Humans spend 90% of our time “inside”, which is no surprise given where shelter, safety and security rank in Maslow’s “Hierarchy of Needs”. But having emerged from the caves our needs and wants of inside space have grown exponentially. Almost as old as the caves were the two basic business models by which space has been contracted: buy or rent. Thanks to technology and the continuous march of the business model innovation it enables, change is coming in the delivery and occupancy of space.
The internet has enabled the birth of countless “as a service” business models. Amazon, Wayfair, Uber, Instacart – we now have numerous ways to get what we need when we need it, nothing more, nothing less. Our expectations as consumers have been heightened by this “on demand” economy. This same set of expectations is coming for real estate and will require Owners to transform how they operate. This is an inevitable trend that Lisa Picard, the CEO of EQOffice, (80 offices over 40 million square feet) has called the” Spotification of Space”. Occupants should be able to get the space they need, designed and outfitted for the task at hand when they need it, where they need it and only for the duration required. The birth of WeWork (and its siblings) dawned a new era for commercial real estate outside the bounds of the 7 year plus lease. Need an impromptu meeting room, Breather; a conference space, Convene, an international network of flex offices; WeWork, AirBnB, HipCamp, ZeusLiving, the list goes on and on. The point is, these, and many more businesses to follow have broken the mold and introduced Flexibility, Branded Experience, Reliable and Predictable Amenities and more to the expectations of consumers of space, that is, all of us.
As long ago as 2014, an Owner’s chief competitive advantage was determined by the location of their asset and their chief concern was the creditworthiness of their tenants. A funny thing happened on the way to the future: the “customer” of a space shifted from the tenant CFO to all of her employees. The use of space and amenities as a competitive advantage was unleashed in full force by the tech giants several years before and it unearthed a hidden truth, people prefer to be in great spaces designed and optimized for the task at hand. A sleeping giant was awakened and an industry transformation began. In an unexpected twist the Covid-19 pandemic has forced virtually everyone who uses a space to ask the question, what do I need this space for and what do I want from it? What had been an emergent realization from prescient early adopters is now at the forefront of everyone’s minds. We will certainly re-occupy all our spaces once again, and our need for more continues unabated. Yet, what those spaces do, how they work for us and how and when we pay for them, that is yet to be determined.
So what does that mean for real estate Owners now? Historically they were Asset owners, now they must be business operators. And as a business they have to obsess about customer needs. The co-working operators demonstrated the customer demand. They came along, rented the space from the Owners, delivered a Value Proposition and charged a premium. They showed that customers had a long list of needs beyond “space” and were willing to pay for it. And above all else what customers need are Flexibility and Utility. The co-working companies have proven that customers are willing to pay a premium for these two most important attributes. By contrast, the long term lease was designed to meet the needs of a building’s investors and lenders, rarely the tenant and occupants. Enter Flex space, which we at Building Ventures define as leases of 3 years or less. By definition this Flex space cannot be delivered as the empty shells of the past but outfited to meet the ever changing needs of a more sophisticated, more engaged, more demanding customer. Today Flex has single digit percentage penetration but we believe it will grow to over 50% over the next 20 years (even JLL thinks 30%). Why? Because it is the cornerstone of delivering a better experience to the tenants and occupants of a space. As a result of these newly discovered customer desires even the incumbents have been forced (after many years in denial) to embrace this shift, HANA by CBRE, Flex by BXP, Vornado, Hines, Related have all launched some sort of Flex offering. In a Post Covid world, we expect this transition to accelerate even faster as employees own desires and expectations for flexible, safe, healthy, productive space increases. But it’s not as easy as installing an espresso machine, stand up desks, touchless entry, antimicrobial surfaces and hip furniture. Owners have to provide much more to ensure that they will be able to retain their tenants or risk the consequences of lower valuations and costlier financing.
The reality is Space as a Service is not new, we just didn’t see it through that lens. Hotels are Space as a Service, rental apartments are space a service, hospitals are Space as a Service, even data centers are Space as a Service. What these businesses have in common is that they operate their physical buildings as businesses, not just real estate assets. Put in another perspective there are companies that we think of as businesses that are also just Space as a Service: Restaurants, Airlines, Uber & Lyft. We temporarily “hire” these spaces for the job at hand, eating, traveling, shopping. Now add to this list every other mode of working and living.
This will result in a massive paradigm shift in how Owner’s acquire, finance, manage and deliver space. It will require Owners to manage their facilities and anticipate their occupants expectations in ways they have never had to consider before. We’ve all been taught the first rule of real estate value: Location, Location, Location. That will soon be Location, Flexibility, Experience. The Owners that deliver on that future promise who collect the most important prize, predictable cash flows through Retention.
The list of “utilities” an Owner must provide in a Flex world has grown far beyond basic ping, power and pipe. Indoor Air Quality, Wellness and Safety, Sustainability Performance, Resilience, Precise Occupancy & Usage, Density, Predictive & Proactive maintenance of systems, services and amenities. The list is long, growing and changing. Owners and providers of “space” are going to really have to step up their game. Initiatives like Sustainability can no longer be treated like a marketing slogan but must be built into the fabric of every design, building and operating decision because the customers will demand it. And while all these are critical considerations in provisioning new buildings it is even more true when you consider the need to retrofit the more than half of the buildings in the US were built before 1980 when such needs weren’t even considered let alone contemplated.
Thankfully, that smorgasbord of technologies we mentioned before can be deployed in the service of meeting that challenge.
In recognizing this paradigm shift, Building Ventures has and will continue to invest in the companies who are making this transformation possible for Owners, Operators and Occupants. From our investments in 75F which has built a new building operating system to deliver a better environmental experience and enVerid which has harnessed space station technology to clean indoor air of pollutants, CO2 and germs to Join Digital who elevate connectivity as a service to a true fourth utility and make possible the next generation of smart and connected building. We seek to invest in platforms that can be deployed across property types that deliver occupants a significantly better experience and in the case of Measurabl actually measure it with the sustainability performance software. We believe these companies and many more to come will help accelerate the deployment and adoption of Space as a Service and help deliver “A Better Built World”.
Occupants want optimal spaces to live, work, and play.
Owners want profitable assets that appreciate in value.
There is enormous value to be had in leveraging technology to deliver both.