wide range of technologies, fed by incisive data, that enable them to delight us shoppers.

We are social beings, but increasingly only on our own terms. If the retail real estate industry wants to thrive it will need to develop new skills, particularly around technology and data and use these to work more closely with the best retailers to mutually create places we really want to visit. Retail Real Estate is still an area of great opportunity, but Real Estate skills alone will not be enough to make the most of them.

The game has changed.