Our Commercial Real Estate Technology Roadmap — Thesis Part 2
This is the second in a series of posts:
- Find the first post here: Our Thesis on Innovation in Commercial Real Estate
Summary of Our Thesis
- We think there are 8 aligned innovation objectives across CREs, unifying asset owners, property operators, integrated and facilities managers etc. (Discussed in Part 1)
- We argued technology contributes to value creation in CRE more than it is given credit for (value creation extended beyond the traditional location, location, location style of thinking) (Also discussed in Part 1)
- New: Of the 8 innovation objectives, we think all CREs should start with focusing on Tenant & Occupant Experience which then informs the other 7 objectives
- We have developed a roadmap of 19 technologies for CREs
- We have identified 8 key technologies of where to start first in your innovation journey
Starting with Customer Experience
Real Estate is a vast industry with numerous stakeholders and market participants, so when deciding on a methodology to create our technology roadmap we had to ask “where to start first?”. To create some stakeholder prioritization we leveraged two simple entrepreneurial rules 1) “start with a happy customer in mind” and “look for the most impact versus effort”.
Economic Impact of Customer Experience
The slide below is a simplified economic model of commercial real estate developed for Part 1 of our Thesis slide deck. I want to point out that Tenant & Occupant Experience is a direct input into both Base Rental Rates (Face Rates) and attracting quality tenants. Base Rental Rates is a major driver of NOI. Attracting quality tenants, which is correlated to stability of cash flows are major drivers of Cap Rate. Therefore Base Rental Rates, attracting quality tenants, and stability of cash flows all have a large controllable impact on asset valuation.
Defining the Customer
In the context of commercial real estate, when referring to customer experience, there are actually two stakeholders being discussed as customers: Tenants and Occupants. It’s important to distinguish between the customer/buyer who is the Employer/Tenant/Facilities Manager and the User who is the Occupant/Employee or Visitor. The customer makes the buying decision and pays the rent. The user shows up and uses the space. This is the difference between tenant experience and occupant experience which we will dive deeper into another time.
Landlord’s Motivations
From what we are hearing in the market right now, Landlords (inclusive of operators, asset managers, and integrated) have a few key objectives:
- Protect Face Rates during lease negotiations. Landlords aren’t interested in lowering Face Rates, but are more willing to offer back-end incentives such as free rent in recent transactions.
- Preservation of brand equity, stability of cash flow, and preservation of long term value in their assets. These two points highlight a similar strategy Apple’s uses to protect its premium brand by rarely putting iPhones on sale.
- Secure leasing rates above market average
- Decrease or eliminate vacancy
Defining Desirable Tenant
By focusing on activities that contribute to attracting desirable tenants, Landlords are able to get closer to achieving their objectives noted above. Based on the objectives above, let’s define the characteristics of a desirable tenant:
- Tenants who demand large amounts of premium space in Class B to AAA buildings in major urban markets often in CBDs. We are seeing this flight to quality trend happening right now in tier 1 cities.
- Tenants who are less budget sensitive about Face Rates can:
- Afford larger office rental budgets because they are usually in high growth industries with fatter margins
- Allocate more of their operating budget to office rental because they value premium office space as part of their corporate cultures and use their spaces as one of the perks to attract and retain top knowledge-based talent.
Typically the tenants who fit this customer profile are:
- Technology companies
- Financial Services companies
- Professional Services companies
Employee/Occupant Motivations
In Part 1, I noted some major recent macro trends accelerated by COVID:
- Commercial Real Estate is experiencing three causes of disruption simultaneously
- COVID, Work-from-Home, and hybrid work culture has solidified employee’s alternatives to not show up to the office (remote work, working from home, or Third place) and therefore raised the bar for the occupant experience to attract highly mobile employees back to the office environment.
- Some employers have mandated employees back to the office, but that creates the chance of putting them at a disadvantage to attracting top talent who are inherently mobile
In the paragraphs above I bolded “Protect Face Rates”, “attract and retain top knowledge-based talent”, “The user [occupant] shows up”. The Landlord’s motivation of asset value preservation through protecting Face Rates, combined with the Tenant’s motivation of attracting and retaining top knowledge-based talent by leveraging their premium office space, and the occupant/employee lack of motivation of showing up to the office is at the very root of our methodology.
Our Methodology
Customer Profiles
We started with asking the key question of “what are ideal (yet realistic) Occupant experience(s) that rival the WFH and Third Place alternatives, and attract employees of desirable tenants back to the office?”. To answer this question we leveraged additional tools from the Startup Playbook such as components of Human Centred Design and Design Thinking to map out Customer Journeys for four Occupant Customer Profiles:
- Tenant Executive
- Tenant Middle Manager or Knowledge-based Worker
- Tenant Administrative or Support Staff
- Visitor, Tenant’s Client, Public
It’s important to distinguish between these different customer profiles as each has different occupant experiences. For example, a Tenant Executive might want to reserve a parking space with EV charging on a daily basis, and have a dedicated office, and schedule lunch reservations with clients at a nearby restaurant. A Support Staff member might use public transit, live further away from the CBD, have less flexibility for childcare, and eat lunch at the food court. Tenant Middle Manager or Knowledge-based Workers might have more flexibility to work in or out of the office and would need to reserve a workspace as they might not have a dedicated workspace.
Customer Journeys
We created these customer journeys by documenting all decisions, options, actions, activities and tasks each of these four users engage in from first thing in the morning while at home until arriving back home in the evening. We broke their days into blocks of time:
- Home
- Transit & Arrival Planning
- Arrival & Check-in
- Workspace
- Meeting & Collaboration
- Lunch, Breaks & End of Day
Use Cases
We documented all of the activities for these 4 customer journeys and the needed second order CRE operator workflow. The product was over 50 use cases that fall under 7 of the 8 innovation objectives. These +50 use cases are by no means an exhaustive list and we expect the list to grow into the future as new business problems become visible and new innovations come to market. Over 30 of these +50 use cases tie directly to Occupant Experience.
It’s also important to note that this customer journey methodology can be applied to any of the other numerous CRE stakeholders such as Tenants/Facilities Managers, CRE Operations Employees, CRE Vendors and Contractors etc. In future posts we will create customer journeys for these other CRE stakeholders which expand the use case list and potentially the Technology Roadmap.
Technology Roadmap
To make these +50 use cases a reality we identified 19 underlying technologies that need to be implemented and many that need to be integrated with each other. We have broken these 19 technologies into 8 categories and prioritized in 3 layers:
8 Key Technologies: Where to Start
Time, headcount, and budget are not infinite, so implementing 19 technologies can be overwhelming for any innovation team. Prioritization based on impact for effort on necessary and sufficient projects is required. The slide below identifies the 8 foundational, required and high impact technologies for any CRE innovation roadmap. This technology roadmap establishes the foundation for all other innovation projects. It’s also worth noting that skipping these technologies especially at the Network or Data level will cause technical and governance debt that will be increasingly expensive to correct in the future.
Value Attribution of Technologies
The slide below is from Part 1 of our Thesis slide deck and asks the two fundamental questions that kicked off our thesis research 6 months ago:
- Is there a technology roadmap that creates positive ROI for CREs? Over the last two posts we believe we have an anecdotally show this to be true through our logic and reasoning. The next step to to prove this quantitatively.
- Can the value contribution of each individual technology be quantified and attributed? Very broadly speaking, for this to be proven we would need each technology to be successfully deployed into a live built environment and to be reconciled with corresponding financial data (rental rates, expenses and valuations).
Key Takeaways
- COVID, Work-from-Home, and hybrid work culture has solidified employee’s alternatives to not show up to the office and therefore raised the bar for the occupant experience to attract highly mobile employees back to the office environment.
- Landlords want to preserve asset values by protecting face rates in lease negotiations. Desirable tenants want to attract top knowledge-based talent. Top knowledge-based talent is highly mobile and wants top quality occupant experience.
- When prioritizing technology projects, use Tenant & Occupant Experience as a starting point. Tenant & Occupant Experience has direct influence on face rental rates, attracting quality tenants, and stability of cash flows which feed into NOI and Cap Rates.
- When prioritizing technology projects start with clear Network and Data infrastructure strategies. Skipping these steps will cause technical and governance debt that will be increasingly expensive to correct in the future.
In our following posts will cover:
- Best practices and potential solution providers of these 8 key technologies
- Diving deeper into Network and Data infrastructure strategies
- Apply our methodology to the residential asset class
