How do technology-enabled real estate companies unlock enterprise value in traditional real estate assets? Here are three ways...
Technology-enabled real estate companies are the real deal, and they are here to stay. Over the past seven years, we have seen the proliferation of companies operating in this space – companies like WeWork, AirBnB, and the Office Group (recently acquired by Blackstone) – who are using technology to unlock tremendous enterprise value in traditional real estate assets. In case you missed it, WeWork was recently valued at over $20 billion! WeWork has approximately 10 million square feet in direct office space. That’s a valuation of $2,000 per square foot of managed space. As a point of reference, the average price per square foot to buy New York City office space in 2016 was $1,347. So how do WeWork and other tech-enabled real estate companies create so much enterprise value?
At Camber Creek, we see hundreds of real estate technology companies a year, many operating in this space. Based on our analysis of these companies, there are three main ways technology is being used to drive value: increasing flexibility, enhancing the efficiency of space, and creating untapped customer value.
While increasing an asset’s flexibility is a relatively simple concept, there are some remarkably innovative ways that developers, architects and entrepreneurs are using technology to expand the ways we can use existing real estate. We are seeing a wave of companies that are (i) coupling flexible design with smart technologies to allow assets to be used for multiple purposes and (ii) collecting data that allows an asset owner to continuously optimise for the highest best use of that asset. For example, through flexible design and smart use of data and technology, companies like Convene and WhyHotel are unlocking value in existing assets and creating new and better asset utilisation and revenue opportunities.
Architectural creativity combined with technological advancements are also making multi-purpose “real estate of the future” closer to a reality. This video of Gary Chang’s work in Hong Kong remains one of my favorites and makes it easy to imagine how technology and innovative architectural design could work together to increase an asset’s value. Gary’s work and some of the other similar ideas out there to increase flexibility are still years away from becoming commercially viable, however, it is certainly a space to watch.
The second main way technology enabled real estate companies creating value is by driving more efficient use of space. A straightforward example here is identifying the right number of desks and amount of space needed for a 100 person company. A traditional approach would include having 100 desks and giving each person a reasonable amount of space, which includes allocating more space for executives (e.g., for larger offices) and less space for more junior employees. Some relatively simple data tracking, benchmarking, and analysis could lead this company to realise that they need fewer desks, for example, taking into account employee work patterns, work-related travel schedules, teleworking, sick days, vacation, etc. Then taking it one step further, providing some employees with the opportunity to work from a convenient co-working facility, the company could sign a master lease for 50% of the space traditionally leased while providing access to the most productive space for each employee.
Beyond the physical reduction of square footage, there are countless ways that technology and good data can improve the efficiency of the space we use, including around energy efficiency, cleaning needs, building maintenance, etc. We are seeing a range of companies, including many traditional real estate firms, who are using technology to rapidly test and rollout new approaches to improve the efficiency of their real estate. One key observation is that many large, historically slow-moving real estate companies are increasingly playing in this space either by building the technology in-house or partnering with real estate tech firms to capture some of these low-hanging opportunities to increase the efficiency of their assets.
Finally, and perhaps the most interesting way these companies are using technology, is to create new customer value. This can mean using technology to increase employee productivity in commercial real estate, identify new revenue streams in shopping centers, or ensure a better customer experience in hotels. Take, for example, a real estate company that has identified a way to structure their space, services, and amenities so that employees are 20% more excited about coming to work each day, 15% more collaborative on the job, and 10% more productive with their time. What would that be worth? Technology-enabled real estate companies on the forefront in this space are constantly developing new ideas, tracking billions of data point and leveraging some of the best minds in the country to create new value for “customers”. Further, many of these companies are identifying ways to monetise these breakthroughs as a service for building owners and tenants that they can’t provide on own. Being able to leverage this data at scale and distribute these valuable services and insights at a low cost with high recurring margins is a very attractive economic opportunity (which is part of the thinking behind WeWork’s recent valuation mentioned at the beginning of the post).
We have heard many skeptics claim that these new models are simply the repurposing of space or clever approaches to leasing with great amenities. This mindset fails to appreciate how technology is and can be used to increase flexibility, enhance the efficiency of space, and create untapped customer value. For us, the companies that are most exciting in this space are the ones that are effectively doing all three of these things in a defensible way.
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