Rethinking real estate as customer-centric
The current real-estate business model is moving away from its traditional form to consumer business. In a world of abundance, real estate needs to take risks to “win” by taking stands and pursuing uniqueness through branding.
Traditionally, businesses used to cater to the mainstream and real-estate assets management was a primary example of such business models. Real-estate businesses would have to provide a neutral environment which would suit multiple types of users within a scope. Curiosity is Key(s) is convinced this is no longer the case, and the future of real estate lies in catering to multiple specific needs, by providing people with unique experiences they would not be able to get elsewhere. This change is comparable to the evolution from Web 2 to Web 3 according to Dror Poleg in one of his latest articles. Curiosity is Key(s) offers to analyze this comparison and provide key insights on the evolution of the real-estate business when the paradigm of the 21 century moves from the economics of scarcity to abundance, including in urban economics. 💫🔜💫
A Pyramid Scheme: a new perspective on the urban economics agglomeration theory
Among urban economists, a consensus exists that the “coveted city will become more coveted”. As Dror Poleg underlines, “cities become attractive to people because they are full of people”. It is a vicious circle. This theory relies on the observation made by the well-known urban economist Paul Krugman in 1991 that successful areas of production tend to agglomerate. The Lower Manhattan Development Corporation sets a prime example of how to exploit such interesting propriety of agglomeration. In the aftermath of the attacks of 9/11, it launched a Residential Grant Program of $227 million to encourage individuals to remain or move into the neighborhood to ensure its revival. 💰💰💰
Cities are networks
This strategy isn’t new: money transfers to the tenants happen in all office, retail, and apartment real-estate markets. Why is it the case? It all comes from a pyramid scheme: landlords utilize the money from investors as “customers subsidy to lower the cost of customer acquisition” as articulated in Bloomberg Opinion. Along the chain everyone has an incentive to play along with the game: a landlord receives money from an investor that he transfers to his tenants which will drive up nominal rents. In turn “the “nominal rent” helps drive the “nominal valuation” that allows the project to secure mortgages from banks. The banks, for their part, package the mortgages into all sorts of securities that they sell to various other investors.” Such pyramid schemes can either fail or succeed, but everyone is willing to risk playing, especially as the benefits are large for those that succeed. This process not only relies on the idea that incentivizing early adopters is rational for many businesses but also on the fact that cities are networks. Thus, cities benefit from positive network effects, such that new residents will attract even more new residents.
Ownership v. participation: understanding a new layer of the pyramid scheme thanks to Web 3
This new interpretation of the agglomeration theory brings an interesting comparison: impossible to think of network effects without thinking of online businesses! Big companies such as Facebook or Airbnb have also benefitted from positive network effects. However, cities and the web differ from each other as online consumers are always participants and not owners. On one hand, the presence of owner-residents in cities enhances the pyramid scheme functioning as they have a personal stake in an increase in their city’s land valuation. On the other hand, it also increases the existing inequalities between renters and rentees. As landlords become richer in a successful city, tenants must pay more and more in rent.
Such inequality exists in the current online world: Web 2. The platforms with the most participants get to set the rules and earn revenues from everyone’s participation. Web 3 will renew this paradigm by proposing an intertwining of participation rights and ownership rights. From the customers’ standpoint, they can decide to purchase a service and will be given tokens that will also confer them some ownership rights. Those ownership rights can take multiple forms such as a say in the governance of a project. Most importantly as the value of the network will increase, the token holder will benefit from it as well. From the businesses’ standpoint, to kickstart their project, they will give away some tokens for free to ensure early adoption of their services. If some of those online projects fail or even turn out to be scams, those that take off, often become very successful, benefitting again from positive network effects.
Pyramid schemes are the new successful marketing: “a growing number of businesses will create mechanisms that enable customers to benefit from the businesses’ growth. This, in turn, will incentivize customers to promote the business to other potential customers.” Dror Poleg calls it the second wave of the Economics of Abundance.
- The first wave took place from 2015 to 2019 when companies offered free products or services to achieve early adoption.
- The second wave is characterized by companies paying consumers not only to consume their products or services but also by giving them a personal stake in the company’s growth through tokens.
Dror Poleg warns us that the evolution from the economics of scarcity to the economics of abundance will be a global phenomenon, while we may witness cities adopting more aggressive marketing styles. Curiosity us Key(s) offers you to complement Dror’s insights by an analysis of the current challenges and changes occurring in cities.
A new trend: Shrinking cities
1. Not only economics but also demographic factors will drive cities’ shrinkage.
Since the pandemic, people seem to have fled the cities. For now, no data support this tale that we have all heard of as there is no evident causal link between Covid-19 and a decrease in cities’ populations. However, in 2021, the European Commission published a report displaying a new trend: cities are declining in size and population. 🔽🔽🔽 If it used to be the case that “declining cities were almost always concentrated in declining regions, with economic factors being a key driver”, some new factors seem to come into play. At the local scale, the process of suburbanization is growing. Furthermore, population aging and low fertility rates seem to be future prominent drivers of further city shrinkage.
The report establishes that fighting this new trend will prove inefficient and that instead, “even currently stable or growing cities should anticipate and plan for possible shrinkage in the future”. Curiosity is Key(s) analysis leads to the same conclusion, especially as the network effects we have mentioned above could trigger a chain reaction.
2. Changes in the labor market due to a shift towards the economy of abundance will shape our future cities.
During a presentation for Pi Capital, Dror Poleg proposes additional insights on the economy of abundance. Not only will it lead to a change in cities’ marketing strategy, but it is another factor that will influence cities’ growth or decline.
Digitalization is leading to three interconnected changes that will impact the labor market:
- More and more industries are shifting from the economics of scarcity to abundance, leading to new business models. Let’s use the example of movie production: Hollywood movies’ goal is to cater to the mainstream thanks to a narrow set of very well-known actors. This represents scarcity. Meanwhile, TikTok has developed features that are fundamentally different: billions of short videos are on offer that “cater to a multitude of very narrow and very specific audiences”. In such an abundant world, winning on the market is a function of tailoring its offer to a specific niche or “building a giant platform that allows others to do so”.
- Furthermore, Nassim Nicholas Taleb in his book The Black Swan makes a comparison between scalable and non-scalable occupations. Those that are scalable are not constrained by the physical world. As a result, a few people with very specific skills will be highly demanded in the future and will be able to provide such services to all those that need them. Dror Poleg concludes that it leads to a “distribution of rewards in a growing number of industries and professions [that] follows a power law”.
- Finally, in such a noisy environment picking a product or service becomes harder, such that luck plays a growing role in determining the success rate of a business.
In our current cities, employment areas are still very concentrated and our vision of urbanism still revolves around this structure. But when all occupations become scalable, and people can access good jobs from almost everywhere, we drift away from the classical “winner-takes-all” vision of urbanism. As people will have an increase in choice as to where to live, more people will exercise those choices which could potentially lead to an increase in cities’ shrinkage. Demand will be redistributed across locations with a greater segmentation of the market depending on people’s preferences. This means that real estate will move from an operational business producing a standard type of assets to a consumer business.
Rethinking real estate as customer-centric: an opportunity to seize!
As people are more mobile real estate will need to bet on the projects that understand their audience the best. Instead of catering for the mainstream, under this new paradigm, Curiosity is Key(s) is certain that the segmentation of the real-estate sector will also see a shift toward a target to the niche. All office, retail, and residential real-estate businesses will be impacted.
WeWork, an example of good practice for office real-estate
With more than 500 locations worldwide and soon-to-be profitable according to the company’s leaders, WeWork is the perfect example of a consumer brand: everyone knows what WeWork is. By going into those co-working spaces, people express their fondness of this office environment. This is what real estate should now be about according to Dror. A brand must trigger strong emotions such that anyone has something to say about it, whether it is good or bad. “Winning in this market is not about a one-size-fits-all but rather having a point of view. It presents bigger risks, but it is also what you need to do: create something unique and give people what they can’t do anywhere else”.
A change in retail with online shopping
With more and more businesses online and massive platforms centralizing products, retail real-estate faces a new challenge. Nonetheless, if it has to adapt, it doesn’t seem of primary concern for two reasons. On one hand, converting retail space into new offices space or activities centers is very feasible. On the other hand, physical stores are a tool for customer acquisition that will reinforce online sales, while online marketing can also boost offline sales.
Residential real-estate offers more opportunities
Life-style cities will become more and more desirable as a growing category of people will be able to relocate without taking into account job considerations. The European Commission report on Shrinking Cities advises for cities to rethink their branding and “to focus not on retaining people”. The shrinkage “provides an opportunity for cities to select a development path centered around quality of life, environmental protection, social equity, and sustainability”. Dror underlines that cities like London for instance stand a better chance at keeping their attractiveness than American cities because they display a lot of features from pre-industrial eras that people will look for. These cities are much more “walkable”, at a human scale and feature a vibrant center.
Finally, digitalization will also be a key asset in this new urbanism and allows us to reframe our entire perception of a city
- Cities will have to bet on pyramid schemes and use new marketing approaches. It is already the case of the Mayor of Miami who seems to seize this opportunity. Particularly proactive on Twitter, he tries to attract venture capitalists and entrepreneurs to his city. To do so, he has notably teamed up with WeWork and offers free rent coworking space to the newcomers.
- As participation and ownership will become more and more intertwined, it could also be the future of cities. Should real-estate businesses “airdrop some tokens” to interest inhabitants in the expansion and success of a city or neighborhood?
