Is Real Estate Becoming A Service?

Real estate just became its own separate asset class.  However, ironically, that may have occurred just at the moment it should have been morphing more deeply into other asset classes.

Don’t get me wrong, as a real estate professional I am very happy about real estate being named as its own investment class; however, it is worth taking stock of what is actually happening around us and its implications.

So far we have the disaggregation of real estate persisting in numerous directions, such as:

  • Co-working

  • Co-living

  • Crowdfunding and similar concepts to democratize real estate investing

  • Airbnb

  • The implications of self-driving automobiles

These are the obvious ones.  But roaming beneath the headlines is a slew of real estate players with different business models, with more being imagined and created every day.  Here is a quick list of some I know of:

  • LiquidSpace – Network for office space where startups and growing teams connect directly with real estate owners, operators and companies that have space to share.

  • Opendoor  and Nested – Offer simpler and easier ways to sell your home

  • Breather – On demand access to private spaces across the U.S. to be used as temporary working spaces.

  • Spacious – Uses restaurants during off-hours as co-working spaces for paying subscribers

  • Roam – Network for global co-living spaces and co-working spaces when you travel – providing everything you need to feel at home and be productive at your chosen destination

  • Remote Year – allows you to travel around the world while still being able to work remotely

  • Common – Manages shared living spaces

  • Storefront – Finds temporary retail or event space in the best neighborhoods

  • Fundrise – makes quality real estate investments available to everyone

And this list just scratches the surface as there are more and more things going on every day.  I certainly don’t know everything and even if I did, there are likely a bunch more things about to happen that I have no idea about, .i.e. to paraphrase Mr. Rumsfeld, “unknown unknowns.”

I have been wondering whether there is a way to make sense of all of this.  And the conclusion I have reached is that just as many people have been wondering whether they should really own a car when they can just rent or use one — through services such as Zipcar and, eventually, self-driving vehicles – I wonder whether people will reach the same conclusion about real estate?  I mean why own a house and why rent space under a long-term lease if you don’t have to make that kind of economic commitment and get pretty close to the same benefits without such a commitment?

What this means is that real estate may transform from a thing you buy to a service…..

Consider these thoughts……
Living space that has co-living and robotic movable walls (already in development) whereby a single room can morph from a bedroom to a kitchen to a party room to a study.

Restaurants that have a breakfast brand – a lunch brand – a dinner brand – and a swinging nightspot brand.  There are logistical issues; however, ultimately with the right cosmetic changes you could see that coming.

Retail stores that are one store on one day and another on another day or at another time of day.  Of course, there are devils in these details but you could see it coming.

Offices that are shared.  I guess we already have that.  At first it was companies like WeWork.  Then it was competitors to WeWork.  And now it is landlords themselves putting these spaces into their buildings without leasing to a WeWork or a competitor of WeWork.

Houses and homes that are like hotels and used and rented out.  I guess we already have that too.

Transient living uses that are being invented, largely under the concept of co-living.

Liquid space – Airbnb – and so much more

For some time, I have been idly thinking and wondering about this concept, but without really putting the intellectual pieces together.  Then I read a very insightful article by Mr. Dror Poleg entitled Don’t Think of a Building, Understanding Technology’s Threat to Real Estate Owners, Operators and Asset Valuations, where he synthesized my nascent thoughts better than I was able to do.  He makes the following points about how real estate is morphing:

  • “Space is broken down into smaller value units, allowing end-users to pay only for the specific components they wish to use — as desks, meeting rooms, bathrooms, beds, etc.”

  • Time is broken down, reducing the minimal commitment required from end-users to as little as 30 minutes — shifting profits to those who can secure large spaces “wholesale” and lease them out “retail” in smaller sizes for shorter periods of time.

  • Incremental use (smaller spaces, shorter periods) gives rise to dynamic pricing models.

  • Equity is broken down, enabling smaller owners to share their financial burden with other small and medium investors.

  • Visibility is no longer just about being seen offline. Accessibility is now partly about the ability to book space and other amenities within it on demand. Spaces with “good enough” locations become more valuable through optimized design and innovative marketing.

  • New attributes – community, curation (who else is there?), content (events), value added services, and availability on demand – are eclipsing location and accessibility as the key drivers of differentiation between assets.

So I wonder if real estate is morphing into a service more than an asset.  What does that mean and what should real estate players do about it?  Of course, no one can really predict the future and figure out what is going to happen.  However, I am getting more and more confident that real estate as we once knew it is going to be changing dramatically in years to come

The answer to appropriate strategy would be specific to the different asset classes and investment strategy of each real estate player; however, I will stick my neck out and advocate the following plan of action:

First read Dror’s article – this article – and whatever you can find about new business models in the real estate world.

Second – sit down with a pad of paper and a pen – and no iPhone – and think of what real estate related business you are in.

Then consider whether there is a deeper meaning to what you are “really” doing.  For example, the car companies are now wondering whether they are really in the transportation business?  Is there a deeper meaning about what you are doing that leads you to describe the heart of your business differently?  For example, instead of building houses, maybe you are in the business of giving people a comfortable place to live.

See where this leads you…….

Finally, I do think it behooves all of us (including us lawyers) to be as vigilant as possible regarding these changes because when an industry is disrupted, it is typically much too late to play catch-up once you fall behind.  And I will end with a Bill Gates (famous?) quote:

“People tend to overestimate what will happen in a year and underestimate what will happen in ten years”

I am comfortable in saying that whatever you are doing now, the odds are that you won’t be able to do that in ten years or, if you can, it will not be nearly as profitable.

The End Game for Co-Working

I have been watching – and our firm has been participating in – the co-working trend.  It started with Regus when it was founded in 1989 but didn’t really go anywhere until the past few years.  Since then, numerous players have entered the market, each with its own twist to appeal to different parties.

There is an ongoing debate as to what will happen during the next downturn.  Some say that the co-working spaces – filled with millennials – will become ghost towns as these millennials will go home to work out of their parents’ basements for free.  Others say that in a downturn, co-working will boom even more because there will be more people out of work.

I am not wading into this debate except to say that I am certain that no one has a crystal ball and we will just have to see what happens at the time of the next downturn.  If I had to guess – and I shouldn’t guess publicly – I think the latter (i.e. the boom) is much more likely than the bust, but that is just my guess.  However, I do have a perspective here that I think is interesting….

To take you through my thinking, I hearken back to the internet.  When it started, everyone was so excited.  It was a “new business” and everyone was pouring into it.  However, it turned out that it was really not “a new business”; instead, it was “a new way of doing business.”  This meant that WalMart could be in the business just as easily as an internet start-up.  If you fast-forward about twenty years, I don’t think there is a single business that exists today that is truly an “internet business”, with the single exception of Amazon and, at least according to my calculations, it is only just now starting to turn a profit.   So much for the “internet business”.

I think the exact same analysis applies to co-working.  If you look at what is happening now, there are numerous competitors; however, recently, landlords themselves have started to enter the fray.  For example, if you own an office building, you might consider allocating a floor for co-working space.  The margins are dramatically higher than what you would get if you leased the floor – versus the risk that your tenants are sort of like hotel guests and could evaporate if the market changes.

To be clear here, since co-working is so labor and operationally intensive, most landlords will team up with a co-working provider.  I think you will see a lot more of this.

As a landlord you wouldn’t want to risk the entire building on this concept just yet and even if you did your lender wouldn’t let you, but for a single floor it probably makes sense to take a chance and enjoy the upside without that much downside risk.  And ten years from now, once co-working has proven to be a longer-lasting concept, your lender will probably let you co-work out half of your building or even more than that, i.e. co-working will likely morph to be more like a hotel concept.

In any case, over the next ten years I suspect co-working will become more and more ubiquitous.  Then what happens to the co-working companies?

My prediction is that there will be a couple of survivors.  The rest will fold or be absorbed or bought by other real estate players.

Meanwhile, I advocate that real estate players – worldwide – should be looking at how they can optimally apply this “new way of doing business.”