Co-working is already making waves in the real estate sector, but other forms of pooled resources like co-producing and co-storage are set to make an appearance too.
The revolutionary ideas informing the new collaborative economy and their potential impact and application to real estate, were at the heart of this year’s Urban Land Institute conference which took place in Europe’s start-up capital, Berlin.
The founder of online car-sharing business Zipcar, Robin Chase, set the scene for the discussion by describing the principles behind her company and other ‘disruptors’ like Airbnb and WeWork, pointing out how they differ from ‘industrial capitalism’ - a model she declared is ‘behind us.’
‘Leveraging excess capacity’ is the central idea behind Zipcar which allows people to rent cars by the hour rather than paying more to own vehicles which are only used some of the time.
Key to implementing Zipcar’s pay-as-you-go idea was harnessing the internet to build an online platform which allows customers to buy time in 30 seconds: critical, as they may only want the product for an hour. ‘I’m shocked that some online purchases take 15 minutes; we made a complex system incredibly simple,’ she said. Similarly, Airbnb ‘takes millions of small spaces around the world and aggregates them on a single platform, with one shared insurance product, one way of paying, so you can compare and contrast easily. It is totally different from a million bed and breakfasts around the world - it’s a totally different value proposition.’
Customers as peers
Also fundamental to those successful companies built on sharing services in the digital age is their treatment of their many customers as collaborators, seeking their ideas as ways to grow rather than countenancing any adversarial relationship.
‘My example here is smart phones and apps,‘ she said. ‘The smart phone is the platform and costs a lot to produce. Since smart phones appeared 10 years ago we’ve had many millions of apps and many ways to use the platform. They are all free-riders, leveraging the excess capacity.’
Chase calls this organisational structure ‘Peers Inc’ and invited delegates to consider how they might ‘Peers Inc’ their own assets and businesses. ‘Think about this in your sector - where is the excess capacity? What is the Zipcar or Airbnb of retail space? What about opening or sharing your open areas, excess heat or rooftops that at night time (might) become a bar?’ And a tip learned from failing ‘when we tried to do “stuff” sharing’ which wasn’t cost-effective: ‘Go for the highest capital value assets first.’
One delegate asked whether the word ‘collaborative’ wasn’t ‘misleading’ - when these businesses are owned by a small number of people who have made huge wealth out of them? Chase agreed that the Airbnb founders ‘will get very rich. But on day one, year one the person who rented out their house made some money. Whereas hundreds of millions of dollars went into the platform and took the risk...I think there is a huge under-appreciation of the risk-reward piece. I disagree with the fact that the individual participants don’t get value out of it, otherwise they wouldn’t participate.’
Online retail impact
Alexander Otto, CEO of shopping centre property company ECE, said retail real estate companies needed to collaborate ‘at this important time for the sector’, referring to the changes being wrought by online retailing. ‘There will be chances for collaboration to benefit the entire market and we need good ideas - we are all a bit in the same boat,’ he suggested.
‘We still own things; we have tenants with long leases. Some are secretive and don’t want to share with anybody,’, said panellist Stephan Bone-Winkel, founder and director of BEOS which develops and manages industrial property. He felt the collaborative economy had yet to touch parts of his business, ‘but it will start, I am certain.
‘And I am right with you in that we should focus on tenant needs, which we see in the future will be to be more flexible with their space and changing its use,’ he said.
Asked by the audience whether the co-working approach that is rapidly penetrating the office sector will work in the industrial and logistics market as well, Bone-Winkel said it might. BEOS had a tenant producing 3-D printers, ‘and what they say is that tomorrow the production process will be completely different, using sensors and 3-D printers and robots. It can’t make sense that just one company uses the whole production line. So they are going to share. What we see is, increasingly, even competitors will work together and even do research together...We will see not only co-working but co-producing and co-storage too.’
He stressed, however, that real estate developers like his, which are also long-term investors, will have to get a return on investments made to enable or change work space.
Proptech and digital technology
BEOS’ founder also had interesting things to say about the challenges to real estate groups of ‘getting a handle’ on proptech and digital technology. His company has five people working on digital solutions. ‘We had a project to lease parking spaces using blockchain technology and it was a total failure. We didn’t know how to do it, it is complicated and didn’t work. So we changed to traditional shopping systems to do this,’ he revealed.
The reality is that breakthrough ideas are few and tech start-ups are many - 3,000 currently in Berlin alone according to speaker Christoph Sollich, aka ‘The Pitch Doctor.’ Bone-Winkel said his team looked at proptech companies at the rate of two a week ‘and we haven’t found a disruptive idea. Most of the start-ups work on very small problems. They are not fixing ours. So we haven’t seen it yet - but we are looking.’
Co-working is about ‘creating a community’
The rise and rise of co-working is a complicated and fast-moving trend with potential to affect real estate profoundly, so perhaps it was not surprising that the appearance on a panel of WeWork’s head of real estate in Europe, Patrick Nelson, did not yield many insights - despite some penetrating questions from ULI delegates.
WeWork opens in 15-20 new locations a month and is in 260 worldwide, Nelson said with real estate ‘a gateway for the platform whose purpose is to facilitate the success of users on that platform. It means supporting them with a lot of additional stuff that they have to do, firstly with the real estate, but also accounting, healthcare and so on, and ultimately it is creating a community and a network that has a physical basis but also has a virtual platform’.
Nelson said that the buildings and the surrounding area themselves contributed to ‘the community, the energy, the positive atmosphere’ that is WeWork’s ‘secret sauce.’ In Germany, the company took the upper floors of Galeria Kaufhof in central Frankfurt as part of an $850 mln deal with Hudson’s Bay Company which included buying the Lord & Taylor store on Fifth Avenue in New York. ‘Retail on the ground floor will improve that energy,’ said Nelson.
Notwithstanding reports that WeWork’s occupancy rates are declining and the firm has increased broker commissions, Nelson said the group was ‘very, very healthy as our landlords can attest’. In reply to a later question about expanding via a lease arbitrage strategy, signing a long lease with a rent-free period and then charging higher rent on shorter leases to its customers, he replied that ‘for each building that we have, we have a very profitable business’.
Analyst Green Street suggested in a report on co-working published last November that a landlord can earn around 50% more income running a co-working space, and break-even occupancy is likely to be 60% in the highest-rent markets like London, where the spreads are larger.
The future of retail
‘Easily 25% (of all bricks-and-mortar retail) is going to go out of business,’ Value Retail’s founder Scott Malkin told the conference in a discussion on the future of retail.
Value Retail’s proposition is very specialised - outlet villages selling predominantly luxury brands at discounted prices - and so few were surprised to hear him say, ‘nobody is coming to us anymore for regular items’ which they could buy online. But his comments about the kind of physical retail that will continue to thrive and be profitable resonated with his co-panellists. Shoppers, he said, were travelling ‘to places where the locations are good; the environment is good; and the experience is special. And that’s a moving target’.
Alexander Otto of shopping centre giant ECE’s view was similar: ‘(Running shopping centres) is a continual management effort now and it is getting more and more management-intensive to do a good job.’ He agreed that centres in the wrong location which are poorly managed will go out of business in the next few years and that looking back, a lot to do with the world of retail was too good to be true. ‘There was a lot of rental growth, and net operating income was fully distributed to the owners instead of being spent on the assets,’ he believed.
That time is over, but there is a lot that can still be done to make shopping centres attractive, he noted: ‘Top parking facilities; fantastic ambience; services; having the right ingredients there that online cannot replace, like restaurants.’
Malkin said costs for retailers continue to go up, including for online retailers. ‘So the trick is to end up (owning or investing in) the must-have locations. Those are the locations that (are able to) charge the most interesting economic price for the work that is being done to create and then sustain that location. Everything else is going to get squeezed.’
