THE BLOG

Antony Slumbers 1/17/22 Antony Slumbers 1/17/22

Two Peas in a Pod: In real estate you need to Educate to Innovate

Bob Dylan: "It's Alright, Ma (I'm Only Bleeding)" 1965

Andy Grove, employee No 1 at Intel, wrote a book in 1988 entitled “Only the Paranoid Survive”. It had the subtitle ‘How to exploit the crisis points that challenge every company’.

34 years later it’s a tome for our times in the real estate industry, as we face ‘crisis points’ on many fronts.

Over the last two years the office sector has learnt what the retail sector learnt over the last 20 years: customers no longer need offices to work in, as they no longer need shops to shop in.

Which rather upsets the apple cart. The certainties of the last forty years have gone out of the window. Deciding what to build where used to be so easy. Offices go here, retail goes here, and residential goes here. Get out the cookie-cutter and away you go. Real estate was not an easy industry, but it wasn’t complicated. You asked investors what they wanted and you built it for them.

Today it most certainly is complicated. Starting with the customer. Whereas what investors wanted was all that really mattered historically, from now on what customers want, actual occupiers and users of your space, is what matters. And, to be honest, often they do not know.

Where we are heading is not an acceleration, or an iteration, of the past. It is a fundamental mistake to think where we were in January 2020 is where we will be returning to, post pandemic. At scale we have learnt that remote working, by and large, works. We have learnt what does work, and what does not work. Furthermore we have all learnt to use the technology that enables us to function as an economy at a level that very few thought possible pre pandemic.

We are now able to look at how we live and work through a different lens. One that shows us we have new options, we have new choices, and we have new needs. And we are not going to give them up.

Which is all very well and good on a personal level but as people working in real estate it does pose a problem. How DO we decide what to build where? What do our customers want? What will they pay good money for? What is an office, what is a home, what is a shop? The form factor and functional specifications of each of these is changing. Asset classes are sort of morphing into each other. Is this a permanent change? Has it got further to go? Where is value to be had?

To further complicate things, we are still in the midst of a pandemic. We have our theories about what the future might bring, but nowhere in the world is anyone operating a post pandemic economy. So do we really know anything…. for sure?

And real estate projects take a long time. It’s no use being right for the market today, or in the immediate future, when in 2-5 years, or 5-10 the market might have changed fundamentally again.

What does #FutureProofRealEstate look like? How do we create the products and services that will be in demand tomorrow and 10 years hence?

The answer is that we need to educate ourselves about the levers that are being pulled, and are available to pull, around ourselves and at the wider societal level. And then we need to use what we learn to innovate our way to new business models, new products and new services that have product/market fit, and are scaleable and flexible enough to remain relevant come what may.

So we need to:

Understand the big picture. How the meaning of location is changing, what happens when technology enables an economy of abundance rather than scarcity, whether agglomeration theory still holds, and where does this open up new opportunities.
Understand the theory behind the oft talked about notion of ‘disruption’. How market leaders can be displaced by new entrants who do a worse job than them, but do something else that customers decide they value more. How to respond to disruption, and how to develop a strategy that maintains competitive advantage.
Understand the importance of data, what data actually matters and how to get hold of it, and how to use it ethically.
Understand how the tech industry thinks, and how to apply this to real estate. And then the 5 steps to innovating with technology.
Understand how #SpaceAsAService is transforming the workplace and catalysing new business models.
Understand how technology is transforming our homes and the housing lifecycle.
Understand how to finance change. Who is going to enable all these new products, services and business models? Which sources of finance should you be using at different stages of your companies development. And above all of this understand why innovation is hard in real estate, where and why blockers exist, and how to get around them.
Understand why ESG is so important, and will be a major component of every conversation in real estate for the next decade and more. How do you develop with ESG as a north star, and why it represents perhaps the biggest opportunity ever within the real estate industry.

All of the above is what each of us needs to approach with a ‘lifelong learning’ mindset. The topics are huge and constantly evolving. Build solid foundations of knowledge and then take it from there. You’ll never know everything but knowing more than your competitors is what you should be aiming at.

Innovation is a tough business. And, like learning, never stops. As with software, it is never finished. Build, measure, learn, and repeat, is how the software industry operates. Within real estate we need to do the same. Think of real estate as software. Constantly adapting to the wants, needs and desires of humans.

The future success of the real estate industry is going to be driven by people continually learning and continually innovating. And doing so amongst other like minded people. We all have to educate each other. A hive mind of the world's most interesting, innovative people is what we should aspire to.

Real estate is at the heart of everything in society. People spend 90% of their time inside real estate. Collectively, we need to build the best built environment possible.

And besides, as Mr Dylan so brilliantly put it:

‘he not busy being born, is busy dying'.

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PS. The next cohort of the Real Innovation Academy’s #FutureProofRealEstate course, where we teach all of the above, starts on the 25th of January. Please join us by registering here - realinnovationacademy.com

Antony Slumbers 1/11/22 Antony Slumbers 1/11/22

Storytelling is the new real estate super skill - Follow up

In yesterdays post I wrote ‘It will be hard to wean a customer off a competitor who knows them much much better than you do. It’ll be like trying to get an iPhone user to switch to Android, or vice versa. The switching cost will just be too high.’

Someone has since asked if I could elaborate on the iPhone vs Android analogy, and how high switching costs might apply in a real estate context.

So here goes.

Within the smartphone market 70% of users run the Android operating system and 29% run iOS, the iPhone’s operating system. Just 1% use something else. This has been constant for many years, as very few people swap from Android to iPhone, or vice versa. Both operating systems have very high ‘lock-in’, meaning that once a customer makes an initial decision that tends to be it. They will be a customer for life.

The reasons for this follow a pattern in the tech industry where the ‘switching costs’ for a consumer to move from one technology to another rise over time. The more a technology becomes tuned to the specific needs of individuals the harder, or more painful, it becomes for them to cast what they know aside and learn, and teach, another technology what works for them. This function of lock-in explains why companies can afford a high ‘customer acquisition cost’, because once a customer, their ‘lifetime value’ will be very high.

What is really instructive within the smartphone market though is that despite the much smaller market share, Apple, via the iPhone, make easily the most profit. For example, in Q2 2021, only 13% of global handset shipments were iPhones but these generated 40% of total revenue and an extraordinary 75% of operating profit.

Why is is? It is because the iPhone is a much more tightly integrated package of hardware, software and services than any Android phone. Apple ruthlessly control the user experience of their devices. Indeed it is the user experience offered by the iPhone that gives Apple so much pricing power. They have spent years creating and curating this user experience and it is this which most customers buy in to. An iPhone is an emotional rather than functional purchase, and this has allowed Apple to pretty much own the high end of the market. In Q4 2020 the iPhone had 65% market share in the US. Most of the expensive, high margin smartphones purchased globally are iPhones.

Which explains why I advocate so strongly for real estate people to think of ‘Office as iPhone’. Where instead of just thinking about the ‘hardware’ of real estate, one thinks about the overall user experience of space that can be delivered if one controls the hardware, software and services of any space, or place. Where one designs ‘workplace as software’ that is never finished but is constantly being iterated based around the mantra of build, measure, learn. You build something, you measure how well it performs against specific criteria, you learn from this data, and then you re-build. And you repeat this constantly. A tweak here, a tweak there, on a rolling basis, based on feedback from users, and from the building itself.

The UX, or user experience of real estate is a function of qualitative and quantitative factors. And there are many of these that need to be tracked. But in essence it is a matter of understanding how individuals ‘feel’ that their workspace is enabling them to perform as best they can (the qualitative factors) and how the workplace is performing in environmental terms (the quantitative factors). Critical amongst these are temperature, noise, lighting, and air quality. To what extent are these perfectly optimised to allow every individual the opportunity to perform their ‘jobs to be done’ with their maximum cognitive firepower? Put simply, the environment we are in impacts on our cognitive function. If we can put our customers in environmental conditions that have no detrimental impact on their cognitive function, then we are enabling them to be as productive as they are capable of being.

With our real estate hats on we cannot make a badly managed company better, but we can at least not make things worse. For a well managed company we definitely can help them be their best. The key point is that no company actually wants an office; what they want is a productive workforce. Our job in real estate is to help make this happen.

So, returning to the original question of how switching costs might manifest themselves in a real estate context, the answer is that by thinking of real estate as hardware, software and services, by continually monitoring defined KPIs, and then on an ongoing basis optimising the space based on this data, we can provide our customers with workplaces that are finely attuned to their specific needs. We can provide demonstrably better working environments than if we did not operate in this way. And over time, this knowledge will act as a ‘lock-in’ to our customers. They could go elsewhere, but then they’d need to start again in training the space to function in an optimal fashion.

Put simply, space that is optimised for you, is hard for you to give up.

Antony Slumbers 1/11/22 Antony Slumbers 1/11/22

Storytelling is the new real estate super skill

Why is someone going to buy, lease or rent your real estate? Do they have to? If the answer is yes then you can stop reading now.

Historically the above question would have led to 95% of people stopping reading. Because historically our customers, in most situations, had to buy, lease or rent our real estate. It’s why real estate has made so many people so wealthy over the centuries.

But today, our customers most likely do not need to do business with us. If Covid has taught us one thing it is that people really can shop and work without shops or offices. They have optionality, as economists say. There is no longer an absolute need to go anywhere to shop or work.

In his Essays, written in 1625, Francis Bacon wrote ‘Mahomet cald the Hill to come to him. And when the Hill stood still, he was neuer a whit abashed, but said; If the Hill will not come to Mahomet, Mahomet wil go to the hil.’

Well today, the mountain will willingly come to Mohammed….

Which leaves those of us active in the office market with a problem. How do we get people to buy or lease our offices?

Answering that question people in real estate tend to jump to the wrong conclusion. Or at least jump to a conclusion without considering exactly why it makes sense. They immediately draw up a list of new amenities, or features, to add to their buildings. We need to add this or offer that. In the same way that second rate computer or car manufacturers add endless bells and whistles in the plaintive hope that the fundamental weakness of their product will go unnoticed.

This will never work. In a real estate world that has been turned upside down, where we have to make people want to come to us, because they no longer need to, you have to start with the customer and work back to the real estate.

You have to become a story teller. You have to obsess about what it is that you can offer your existing customers, or the customers you are trying to attract, that will make them feel like they are missing out if they do not spend time in your spaces and places. Though it goes against the received wisdom of the real estate industry, your most important job going forward is to create and curate your companies Brand. Yes, that thing that you probably learnt does not apply to commercial real estate, actually applies more than anything else. Without a powerful Brand you’ll be consigned to the hell of being a low margin, interchangeable provider of commodity space.

And Brands are all about story telling.

Great Brands represent great stories. They have meaning to their customers. Their ‘story’ evokes pleasure, pride, greed, avarice. The Hermes ‘Birkin’ handbag is an an example of what is known as a Veblen good; something that gets more desirable the more the price is raised. Primark, the retailer, work at the other end of the scale, where their clothes become more desirable the cheaper they get. Disposable fashion to eternal fashion. Both tell great stories.

Most analogous for real estate, I think, are the premium car Brands. The most important customer for Audi, BMW or Mercedes is the person buying their first premium car. Because, like the Jesuits, once they’ve got you you’re likely to stay. People buy into brands like this. They buy into a certain style, a certain user experience, and certain ethos. And they invest more than money into them. They start to become, to an extent, defined by them. I am this ‘type’ of person.

And even these super powerful brands are wilting under the fire power of the greatest story teller of modern times, Elon Musk and his mega Brand Tesla.

In real estate we are going to see the development of Brands, across all asset types, as powerful as all of these. In offices, the operator of the space is going to become as important as the operator of a hotel, and companies and individuals will become loyal to particular brands. Because particular brands stand for particular user experiences, different ‘end to end’ stories, and over time will know how I want my space set up. It will be hard to wean a customer off a competitor who knows them much much better than you do. It’ll be like trying to get an iPhone user to switch to Android, or vice versa. The switching cost will just be too high.

The same applies for residential, retail, industrial … all asset classes. Remember, we are no longer just selling hardware (dumb boxes) - we are adding digital layers of software and services on top of this hardware. We are, via our human and technological skills, building stories around our buildings.

Modern economies are increasingly valued based on their intangible assets. Our Brand, our story, our user experience, these are our intangible assets.

Ultimately UX will equal Brand, and Brand will equal Value.

What’s your story?

Antony Slumbers 1/3/22 Antony Slumbers 1/3/22

Real Estate 2022: The New Rules of Engagement

From The Second Curve Thoughts on Reinventing Society Charles Handy

After nearly two years of Covid we are finally seeing the real estate market acquiesce to the revolution it has precipitated. No longer do we hear much talk of ‘returning to normal’ or of existing trends being ‘accelerated’. Where we do, these are ardently shot down.

Some nine years ago I started writing about the impact emerging technologies would have on the real estate industry, and in January 2019 I published ‘Space as a Service: The Trillion Dollar Hashtag’. The latter is now common parlance and the former can be seen all around us. What the pandemic has done is provide an environment where a slow morphing of behaviours has instead become an explosion of accepted beliefs. What seemed radical a few years ago IS the ‘new normal’. The future has arrived.

Which means we need a new future. We need a new set of beliefs, attitudes and ideas to aspire to. We need a new differentiation. When the market has swallowed the new, the new needs to be reinvented. How do you stand out when the way you think is the way everyone else thinks? When you reach the top right of one ’S’ curve, and innovative ideas have evolved from being customised to productised and finally commoditised, you need a new ’S’ curve. When the slowest late adopters have adopted your ideas you need new ones.

Which is where everyone in thrall to #FutureProofRealEstate finds themselves as we embark on the good ship 2022. In a Catch-22. Is it better to catch our breath, and repeat our vision to those at the back who took a while to come onboard, or should we push on to where, once again, we’ll be preaching to the early adopters?

Well, push on of course! This is 21st century real estate after all. Where good ideas take a decade to be accepted, but also where a decade is a project lifecycle. Where the market will slowly adopt best practice (after trying everything else) but where best practice will look entirely different a decade hence.

20th century real estate was different. Nothing much changed, beneath the veneer, because everyone needed what we had to sell, and our customers were actually our financial backers rather than the users of our products. But this century, especially from now onwards, our customers really are the users of our products and they no longer need us. Technology has enabled them to work without offices, and shop without shops. They can now do what they want, where they want. Our necessity, our mission, our challenge, is to make them want what we have to sell, now that they do not need it. And therein lies the next ’S’ curve.

What needs are we looking to fulfil? And how will we do so?

The late adopters have clicked that companies, and their employees, now want more flexibility, better quality space, and more of a collaborative environment. And, to be fair, most are now at least trying to provide these. But ….

…. the #RealEstateInnovators, starting out bottom left of the new ’S’ curve, have realised that what the leading companies (from startups to megacorps) want conforms to a new playbook, and tells a new story. These companies, and more particularly their employees, want a new way of living and working. They want to be productive, in fact they want to be hyper productive, but they also want to be happy and healthy. They want environments that enable them to be as happy, healthy and productive as they are capable of being. That vary according to their specific needs and ‘jobs to be done’. They want to spend time with their co-workers but time that is more fruitful than not being with them. They don’t want to commute for hours unless it is to do something that could not be done where they are. They want to be part of a community, but not one separate from their home life. They want access to all the best digital tools to enable them to live online/offline lives that coexist rather than conflict.

All of this needs to be wrapped up in a sense of purpose, a feeling that the effort is worthwhile, that they are making a difference. There is no effort too great if the purpose is great enough. But where the purpose does not exist any effort is too great.

And above perhaps all else, they know that 2030 is just 8 years, a mere 96 months away, and by then the world needs to have cut its carbon emissions by 50% to have any chance of becoming net zero by 2050. A year where many of those currently ‘ruling the world’ will not be alive but they most certainly will be. So it matters. A lot.

So, our new real estate rules of engagement must address all of this. Where do we fit in? Which parts of this can we impact? What skills, what people, what products, services and business models do we need to maximise our role in building this better built environment?

People spend 90% of their time indoors. In real estate. The form factor of that real estate does not matter. Providing the right real estate does.

Antony

Antony Slumbers 12/13/21 Antony Slumbers 12/13/21

The Real Innovation Academy: A Year of Learning

David Hockney’s “The Arrival of Spring in Woldgate, East Yorkshire in 2011” - from his Four Seasons collection.

The four ‘essentials’ of #FutureProofRealEstate

Just over a year ago Dror Poleg and I launched Cohort No 1 of the #FutureProofOffice course we developed for our newly formed Real Innovation Academy. Though planned before Covid overtook all our lives, the pandemic gave added impetus, even urgency, to what we had in mind. We were already convinced that the real estate industry was undergoing profound disruption, but now it seemed this change was going to occur faster than even we imagined. Being #FutureProof was turning from being a nice to have to a necessity. The 10 year real estate boom, where innovation was hardly required, was turning to a bust where innovation would be everything.

Next week we will be launching Cohort No 7 of the Office course and Cohort No 2 of its sister course, #FutureProofHousing. To date we have over 350 Alumni, from 32 countries across 6 continents. No one, yet, from Antartica.

So, what have we learnt?

First off, the much trumpeted mantra that real estate is an industry of luddites, wedded to the analogue in a digital world, needs to be put to bed. Admittedly our audience is self selecting and perhaps not indicative of the wider market, but the level of imagination, innovation, forward thinking, positivity and smarts (street and academic) that we have encountered in our students has been an absolute pleasure to be exposed to. It’s not only the tech industry where people who want to ‘change the world’ work. You’d not be worrying about whether we really can ‘build back better’ if you’d sat in on the discussions at the Academy. Making an impact is the starting point. Nothing less.

We wanted to build a network of the smartest, most interesting people in real estate around the world, and we’re off to a good start.

The second thing we have learned though is something that has evolved over the year. The course is predicated on the idea that the nature of demand for real estate is fundamentally changing, and that supply will, indeed has to, change in response. What has become clearer though, from running both courses and the dozens of hours discussing, presenting and analysing the industry, is that how we need to respond to this change, across all asset classes, boils down to just four themes. And working upwards from these four foundational pillars is the route to creating products and services that are fit for purpose, and #FutureProof.

Theme number 1 is customer centricity.

Steve Jobs provides the canonical example of this. Shortly after returning to Apple, at their Developers Conference, he was aggressively asked during a Q&A session why developers should have faith in him, as he seemed to not know that much about technology. After a pregnant pause, where he was clearly angry with the questioner, he said ‘You’ve got to start with the customer experience and work backwards to the technology…I’ve made this mistake probably more than anybody else in this room…As we have tried to come up with a strategy and a vision for Apple, it started with ‘What incredible benefits can we give to the customer? Where can we take the customer?’...I think that’s the right path to take.’

Start with the customer and work backwards to the technology.

Substitute real estate for technology, and then back from real estate to user experience, and you have the best starting point for any business plan.

Jeff Bezos designed the ‘working backwards’ process at Amazon based on this principle. What benefits the customer? So long as you have a laser focus on pleasing your customer, you have the makings of a great business. Don’t focus on what you want, focus on what your customer wants.

This is not the natural order of things in real estate. Because it never needed to be. People needed shops to go shopping and they needed offices in which to work. Over the last 15 years or so the retail real estate industry has learnt this is no longer true, and over the last 15 months the office real estate industry has been learning the same lesson. In retail and office, our customer no longer needs what we have to sell. We need to make them want what we have to sell.

All around us are examples of retail real estate companies, and retailers, who have not cottoned on to this new absolute truth. Many owners and occupiers of offices are going to follow suit over the next 24 months.

Before doing anything, we in real estate need to get to grips with how are we going to better understand the wants, needs and desires of our existing or prospective customers? Across all asset classes.

Theme Number 2 is creating tech enabled ‘Smart’ assets.

We are no longer simply the providers of dumb shells, we are the providers of hardware, software and services that needs to work together to offer our customers the spaces that provide them with the services they need for their ‘jobs to be done’.

That is what a ‘Smart’ asset is. Somewhere that understands what its purpose is. What benefit it is there to offer the customer.

This is why so many smart assets are not that smart. Anyone can kit out a building with tools, technologies and the latest gizmos. And many do. But far fewer kit our their building with only the tools, technologies and gizmos that are needed to provide the UX, the user experience, that they have deliberatively designed for the particular type of customer they are wishing to serve.

Start with the customer and work backwards to the technology.

Real estate is a siloed industry. Just taking offices, there are six industries that need to work together to create a great workplace. Real estate, IoT Networking, Data analytics, Workplace, HR and Hospitality. And they rarely talk to each other. They almost certainly do not all talk to each other before a project starts. So the creation of a truly ‘Smart’ building has little chance of success built in from inception.

Smart assets absolutely need the right technological infrastructure, but this is necessary but not sufficient. A smart building needs to be human smart as well as tech smart.

Smart is a quantitative and qualitative game. Across every asset class. The tech is there to ‘enable’ something. Work out what you want to ‘enable’ first.

Theme No 3 is about storytelling.

Why is someone going to buy, lease or rent your real estate? Do they have to? If the answer is yes then you can skip this section.

Historically the above question would have led to 95% of people skipping this section. Because historically our customers, in most situations, had to buy, lease or rent our real estate. It’s why real estate has made so many people so wealthy over the centuries.

But today, as we discussed above, our customers most likely do not need to do business with us. They have optionality, as the economists say. They can satisfy their needs in other ways.

Hence we need to become story tellers.

In real estate we are going to see the development of Brands, across all asset types, as powerful as these. In offices, the operator of the space is going to become as important as the operator of a hotel, and companies and individuals will become loyal to particular brands. Because particular brands stand for particular user experiences, different ‘end to end’ stories, and over time will know how I want my space set up. It will be hard to wean a customer off a competitor who knows them much much better than you do. It’ll be like trying to get an iPhone user to switch to Android, or vice versa. The switching cost will just be too high.

Modern economies are increasingly valued based on their intangible assets. Our Brand, our story, our user experience, these are our intangible assets.

Ultimately UX will equal Brand, and Brand will equal Value.

Theme 4, the final theme, is about relationships.

The real estate industry has always prided itself on being a relationship business. But usually those relationships were with other people in real estate. So the industry talking to itself.

#FutureProofRealEstate will still be an industry built on relationships, but built on relationships with customers. Nothing will be as important as owning the relationship with our customers.

But who are our customers you might ask? Well, they are not who they used to be. In the past the most important customer, indeed probably the only person treated as a customer, was whoever signed our leases or quarterly rental payments. No-one mattered much besides them. That was the beauty of real estate. Long leases with upwards only rent reviews were a wondrous invention. But those days are dead, or dying. Today, in a world where our customers no longer need us like they used to, we have to please everyone who uses our spaces and places. For long term success, we need to give everybody a great user experience. The customer of real estate in the future will be the user of real estate. All of them.

This can either be, as they say in tech, a bug or a feature. It’s a bug if you do not have that relationship with these customers, because there is then little you can do to influence how much they enjoy your assets. You’ll be commoditised, and nothing more than the owner of the ‘dumb box’. Your fortunes will be dependant on the quality of the middleman, the operator, you have outsourced your customers relationships to.

But if you own the relationship, and do everything we have discussed above to make the user experience of your asset as exceptional as it can be, you’ll be in a position of real power. Having invested so much into understanding the wants, needs and desires, of your customers, and then by real time monitoring and optimising of these variables, you’ll be able to leverage this relationship in meaningful, beneficial and profitable ways, for your self and your customer.

People spend 90% of their time indoors and in real estate we connect with people for longer than any other service provider. So it is us, in real estate, who are in the best position to service the needs of our customers. We can move way beyond just letting them space by the foot or metre: we can help them be happy, healthy and productive. We can enhance their pleasure whilst shopping, or make them more comfortable when at home. We can do much more than we ever have before. But only if we own the relationship.

And that is it. The four themes above are applicable across every real estate asset class:

Focussing on the customer and understanding their wants, needs and desires
Creating efficient tech enabled smart assets
Developing ‘end to end’ stories and building Brands around them
Owning and leveraging the customer relationship

They form the foundations of the next generation real estate company. Sure, each asset class requires particular skills but, unlike in ‘old’ real estate, the core is the same now we are moving beyond selling a product to delivering a service.

Real estate is now a ‘Space as a Service’ industry, providing our customers with the spaces and services they need to do whatever it is they wish to do, wherever they are.

Come join us - register at realinnovationacademy.com

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First published June 2021.