Landlords’ Perspective on Tech: What’s Available vs. What’s Needed

Landlord’s Dilemma

The COVID crisis triggered value displacement processes across commercial real estate markets globally. The assets acquired 7-10 years ago might have been valued highly, but by the time of exit they might turn into obsolete hardware, which has little value, unless underpinned by a holistic technology solution. Built environment is getting, in some sense, analogous to digital environment, where the space (built or digital) by itself is a free public resource, while profits are generated through diverse services. Both of those spaces share one uniform feature: revenue generation is a function of users’ willingness to use a particular service repeatedly.

The Tech community has been finding it hard to go after such a legacy industry as real estate. The overwhelming majority of proposed solutions have failed to deliver on industry needs, the major reason being as simple as the absence of such needs. The situation has changed, however, and landlords are now forced to go out of their ways in efforts to maintain buildings occupancy at a decent level.

The general consensus across the industry is that landlords above all have to rethink their facility operations strategy. However, choosing the right approach and allocating scarce resources in the most efficient way requires deep understanding of tenants’ needs, or, to be more precise – tenants’ employees’ needs. Essentially, landlords have to change their B2B approach to customer acquisition and retention strategy and follow the patterns applied in the B2C sphere by direct-to-consumer brands. And this is where the opportunity for technology startups is to be found.

Product/Market Fit Challenge

tenants pool of a building is about to become more diverse, increasing operational complexity even further

Today’s proptech landscape is extremely diverse and fragmented. Looking from a landlord’s perspective at this patchwork blanket, it is extremely hard to define where the true value can be extracted. Betting on a wrong horse is costly, but there is yet no clear sign of who has opened proptech Pandora’s box and is about to surpass the crowd.

Since the health crisis broke out, workplace solutions are particularly about hype. They promise not only to help in operating office buildings safely during the pandemic times, but also to serve as a foundation for further asset digitization on its glorious way to becoming a smart building – operationally efficient and environmentally friendly.

Here is a short video by Microsoft, demonstrating the potential of workplace solutions.

The beauty and functionality of this solution is out of question. But there are two underlying conditions of such success. Number one is that the demonstrated solution is custom-made for a specific company. Its design and functionality has been developed around company’s internal operations, corporate culture and human talent strategy. The second crucial point is that the company is occupying its facility exclusively. In other words, this is a single tenant type of property. Therefore, the functionality of this workplace software does not stretch beyond the walls of the building.

In reality, however, the overwhelming majority of commercial properties are leased to multiple tenants. More than that, the trend towards applying mix-use concept to different types of assets is gaining power, which means that tenants pool of a building is about to become more diverse, increasing operational complexity even further.

The quest for the “landlord’s killer app” should start from digging into the end users’ needs, which are certainly going to be diverse and dynamic.

Workplace solutions for multitenant buildings would have to be introduced to the market through landlords, who are going to make their decision based on whether they believe that adopting this solution would create an incremental value for their tenants and would promote their building ahead of competitors.

However, the benefits of such app might be not especially great for occupiers of a multitenant building for a few reasons. Firstly, such solution would not be fine-tuned to the specific needs of companies, as it could be achieved in the case, demonstrated by Microsoft. Secondly, its functionalities are going to be tied to a single building. While being useful from a health and safety standpoint, such app might quickly lose its usefulness once things settle down. With this context in mind, the value of such app for tenants seems to be limited. It does not help them in achieving their prime goals in designing a workplace solution – to cut costs and to increase employees’ productivity. Consequently, the value for the landlords might turn out to be equally perishable.

Alternative Approach to Tech

A landlord should be working in tandem with a tenant on … providing employees with access to a variety of spaces, services, amenities and equipment.

The quest for the “landlord’s killer app” should start from digging into the end users’ needs, which are certainly going to be diverse and dynamic. The end users – the employees – are willing to have access to a range of spaces, which would fit various types of work, be safe, available on demand and easy to reach. The tenant – the company – is seeking to satisfy such employees’ request at the lowest possible cost, but dealing with such complex task is beyond its competence and has to be outsourced. Following this logic, a landlord should be working in tandem with a tenant on satisfying this demand by providing employees with access to a variety of spaces, services, amenities and equipment.

The question remains about how landlords can leverage technology on this journey. Considering that landlords and tenants in many ways share their goals of addressing end users’ needs, a shared solution and shared data sets would be a legitimate suggestion. While the insights to be drawn by tenants and landlords are of different kind, the raw data in many cases has to be extracted from the same sources. It is hard to imagine any sort of silver bullet solution that would be equally comprehensive for both parties. A more viable scenario is that multiple proptech solutions will gradually start integrating with each other, forming a technological ecosystem around built environment and its major players.

While the insights to be drawn by tenants and landlords are of different kind, the raw data in many cases has to be extracted from the same sources.

For such ecosystem to emerge, tenants and landlords have to reset their historically adversarial relations, which implied, that financial benefit for one party would automatically translate into the other party’s loss. Strategically thinking landlords have to go beyond their conventional role of asset owners and start building expertise in running real estate business as a service. Early adopters of an active approach to assets management would not only have a better chance of retaining tenants during the post-COVID economic downturn, but would also find themselves far ahead of competitors in a long run. Armed with the first-hand information on tenants’ sentiments across different business areas, landlords would be able to make better strategic decisions about their portfolios and potential new amenities worth introducing; to identify real estate asset or even consumer businesses to be acquired for augmenting the existing portfolio and creating new synergies. Rent-for-equity deals have happened even before the crisis, and soon might see a surge.

A reiteration of the main takeaways for tech entrepreneurs would serve as a conclusion to this text:

• product/market fit, go-to market strategy and distribution channels are more important in today’s real estate context, than technological component;
• any new solution should be built with the perspective of integration with third parties’ products and allow for continuous alternation along its lifecycle;
• even though decisions on software adoption would be still made within the B2B domain, the end users (employees) are the ones who would be driving those decisions;
• customer retention and organic growth person-to-person promotion is a sign of success, while going back to the top of the funnel and growth through sales to new customers might signal that the product is failing to address key participants’ needs.

Photo by Scott Graham on Unsplash