Speaking at an event in New York City, Dror Poleg, a former real estate and technology executive and co-chair of ULI New York’s Technology and Innovation Council, said shifts in real estate often result from overlooked factors that alter its value, beginning in the faraway emergence of landlord/tenant relations out of feudalism and stretching to the innovations of today.
Poleg, author of the new book Rethinking Real Estate: A Roadmap to Technology’s Impact on the World’s Largest Asset Class, was interviewed in a question-and-answer format in Manhattan with Chris Kelly, cofounder and vice chairman of Convene, a provider of flexible office space.
“By looking at history, we can identify outside technologies that nobody at the time was linking to real estate but in the end was the thing that fundamentally changed the entire game,” Poleg said. “Most of the inventions that really impacted real estate were not really estate related.”
As a consultant, Poleg advises executives across the real estate industry on emerging business models and consumer behaviors. His clients include companies such as AvalonBay Communities, British Land, Liberty Mutual, Dubai Holding, and Cushman & Wakefield, as well as industry organizations such as the National Multifamily Housing Council, NAIOP, EPRA, and INREV.
The car was one obvious development that fundamentally changed real estate, but more prosaic devices did as well, such as the cash register, said Poeg. “Before cash registers were invented, most businesses were run by family members, so most retail stores had to have someone who was a relative of the owner himself. Once cash registers arrived, they suddenly enabled people to open chain stores and have multiple branches and to build retail empires. When you look at a cash register, that is not an implication you think about too much.”
Poleg’s emphasis is on technological changes that have affected the value and consequence of a given building, location, or asset, and that will continue to do so. The cash register was one stepping stone toward the traditional department store, said Poleg. “If you look at the department stores of the late 19th century, they did everything that retailers today are supposed to be doing in order to stay relevant. They were a cultural center; they were very experiential; they offered free delivery, free returns.”
Department stores were also innovative and progressive in in other ways, he said. In London, they were the first institution to introduce bathrooms for women. In Tokyo, they were the first to allow patrons to walk in without taking off their shoes. “Department stores and retail centers used to be not just a place to go and spend money but a place to go and experience the most exciting new thing—something between a museum and a community center,” said Poleg. “And all of that disappeared in the 20th century, which was defined by mass media and mass manufacturing and things that looked the same and are made in the same way.”
Some things come and go; others change as the world changes around them. Poleg’s focus is “to show how structural things make certain outcomes inevitable.”
One example is the institution of hotels. Their location was once elementary: next to a train station or in a port area. “If I owned the building in front of the train station, I had the monopoly and my life was good.” This changed with the rise of the automobile. “Once people started driving around, they could suddenly stop wherever they wanted, which meant that a hotel had to actually convince them to stop. This meant that the brand name on the roadside sign had to be recognizable and trustworthy. Thanks to cars, hotel brands became much more important than they were before.”
Change did not stop there. Branding, which once seemed incidental, rapidly became paramount. Even on the finance side, the value of the brand shifted from a “nice to have” to a “can’t live without,” Poleg said. “Lenders started telling owners, ‘It’s very nice that you own this building, but unless you bring in a brand to operate it, we’re actually not going to finance your project.’”
These chain effects are still underway as transportation continues to evolve, he said. For instance, Uber and Lyft do not alter transportation itself but do alter the way it is used. “Suddenly four times more people take taxis or ride by private cars, and they start moving around the city on patterns that are very different from those of the subway line,” he said.
“Say you bought a building at Grand Central Station,” Poleg said. “You thought it was the best building in the city, but suddenly people start moving around in other ways. This doesn’t destroy the value of all real estate, but it suddenly moves a little bit of the value to another building that is not on the corner of a main avenue; maybe it’s inside a street,” he said. “It’s something that we see: operators such as Convene and WeWork can get more revenue per square foot in locations that are not bad locations, but they would not traditionally be considered the best locations in the city or the most visible and most accessible.”
Kelly echoed this point directly in response. “When we [Convene] started in 2009, any type of shared service building was always on a vanity address,” he said. “That was 100 percent of the time—no exceptions to that rule—and then Convene blew up that assumption.” He noted, referencing the venue of the event, “Here we are in a midblock location. The space you’re in used to be a cafeteria.”
These changes continue, Poleg said. “Now with all these scooters, e-bikes, all sorts of other things that are about to come online, the patterns of movement for people are about to become even more chaotic,” he said. “For a real estate owner to estimate the value of a location and how people move around is becoming much more complicated.”
This trend has extended to the residential world as addresses never thought desirable have become so, in part because of the increased convenience of personal transport and delivery technology. “A lot of things that you had to be in the center of Manhattan to access, today you can access anywhere in America or in the world or definitely in Brooklyn,” Poleg noted. The nature of this demand is dual: a prime address will not generally cause persons to forgo contemporary amenities; these are desired even on Park Avenue, he said.
This sort of technology-induced flexibility has been manifest in commercial leasing: tenants are willing to rent space in unconventional locations, but they often are not willing to do so under terms that characterized previous prime spaces.
“In the past, the office market was built around 16-year leases or 10-year leases with lenders that financed those buildings that liked those long leases, signed by tenants that were very, very big for a long time,” said Poleg. “Today any company in the world cannot plan more than two years ahead. And even if it knows how many employees it will have, those employees no longer just do the same thing every day in the same place.”
Poleg noted that the nature of much contemporary work is contingent upon and often shifts dramatically on every project. He pointed to a familiar example: the credits at the end of any movie, which include hundreds of people. Most of them do not work for the same company, and after that film, their projects will likely diverge completely. Nor were more than a handful of them doing the same thing. “They come from maybe 200 different disciplines,” he noted.
“And this is how human work is created today, which means that the physical space has to accommodate this diversity of needs; it has to accommodate things coming together and then disappearing again; and it doesn’t really work with the traditional model. So today when we look at things that emerged, such as Convene or WeWork, and we say, ‘Oh, it’s just a fad. Who needs this flexibility? There’s no way to finance it—it doesn’t make sense’—but there’s actually an inevitable undercurrent that means that these things will not go away. It doesn’t mean that they’re currently funded in the right way or that there’s not going to be a lot of pain until people figure out the right model, but in the book I try to go through a lot of these undercurrents and show how they cause things to exist that are in a way inevitable.”
Poleg counseled against reading too much into WeWork’s difficulties, pointing to another infamous collapsed innovator.
“Napster was the poster child of the previous tech boom,” he noted. “It was actually much worse than WeWork. It didn’t have a business model. It didn’t have revenue. It didn’t try an IPO because it failed so badly. It wasn’t even legal!” But Napster did provide a vision to consumers of how to access music by methods outside of standard physical album sales [and] that revolutionized the music industry. People kept listening to music, but the labels that had the monopoly over the content saw their revenue collapse and became dependent on new operators and distributors such as Apple and Spotify.
“I think real estate is looking at a similar fate,” he said.
