The technology sector, which tends to advance rapidly in game-changing shifts, has long provided a glaring contrast to the real estate industry, which is based on long-lived assets and evolves slowly.
But that dichotomy will soon fade, according to a panel of real estate and tech leaders at ULI’s Fall Meeting in San Francisco. Along with the rest of society, real estate inevitably will be transformed by the ascendance of e-commerce, innovations such as driverless vehicles, and the rise of a new, sharing-oriented economy in which players collaborate to improve efficiency, panelists said.
The industry needs to alter its business model in order to serve tenants whose needs are different than they were in the past, said Patrick L. Phillips, ULI global chief executive officer, who led the discussion. Real estate executives need to develop more flexible leasing arrangements, which would enable companies to scale up and down to adjust to market changes, he said. The industry also needs to look at building more flexibility into building design and land use. And given the rise of collaborative relationships in the digital economy, real estate developers should look at developing closer relationships with tenants—possibly by becoming equity partners in their businesses.
“We need to align real estate providers’ interests with those of their tenants,” Phillips explained. As a possible model, he cited coworking space provider WeWork, which not only seeks to build relationships among its clients, but even looks to them as a source of services. “Yes, that is a real estate business,” Phillips said. “But it’s also about creating an ecosystem of companies that benefit from close proximity to one another. It’s an interesting take on the traditional real estate play.”
“The real estate industry has taken a linear approach instead of a disruptive one,” said Mark Platshon, a senior adviser to venture capital fund BMW i Ventures. But faster innovation not only will enable real estate businesses to cope with change, but also will create new business opportunities as well.
The biggest impact on real estate may come from the development of autonomous vehicles, said Randall K. Rowe, ULI global chairman, who also is chairman of the real estate investment firm Green Courte Partners. Driverless cars and trucks “will change the way that we think about designing cities,” he said. But it is unclear whether the technology will promote greater densification or, in a worst-case scenario, increase urban/suburban sprawl.
In contrast, Hamid R. Moghadam, chairman and chief executive officer of distribution facility developer and owner Prologis, said he expects the most profound changes to be wrought by e-commerce. “A lot of retail is shifting to that mode, and the space needs of those companies are going to change,” he predicted.
Another trend that will alter real estate is the sharing of resources among businesses to improve efficiency and add flexibility. David Mandell, cofounder and chief executive officer of New York–based PivotDesk, in some ways exemplifies that phenomenon by helping startups and small businesses connect with larger companies that have surplus facility space to share.
“We’re so conditioned to think about our infrastructure and office space in a certain way,” Mandell explained. Tenants, he said, might initially resist the idea of sharing their facilities—until they see the benefits. “You can leverage that asset,” he said. “Once they try it, they say, ‘I should have done this a year ago.’ It’s really about getting over that [resistance].”
Moghadam said sharing and coworking arrangements also could transform the logistics sector. In the future, companies increasingly will offer unused warehouse capacity to other businesses via the web, he said. “If you own these valuable assets, some smart guy in Silicon Valley will figure out how to get the [optimum] utilization.”
Eventually, the shift to driverless delivery trucks may alter the logistics industry even more. Moghadam noted that a shift to driverless delivery trucks will make the existing supply chains more cost competitive by alleviating the current severe shortage of truck drivers. He envisions driverless vehicles transporting wares from factories to retailers, supplementing the current practice of using large trucks to transport products to distribution centers, where the goods are transferred to smaller vans for delivery to retailers.
Platshon said one of the biggest impediments to change may come from public sector regulation, which tends to evolve at an even slower pace than real estate. For driverless vehicles to have the maximal impact on land use, for example, cities will need to rewrite their building codes to reduce or eliminate parking requirements so those spaces can be repurposed.