THE BLOG
What matters in the future of Real Estate?
Paolo Veronese - The wedding at Cana, 1563 - the Louvre, Paris
“It was the best of times, it was the worst of times, …”
Charles Dickens, A Tale of Two cities, 1859.
With perhaps the most famous opening words in English Literature Charles Dickens captures the feeling of living in an age of great change. In his case he was writing about the French Revolution but using it as an analogy for his own time. He goes on:
‘it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”
Doesn’t this feel just as appropriate today as it did 163 years ago? Having come through two years of a global pandemic we have somehow jumped straight into a land war in Europe. Russian nationalists are raving about submerging the entire UK under a tsunami caused by a strategic nuclear explosion, whilst women and children are fleeing Ukraine and being taking in by good souls in countries across Europe.
And it is not just in Europe that calamitous things are occurring; across the globe we are seeing events of epochal significance.
Most definitely we are living in troubled and changing times.
Which has led me to thinking about what the future of real estate has in store for us. After all we spend 90% of our time indoors, in real estate, so there is no way what is happening outside will not be affecting what happens inside.
And ‘best of times, worst of times’ is perfect for where we are now.
Historically real estate markets have gone up and down in cycles. There were times when everyone was a genius and minting money, and then there were times when everyone was an idiot and losing value hand over fist. Today though, and in the conceivable future, this moving in lockstep is going to end. Cycles will still occur but within them there are going to be significant winners and significant losers, at the same time. We’ll even see near identical assets diverging dramatically in revenue generation, as one is operated in an entirely different way to the other.
This is because fundamentally the real estate industry is moving from one that revolved around selling a product to one that is all about delivering a service.
The real estate industry is no longer about real estate.
Being skilled in the art of real estate is still a necessity but it is no longer sufficient. The real estate industry is morphing, slowly then suddenly, into a different beast. What mattered is not what matters today.
So what does matter in the future of real estate? How should you be thinking about the future, what do you need to know, what do you need to understand? What are the inputs that are going to generate successful outputs?
Here are a selection of things that really matter:
First, the future is going to be ‘won’ by those that embrace the notion of human + machine. Where it is essential to appreciate what it is that machines (computers, robots, whatever…) are good at and what humans are good at. And then how to use the capabilities of one to enhance, or leverage, the skills of the other. In broad brush terms machines are exceptional at processing anything that is structured, repeatable or predictable. Anything that follows a pattern, where B follows A and Y is determined by X. Humans cannot even begin to compete in dealing with such matters. And McKinsey have written (as far back as 2017) that such tasks make up roughly half the things that people are paid to do around the world. These tasks will be automated.
This change in the nature of the ‘work we do’ will impact real estate companies just as much as their customers. So we need to be thinking about the types of environments needed to assist humans in designing, developing and refining new products and services in conjunction with advanced technologies. Machines are becoming extraordinarily capable at communication, perception, knowledge, reasoning and planning but they still need to be given instructions as to what is required, under what constraints, and to what purpose. Computers should not ask you a question they can work out by themselves, but the sophistication of the questions being asked are where us humans come in. We need to be asking the right questions, and that is becoming ever more complicated. Places and spaces conducive to abstract and critical thinking, empathy, design and judgement will become a critical input that real estate people can innovate around. Who has the best environments for humans to work in, with their servant machines?
Secondly, we need to be thinking hard about flexibility. It is the tent pole word of our time. Flexibility in terms of when people have to work, flexibility around where they can chose to work and flexibility around how they can configure the spaces and places that they use. Currently there is much ‘sturm und drang’ within corporates around how they are going to be working post pandemic but this will settle over time and, amongst the best companies at least, employees will win the argument, and will be defining how, when and where they work. It is simply too easy today for the best talent to go where their talents are appreciated, so companies will have no choice but to accommodate locational, temporal and spacial flexibility.
This poses real challenges for a real estate industry that operated on the basis of fixed spaces and routines persisting for years at a time. Going forward, the industry will need to innovate to provide the choices their customers are now demanding. Everything fixed will need to become flexible, and this will entail a wholesale redesign of just about every component part of a building. Interiors will become full of emergent elements, constantly in flux as needs change. The opportunities for new form factors, workflows and operating procedures are immense, though great skill will be needed to execute on each plan.
Thirdly, the spaces and places we spend 90% of our time in are going to have to be become healthier and more cognisant of customers wellbeing. The joke about leaving a building healthier then when you entered needs to become fact. Interior spaces, full of people, can be, as we have found out during the pandemic, literally killing zones. Bad ventilation and airborne pathogens are not a good mix. We have actually known this for decades but done little about it. Those days are over. Being able to demonstrate that you are operating safe and healthy spaces will become mandatory. We have all the technology needed to monitor and continually optimise environmental conditions in our buildings and we are going to have to start using them. There is no future for assets that cannot provide at least decent environmental conditions; whatever is required to get to that state will have to be deployed.
Fourthly, dealing with environmental conditions will go a long way to dealing with the infamous ‘productivity issue’. As real estate people we cannot make bad companies good, but we can assist good companies in being their best. Productivity is largely a cultural issue determined by good or bad management but on one axis we in real estate can make a major impact. Productivity at an individual level necessitates working at the peak of ones cognitive abilities, and these cognitive abilities are directly affected by environmental conditions. If there is too much CO2 in a room, or the temperature is too hot or too cold, or the lighting too dim or too bright for example it will impact on an occupiers cognitive function. If we can provide our customers with optimum environmental conditions it will not only assist them in being happy and healthy but will enable them to operate to the best of their abilities.
Being overly concerned about ‘health and wellbeing’ is, in some quarters considered a bit woke, a bit too soft and fluffy for serious business people. They are paid aren’t they, so they should just get on with their work. Dickensian thinking persists more than is good for us all. But in reality, being concerned about our employees health and well-being is pure Adam Smith capitalism, because happy and healthy people are statistically most likely to also be the most productive. At root, no company wants an office, what they want is a productive workforce. And the way to a productive workforce starts with putting them in an environment that enables them first and foremost to be happy and healthy. Productivity will follow. Happy, healthy people work better, full stop.
Within the real estate industry we have many tools to help enable happy, healthy and productive people. And people are much more expensive than real estate. So the more we are known for providing environmentally high quality space the better our business will be.
Remember, we think we are selling offices, but our customers aren’t looking for offices. Sell the customer what the customer wants!
Fifthly, creating happy, healthy, productive spaces helps deal with another matter that is perhaps more important than any other. The need to create, and operate, sustainable, net zero buildings. Much of what is needed to create environmentally high quality space overlaps with what is needed to create sustainable buildings. Getting to net zero is a major challenge. Getting there by 2050, across all the built world, can only happen if actions are being taken now. But at least we have aligned incentives. Governments, investors and occupiers are all demanding we deliver net zero over time, but in the short term the strongest demand is coming from customers who want this now. So putting off full throttled commitment to engage with all matters sustainability is already bad business. Unless you are committed to the cause of a net zero built environment you really should be looking for another industry to work in. The carrots and sticks wielded in the cause are only going to get bigger, and you’ll never be able to win in real estate long term without leaning in massively to sustainability.
Sixthly though leaning in hard is the next thing that really matters in real estate. Because leaning in hard will involve building a trusted, consumer Brand that is recognised for providing spaces, buildings, campuses that deliver a certain UX, a certain user experience, that is differentiated from competitors. Building Brands in real estate is going to be the next big thing. Creative, innovative, visionaries are going to create competitive moats around their business that will be hard to challenge. They will alight on certain customer types, or peer groups, who have particular wants, needs and desires and who seek out spaces and places that give them what they want. Customers of real estate are about to go much more heterogenous than homogeneous. Where once a textbook BCO specification would do for all, in the future the best owners and operators will create and curate spaces and places that are attuned to specific market sectors. There will be Audi places, Mercedes places, BMW places, Tesla places - designed and refined to appeal to certain tastes.
We are learning rapidly that getting people back to the office is not going to be easy. Because people have learnt that they do not need an office to work, in the same way that they do not need a shop to go shopping. For over two years remote working has, by and large, worked. The challenge going forward, if we want an office industry to survive, is going to be creating offices people want to come to, despite not needing to. And that is going to entail branding like the real estate industry has never experienced before. In fact it is going to involve the novel to real estate experience of story telling. The office industry, as with the retail sector, is going to need to develop stories around the user experience they offer their customers. What is the experience of our building? How does it feel to be in our buildings? What human skills do our spaces catalyse? Who are they designed for? What can they help enable you to do? What can you do in our building better than anywhere else?
The seventh thing that matters stems directly from the above, and that is real estate companies need people with different skills from those they’ve traditionally sort out. They have enough people who understand real estate, but they lack those who understand branding, story telling, human behaviour. They need people who can discern the wants, needs and desires of the types of customers they wish to retain or attract. They need people able to put together quantitative and qualitative data collection procedures, and then people to analyse that data. They need to be able to really get under the skin of the people who use their buildings. They need to know their customers like a luxury goods company knows their customers. With demand for space coming more from individual users than from corporate finance types, they need to realise they are now in the B2B2C business. They have to help satisfy the needs of their corporate customers in pleasing their own employees. It’s a joint sell. Landlord and Tenant working together to satisfy individuals.
Quite the different game…… ultimately the future of real estate is about starting with the individual customer and then working back from there to the real estate. The real estate becomes the output, rather than the input.
Which brings us to the eight thing that matters, and that is becoming an innovative company, head to toe. For too long innovation has been a tick box exercise where one, two, seldom more than a few, people are tasked with ‘innovation’. In a basement office, away from the core business, with no North Star to guide them and precious little resources to actually do anything. Going forward, real estate companies need to injest innovation as a way of being. With air cover from the CEO and tasked with doing everything from continuous incremental innovation of existing products or services to the creation and execution of entirely new ones. The flexibility we discussed above necessitates this type of model. We have hypotheses to test, and iterations to roll out. Continually, as if we were working with software. Building, measuring, learning and repeating, and repeating. With a market place subject to so much flux, real estate companies need an innovative core like never before.
The ninth thing that matters is doubling down on relationships, networks and ecosystems. Everything about real estate in the future is about delivering services to customers. It’s about doing so in such a way that your customer cannot leave you. It’s about understanding them so well that you can deliver a level of service that no-one else can. If they leave you they leave behind all that understanding of what they really need to be happy, healthy and productive and they’ll have to start again with a new operator. Which is where networks and ecosystems come in; these are groupings, official and unofficial partnerships you develop with 3rd parties to help you deliver what you could not on your own. Could you build a network and ecosystem such that you could handle whatever real estate needs your customer has? It is a certainty that every company will be served by a network of offices rather than focus on a single HQ. Every company will need a range of spaces to work, in different geographies and catering to different needs. How many of these could you help provide? Where do you fit in? How can you help?
And lastly, the tenth thing that really matters to the real estate industry of the future, is to understand what being a ‘Smart’ building really means. Today ‘Smart’ buildings are mostly described and discussed in terms of real estate and technology. Someone will say we have installed this technology, and that technology and we have a data lake and dashboards galore. They will wax lyrical about the ‘Smarts’ of their building and the accreditations it has received. What you mostly do not hear people talk about is how any of this actually benefits the human beings in the building. How they started with specific customer needs and worked back to the technology. How they designed the user experience they wanted to achieve ahead of any discussion about technology. How all this technology is there to serve the people in the building. How it improves their day to day enjoyment. How it enables them to be happy, healthy and productive.
You won’t find a stronger advocate for super smart technological buildings than me. But, and it is a big but, the only reason for technology is to improve the lives of people. Everything must centre around the individual, and then work out from there. The starting point in every real estate project must be the people who will be using that building.
This does turn real estate on its head. The actual real estate is the last thing that matters. It’s what you discuss after you have designed for all human factors. However, because this is the approach, the resulting real estate will be better than ever before. It will exist to deliver against a comprehensive list of requirements, and in doing so will perform at a level hitherto unimaginable or at least very very rare. You make great real estate by not concentrating on the real estate.
These ten factors to concentrate on will deliver ‘the best of times’. The ‘worst of times’ will be on a scale of not concentrating on them. In practice I think we’ll see real estate companies that seriously commit to creating great, human centric, spaces and we’ll see others that just do real estate.
They won’t get the same results!
It’s not about the building
Johan Zoffany - Tribuna of the Uffizi - 1772 - Royal Collection Trust
There is a fundamental structural shift going on around the demand for offices. It’s something I’ve written about many times. In quite strident terms. But as of today, it is clear that I’ve not been strident enough, because the supply side, on the whole and with notable exceptions, does not seem to be getting the message. Which is that ‘the real estate industry is no longer about real estate’ and it’s not about the building.
As time passes it is becoming clear that, despite (in many countries) Covid-19 being far less of a mortal danger, and all pandemic restrictions being lifted, getting employees to return to their offices, en masse, is not looking likely. Just today, in the UK, Cabinet Minister Jacob Rees-Mogg has been issuing missives to his fellow Ministers to demand they force their civil servants to return to the office. Currently average daily attendance is just 44%. Not surprisingly this has been met, from the demand side, with howls of derision. For a large percentage of individuals, the break from a five day a week office bound life has been the only silver lining to the misery of the last two years. They will not give this up easily. Without good reason to go to the office, they won’t.
And in this is the kernel for amazing new business opportunities in real estate. Once you can reset your mindset to realise that real estate should not be the thing being sold in the real estate industry you’ll start to see the scope to develop new business models, with new products and services, that will benefit from larger margins and greater competitive differentiation. The supply side in real estate needs to grasp that the demand side no longer wants what it has to sell. And worse than that, the Covid experience has proven to them that they do not need what they are currently selling either.
That though is the macro view; overall it is 100% certain that, on average, every company is going to need less full time, long term leased real estate. The evidence for this is all around us. One can quibble whether the reduction in demand is going to be 5,10, 20 or some other percentage, but there will be reductions. Per capita.
At the micro level though the opposite will occur. Successful buildings will be those that combine the ability to enable happy, healthy and productive people but also occupier companies that are interested in doing the same. Anyone who understands the workplace market will tell you that the reason many people really do not like their office is nothing to do with it being a badly designed office. The culprit is the toxic culture of their employee. Sadly, there are a lot of second rate companies with second, or worse, rate management teams. Rob Harris provides the long view on this but the TL:DR is that the workplace often gets the blame when it lies much close to home.
So what is this telling us?
First, that a hybrid way of working is definitely the future. With lots of caveats and a warning in advance that this will cause much noise over the next year or so, if you on the supply side of the industry you need to internalise this and reset ALL your assumptions around it.
Secondly, in real estate we can make good companies better, but we cannot make bad companies good. So the supply side needs to dig much deeper into the merits, or not, of current customers, and be very precise and deliberate in who they target as future customers. Bad companies will be bad occupiers and much more likely to have real employee/management issues, that could well spill over into being real estate issues.
And thirdly, the massive opportunity for the supply side is that the workplace issue for companies is now way harder than it ever has been before. Yet there is no standalone segment of the supply side that works at creating and then curating great user experiences for them.
To create a great workplace you need multifunctional teams whose skills cover real estate, IoT, data, workplace, hospitality and HR. Input from all of these is needed to be able to orchestrate the hardware, software and services required. And all working to a predefined and designed UX, that is created before anything technical has even be thought about. ‘Start with the customer and work back to the real estate’, as I have written many times before.
With this knowledge about the skills needed to create your happy, healthy and productive environment, go and try and find a supplier. Someone why will start at the end, and craft everything to achieve it.
I suspect you now have a problem. Such companies do not exist. Most pressingly the overall designer of the UX is usually, if they are commissioned at all, only able to work within the narrow confines of a particular clients domain. Whereas what is needed is a true conductor of the entire orchestra, we mostly have people organising just the percusion section.
Surely this is what ‘Smart Building’ suppliers are all about? Again, mostly not. The ‘Smart Building’ industry is particularly good at thinking ‘it’s about the building’.
What about the property management company, or the workplace consultants, or the tenant engagement people, or, long long shot, the HR department? No. It’s almost a certainty that each of these is working within their silos, and incentivised accordingly. They’ll all talk a good collaboration story, and many will try hard, but the problem is more fundamental. The supply side needs a new type of company. One that is responsible for the UX, on an ongoing basis, of the entire experience within a building, and whose job it is to summon into existence places and spaces that people want to come to. And do come to.
Buildings that meet the wants, needs and desires of every individual they host will be massively valuable. Because they will have high occupancy and high satisfaction and will be able to charge a significant premium for delivering this. Their customers are likely to be taking less space than pre pandemic, paying more for it per unit of space, yet most likely also saving money on their total occupancy costs. But the cost, whilst always important, will fall down the rankings of most important features, because a workplace that does enable people to be as happy, healthy and productive as they are able to be, IS massively valuable. Conversely a workplace that does not enable this is going to drop in value precipitously, because it has no purpose. It won’t be a bit less valuable, it’ll be on the way or already obsolete.
Sadly much of the above is fantasy at the moment, because the real estate industry is not developing the types of company, or networks of companies, that could make it happen. That are building new Brands, operating on new business models, and offering new products and services. As stated above, with exceptions. Currently we have an industry mostly accepting that things are changing, but without realising that in reality they are on a burning platform.
The route off that platform starts with understanding ‘It’s not about the building’.
UX = Brand & Brand = Value.
The Human Case of Return to Workplace
Syndics of the Drapers' Guild, Rembrandt, 1662, Rijksmuseum, Amsterdam.
I took part in a presentation and Q&A session with Manchester based property management company, All+ Management and many of their customers. Here is the text of my opening summary presentation. The full one is circa 35 minutes.
I’d just like to set the scene about where we are on Planet Office today. In particular I’d like to outline what has changed, what are the new realities of our world, what are the consequences of these new realities and then what to do about them. Just in brief, then we can dive in deeper.
Starting with the new realities, of which I think there are three: two are directly the result of Covid and one is an acceleration of a trend that was occurring anyway.
First off we are now very aware that being together, en masse, in badly ventilated areas, in the presence of a highly contagious airborne virus, can kill us. Actually we already knew, and had known for decades, that bad environmental conditions, are not at all good for our health. But largely we had chosen to ignore this, with no real urgency applied to improving them. We now know that this has to change.
Secondly, when 95% of office based knowledge workers moved, over the course of just a few weeks, to working from home, the world did not collapse. Over two years we have learnt that, by and large, remote working works.
And thirdly, going in to the pandemic there was already a rising groundswell of interest in sustainability, in ESG. Government was regulating for it, investors were demanding it, and occupiers insisted on it. But now, we have the horrendous situation in Ukraine making it crystal clear that the energy component of ESG at least needs to be addressed as a matter of urgency.
So we have three very powerful drivers of change. Three genies that cannot be put back in the bottle.
So what? What are the consequences of these forces.
First off, we need to ensure the real estate we spend 90% of our time in, is not harming us. We need to pay attention to, monitor and optimise the environmental conditions of the space around us.
Secondly, we need to accept the reality of working away from the office. For most people, under most circumstances, it works well. But for some people it absolutely does not, and for almost all people there are certain tasks and objectives that can be performed better, more efficiently, more effectively, and more enjoyably, from an office. But we also need to accept that there are big issues to be addressed around culture, management and ‘the way we work’.
And thirdly, we need to use renewable energy wherever possible and we need to use as little energy as we can. The cost of energy is skyrocketing like at no time since the great energy shock of the 1970’s. And that crashed western economies.
Now, what do we do about this?
Well the answers are different but interlinked. To solve each one we actually need to solve all three. Think of it as one problem.
The first point is to realise this is a ‘Human + Machine’ problem. The solutions required are partly going to be provided by technology and partly by humans. We need quantitative and qualitative inputs. We need thinkers, feelers and doers.
And the central output is human centric. What we are aiming to do is enable people to be as happy, healthy and productive as possible. If you want supper productive people you need to help make them happy and healthy.
Fundamentally no company wants an office, they want a productive workforce.
So we need to start with the customer, which is our people, and work back to the real estate.
What physical spaces and places do we need to provide to enable our people to be as happy, healthy and productive as they are capable of being?
Think of it like an iPhone. A product that owns 25% of its market but commands 75% of all the profit. Why? Because it provides a user experience created by curating hardware, software and services.
What would the iPhone of workplace look like?
And what would you need to know to create it?
You’d need to know how your building was actually performing, in terms of all its capabilities acting in concert and operating at an optimum level. In a granular, real time and ongoing way. You’d need to know how your spaces were actually being used, again at a granular level, and you’d need to know what were people using the space for. What were the ‘jobs to be done’ that people were using the space to achieve. At an individual level, what were the wants, needs and desires of people in this building.
Historically our offices have been utilised circa 50% of the time. Half the space was unused at any time. On top of which, based on data from the Leesman Index, roughly 40% of office users said that their workplaces did not enable them to be productive. The current circumstances give us an opportunity, nay an obligation and necessity, to fix this.
If we can create safe and healthy buildings, that are low energy users and long term sustainable, AND are places that our people WANT to be in, then we will have done a good job.
With real estate hats on there is only so much we can do. We cannot make bad companies good, but we can help make good companies better. We can enable people to be in environments that maximise their cognitive function, and do nothing to add friction to their working lives. What we are yet to know, but which I suspect to be true, is to what extent doubling down on creating and curating intensely human centric workplaces, that are tailored to the individual, actually can raise the bar as to what constitutes a great company.
What I am certain about though is that the most talented people will want to work for companies that take all of this seriously, are cognisant of the new realities, and focus on providing the conditions in which individuals can do great work.
Here is the video of me presenting the above.
The full presentation is circa 35 minutes.
What it means to own a smart building
I joined James Dice on the excellent Nexus ‘Smart Buildings‘ podcast.
Summary
From James:
‘We started with his background founding one of the first occupant experience software companies back in 2001 and followed his illustrious career that eventually saw him coining the term, "space as a service." We unpacked what that phrase means in light of COVID, where sustainability and decarbonization fits, and finally, what a smart asset means in this context.
I loved this conversation because it puts technology in its place - we should be asking ‘technology for who? and for what?’. This answers it.’
Mentions and Links
Real Innovation Academy (0:34)
Antony's Website (0:36)
MIPIM (7:56)
Dror Poleg (11:32)
Vicinitee (12:43)
Broadgate (13:30)
Darlene Pope on the history of smart buildings, the 3-30-300 rule, and where we're headed (35:16)
Human + Machine: Reimagining Work in the Age of AI (1:04:20)
Lost Connections: Why You’re Depressed and How to Find Hope (1:06:21)
How Real Estate and Tech Work Together
Dror Poleg and I joined Sandra Panera on the Relogix podcast:
Some of the highlights of the show include:
The intersection of real estate and tech
The founding of Real Innovation Academy
Buildings are a standalone business, making it difficult to make big strategic moves
Corporate real estate management is focused on efficiency
Does occupancy as a KPI matter anymore?
Offices matter less than ever, but they also matter more than ever
Real estate as a service
What do employees need to be as effective as possible?
How do I create an office building that has 70%+ occupancy and 70%+ satisfaction?
How to measure workplace productivity
There’s no single answer on the future of real estate
To create a great workplace, you need to consider 6 different industries
The future of work is not obvious
Crypto will impact real estate – but not in the way we think