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. 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.
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 (AI), especially around the sub-set of ‘machine learning’. How we work, live and play is being changed fundamentally.
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.
Within the workplace, any tasks that are ‘structured, repeatable or predictable’ will be automated. In 2017, McKinsey estimated that this applied to 49% of all the tasks people are paid for across the globe. That might be tasks, not jobs (automating an entire job is seldom possible), but 49% of everything we actually do being automated is a big deal. Not least of all, offices have been designed around providing spaces suitable for doing those tasks. What happens when that type of space is no longer needed?
An office designed around ‘old’ work (anything ‘structured, repeatable, predictable’) is, or shortly will be, obsolete. Not understanding the nature of what ‘new’ work we will be doing is going to be one of the fastest ways possible to destroy value.
All around us we see a world moving from selling products to delivering services. People are becoming much less concerned about ownership and much more focused on having access to what they need, when they need it. So, we have Netflix for movies, Spotify for music and Uber for cars. We increasingly live in an ‘as a Service’ society; real estate will surely follow. #SpaceAsAService is the future of real estate. Google published ‘Workplace 2020’ in 2015, which included the line:
‘Flexible working will be the defining characteristic of the workplace.’
In 2019, this is looking remarkably prescient. The real concern for companies is not acquiring an office but enabling a productive workforce. Whoever helps them do that will be lavishly rewarded.
Historically, the real estate industry has had no interest in brands and branding. I was brought up on the supposed truism that ‘you cannot brand a building’. WeWork has provided USD 42 billion of evidence that might not be as true as suggested.
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 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 pervasive manner.
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.
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.
The upheaval is everywhere. How does one adapt, preserve value, create value? Is the past no longer a good guide to the future? What will differentiate winners from losers? What indeed.