Commercial Real Estate: Moving Forward After 2020
Changes have been slowly underway in the archaic industry of commercial real estate, but no one could have predicted the Armageddon which was 2020. I had been a staunch believer that a downturn would create a boom for flexible real estate operators, as uncertainty would surely drive demand for short term commitments. What I could never have imagined was the reality that the Coronavirus pandemic created. This was not a typical downturn like the industry has experienced time and time again. The pandemic created a complete and abrupt stoppage to commercial leasing activity. Literally, all leasing activity grinded to a halt and everyone stopped coming into the office. Even old school thinkers like myself, those who believed that remote working was the death of productivity, started to see the euphoria of a 5-second commute, instead of the 4 hours I traveled everyday into and out of NYC. As much as I believed in the future of Flex, I never saw a future where commercial landlords would experience disruption on the level of Blockbuster video. I was wrong. The world has changed forever. Even when the vaccine brings an end to the pandemic, and I believe it will, the future will never be the same.
Employees will demand the ability to work remotely and CFOs and investors will demand that real estate footprints be reduced. The pandemic has proven that employees can be as productive at home as they are in the office, however there is one ingredient that will be the savior of the commercial real estate industry. That ingredient is “Culture”. Many people still hear the word “Culture” and think of it as a buzzword... unquantifiable, a hippie belief system, a figment of the imagination of HR professionals that they use to justify their existence. Those people are wrong. Even if you have plenty of capital, product market fit, and brilliant leadership, if you lack a positive culture where creativity, kindness and accountability are rewarded, your company will fail 100 out of 100 times. A positive culture requires some face-to-face interaction to be sustainable, and face-to-face cannot exist without real estate.
Besides for headquarter locations for large enterprise companies, 15-year leases will disappear. They never made much sense in the past for companies with fluctuating headcounts or when testing new geographies, and while WeWork did a good job of opening our eyes to this fact over the last few years, it took a worldwide pandemic to prove it. Another fact that the pandemic proved, which ran counter to WeWork’s thesis, is that the answer does not involve a 3rd party taking on hundreds of millions of dollars (or worse yet billions of dollars) of liability by arbitraging landlord’s desire for long term stability with tenant’s desire for flexibility. However, like all problems, a solution does exist. Landlords play a critical role in the solution, but just because a 3rd party shouldn’t own the lease liability, it doesn’t mean that the landlord should go it alone. Physical Real Estate should be viewed as hardware, and in order to meet clients needs, it must run on an Operating System.
The Operating System for Workspace
There is a ton of money being pumped into Prop-Tech (nearly $31B in 2019 according to Prescriptive Data). These categories include booking & access, tenant amenity, safety/security, HVAC automation, destination dispatch elevators, connectivity, leasing/marketing, property management, accounting... These software providers are creating integrations, but a true Operating System does not yet exist. The most important component of any commercial building are the tenants, and with all tenants demanding flexibility, it is incumbent on the providers of flexible services to push forward the process of developing the Operating System for landlords to meet the needs of tenants.
Like all good operating systems, their purpose is not to solve all problems. Their role is to provide the core functionality, while integrating all partners into a single, easy-to-use interface. When hearing the words Operating System, the immediate thoughts are Windows, IOS, and Android, but I believe that the right OS for Commercial Real to be more analogous to what Salesforce did for B2B business. Businesses need a system of record, a platform which ties all other systems together. Most sales and marketing leaders will argue that CRM is the most important tool that a company has, and Salesforce eagerly agrees. Where Salesforce got it right was not trying to force their customers to use Salesforce tools for everything. Sure, Salesforce may want you to use their ticketing system, but if a client prefers to use ZenDesk, Salesforce is happy to support it through their API. They are willing to forgo some revenue and control through integration to make their product more sticky and create long term growth.
The winner in the Commercial Real Estate OS game will be the company that provides the most important function while being smart enough to integrate with anyone/everyone that offers a value add (even if an integration partner competes with some of their features). Everyone is fighting to be the OS of Commercial Real Estate, and it is too early to tell who will win. Will it be the access control providers, or the tenant amenity apps, or the property management systems? It could be any of these vendors, but my money is on the company that puts forward the solution that offers landlords an easy and effective way to provide flexible options for their tenants.
When an industry gets disrupted, there are always losers. With the travel industry it was the travel agents. With ridesharing it was the taxi drivers. What we are seeing in Commercial Real Estate is not a traditional disruption because no group is being left out of a party. Commercial Real Estate brokers are more important than ever as they guide their clients through these unprecedented times, landlords own the asset in play, tenants are still the customer, and service providers (access, janitorial, architects, general contractors, property managers…) remain crucial to the ecosystems. This is not a disruption, but an evolution.
A Winner Has Yet to be Crowned
As of right now, the field is wide-open. I still believe that one of the existing flex providers (WeWork, IWG, Convene, Industrious) can use their learnings from the past few years to build the Operating System to win the race. I also think that a newcomer that isn’t saddled with liabilities can develop the right solution. There is also an opening for big brokerages (JLL, CBRE, Cushman Wakefield, Avison Young, Colliers…), or a company which carries leverage in the industry like CoStar, VTS, or Yardi to provide an offering or buy up the component parts required. The prize is a big one, so it's not unthinkable for the Googles or the Saleforces of the world to make a play. The winning solution must address the various ways that tenants want to work: CoWorking, Flexible Private Offices, On-Demand Meeting, Conference, Hybrid, and Traditional Leasing, all while being flexible enough to adapt to another paradigm shift such as a Pandemic Once the winner controls the Operating System for one of the largest Asset Classes in the world, the possibilities for monetization are endless. As just one example, the winner can build a marketplace where the majority of buyers and sellers meet. As we enter the new year, and the world is armed with the miracle that is the vaccine, the time to develop the solution is now.