Innovative business models help unlock real estate value
WeWork became the largest non-governmental office tenant in central London and the second largest in Manhattan in only eight years. Airbnb, launched in 2008, now has more room inventory than the world’s largest five hotel companies combined, yet doesn’t own a building.
What has allowed WeWork and Airbnb to become so ubiquitous in such a short period of time? Each company created a new, innovative business model to unlock value left in overlooked or underutilized real estate. Airbnb was originally envisioned as a way for hosts to make extra money by temporarily renting out empty bedrooms. WeWork, and other co-working programs like it, saw opportunity in dividing up vacant office space into smaller, less expensive units and renting them to freelance workers and start-ups, profiting from the lease arbitrage between their own lease terms and the much higher per-square-foot fees paid by its customers. This fractional use of office real estate mirrors that of resort time-shares and private jets, allowing customers to use and pay for only what they need when they need it, while letting owners maximize revenue. Yet a broader industry trend is emerging as technology allows all types of real estate to be subdivided and reconfigured in higher value combinations.
Co-working is certainly not a new concept. IWG, currently the world’s largest provider of shared-service office space, was founded as Regus in 1989. However, the explosive growth of WeWork’s hipper, cooler version of shared office space, and hundreds of other co-working ventures like it, is remarkable. The number of co-working venues worldwide grew exponentially from 1,130 in 2013 to 13,800 in 2017. Notably, co-working is now evolving from a workplace for the freelance and start-up economies to a strategic real estate solution for larger corporations. Between 2010 and 2017 the number of co-working users identified as freelance or independent workers dropped by nearly half, while the percentage of workers from companies with more than 100 employees had a nearly six-fold increase. The trend is further exemplified by the recent announcement that IBM will be the sole tenant of a WeWork building in New York City.
While WeWork and most other co-working venues generally welcome all customers, other co-working ventures are finding value in catering to niche verticals or interest groups.
Aside from co-working, hundreds of real estate start-ups are using technology in new and innovative ways to unlock value in every kind of property. One category monetizes different under-utilized areas in office buildings. LiquidSpace allows empty conference rooms to be booked by the hour by outside, transient groups such as sales teams and non-profit boards via a mobile app. PivotDesk, recently acquired by Industrious, allows space-seekers to use office cubicles left vacant due to company downsizing. Groups of different sizes can book empty desks for varying lengths of time, providing additional income to the principal tenant. BetterSpaces provides pop-up amenities for office tenants, such as yoga classes, meeting space and educational programs, that can be moved as needed throughout the building as different space becomes available. What these examples all share is flexibility, on-demand availability via an easy-to-use app, short term use, and the monetization of unused office real estate.
A separate category of start-ups gather data and optimize space that is seemingly at full occupancy. Using various technologies, they are becoming increasingly effective at gathering data on user behavior to provide a better understanding of real estate needs. Common questions include: What is the actual workspace use by employees and can the organization make due with less by hoteling or hot-desking? What size groups are using conference rooms and when; are more or fewer needed; should they be larger or smaller? How much parking is needed for tenants and visitors; can the garage be optimized to accommodate more cars or charge surge pricing, perhaps allocating more spaces for higher-value public parking?
Innovators in this arena use different methods to answer these questions. Rifiniti, for example, monitors wi-fi traffic from mobile devices to better understand how employees use space. Beco relies primarily on tiny, solar powered beacons that communicate with mobile devices to analyze space usage and activity. Humanyze, a product of research from the MIT Media Lab, analyzes corporate communication data via the Humanyze Badge (a type of employee ID card) and enterprise channels such as Microsoft Office Exchange, Google Suite and Skype, to identify patterns of how people work. Robin and teem began by focusing on conference room management, but have broadened their platform across the office. Smarking, another MIT startup, uses complex analytics and sophisticated algorithms to make smarter pricing decisions to increase revenue for parking garages.
In retail, Storefront and Appear Here offer global platforms for renting temporary pop-up retail, showroom and event space that may otherwise sit vacant. Similarly, b8ta provides retail-as-a-service for small vendors, with curated products and services that alternate regularly to provide an ever-changing experience for shoppers. For warehouse and storage buildings, Flexe offers a platform to optimize warehouse capacity, while Clutter does the same for empty self-storage units. Darkstore provides on-demand “micro fulfillment” and distribution services for temporary, less desirable office, retail, or garage space.
While Airbnb continues to enable owners and tenants to monetize empty sleeping rooms, firms are optimizing multi-family housing and unlocking value in different ways. WhyHotel runs pop-up hotels in newly built apartment buildings during lease up, providing separate check-in and concierge services and electronic entry to the units. When the building reaches 90% residential lease occupancy, the hotel ceases operations. Flip pre-qualifies renters with a FICO-like score, so new renters can seamlessly take over from prior tenants, which minimizes vacancies, reduces nonpayment, and makes subleasing profitable for landlords.
A shift in thinking
These tech start-ups, and hundreds of others identified by the MIT Real Estate Innovation Lab, work to optimize the use of real estate, making properties more efficient and more profitable. Generally, their approach views space more as a flexible service than a long-term asset. In fact, Mark Grinis, global head of real estate at business consultancy EY, suggests that "commercial real estate is no longer a fixed asset–it's fluid." Quite a shift from long held assumptions about real estate as static and fixed.
What’s driving this new thinking about real estate? Out of necessity during the recent economic collapse, workers and work became more transient yet required a place other than the local Starbucks for conducting business. Co-working provided a relatively inexpensive community of similarly situated gig workers, support resources, and a built-in social network. Moreover, the concurrent growth of the sharing economy made people more comfortable not only with staying overnight in someone’s spare bedroom via Airbnb or hitching a ride in a stranger's car with Uber, but also with using temporary space like board rooms and empty desks or working in a communal environment like WeWork. A wave of new technology, from ubiquitous connectivity and more powerful mobile devices, to seamless, easy-to-use apps, enables real estate to be used in myriad new ways, reinforcing the idea that real estate is a service rather than a long-term commitment.
Larger behavioral trends are emerging as well. Today’s workforce, now accustomed to technology solutions for all areas of their lives, expects the real estate business to offer similar convenience. Yet this global industry still often runs on spreadsheets, a 40-year-old technology. Former real estate careerists are launching startups to solve problems they experienced in the business, while technologists are eying a multi-trillion dollar asset class that’s ripe for disruption.
The industry will evolve
The impact of technology and innovation on the real estate industry cannot be understated. New business models are greatly contracting the industry’s conception of time. In the case of co-working, it’s a shift from longer-term leases to shorter term licenses. Even with more traditional leases, lessees are pressing landlords for shorter tenure and greater flexibility—impacts tenant improvement costs, risk analysis, underwriting, lending terms and even brokerage commissions. Moreover, Mark Gilbreath, CEO of LiquidSpace, provocatively suggests that if we fully optimize real estate we may already have all the office space we need. “If we can increase sharing of the built landscape…we will reach ‘peak office’ in the next four to five years.”
While one may challenge Gilbreath’s claim, what’s undeniable is that the traditional assumptions of real estate—how it’s used, managed and monetized—will continue to evolve as innovators and technology redefine the business to unlock hidden value.
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