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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

My advice? Be a Pig!

This was first published on MIPIM PropTech in 2019

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

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

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

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

Human + Machine; because technology is not enough.

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

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

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

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

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

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

A McKinsey report in 2017 stated that:

‘49 percent of the activities that people are paid to do in the global economy have the potential to be automated by adapting currently demonstrated technology’. 

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

So that’s alright then? We’re safe…. 

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

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

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

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

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

Let’s look at how this might evolve.

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

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

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

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

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

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

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

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

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

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

Human + Machine Wins.

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

First published by MIPIM PropTech in 2019