Tired of calling your cell phone provider only to be met with endless hold times and snarky service?
There is a reason why you often get great service and value from a startup but rotten service and poor value from a utility. One is incentivized to get you to buy into their brand in the hopes that you become a repeat customer, while the other is incentivized to exploit their monopoly power to extract as much money from you as they can.
Incentives matter. As every practitioner or student of business knows, a company’s business model is largely driven by where they are on the classic “S curve” of business.
At the bottom left of the curve, a company has little competition and few customers, and as they move up the center of the “S,” they gain more competition, but enough customers to keep everyone pushing on and profitable. By the time companies reach the top right of the “S,” they have all the customers they are ever going to get, but much more competition.
The upside of this process is that as one S curve reaches the top right, the beginnings of the next S curve are bubbling away, and the monopolist is disrupted relatively quickly. Technologies change, innovations occur and, as consumers, we have the option of something better, cheaper and faster.
In real estate, though, this process has never really worked. The oﬃce building has not fundamentally changed much over many decades. Barring notable exceptions, they are all much of the same: grey decor, grey desks, grey computers and black chairs. You had posh versions of dreary oﬃces and ordinary versions of dreary oﬃces. And this worked beautifully for the industry; all the incentives pointed towards doing the same as your competition. The sheer dullness of corporate oﬃces was a feature, not a bug. In short, this setup worked and worked well – at least it did for landlords.
That world has been blown apart by the rise of #SpaceAsAService, as all the incentives the real estate industry has known for decades are about to change.
And this is a great thing.
The two biggest changes are around customers and product. First, the most important feature of #SpaceAsAService is that the landlord’s customer morphs from being the name on the lease and the person who signs the quarterly rent check, to every single person who enters the property.
When occupancy is on-demand, or at least by way of short-term leases, the incentive to keep pleasing the users day-in, day-out suddenly becomes of paramount importance. In a long-lease world, the incentives are to let as much space as you can for as long as you can. Your incentives are to not spend a cent more than what is required to fulfil your lease obligations. In a #SpaceAsAService world, these incentives are turned inside out; you really want to lease less space per person, and in many cases, for as little time as possible.
Completely on-demand space carries a significant price premium, so in an ideal world, if you maintain high occupancy with a high percentage of on-demand usage, your returns would be optimized. Obviously that price premium reflects the higher risk to the landlord, but again the incentive then is to minimize this risk by providing the greatest possible user experience for the specific type of customer segment you are targeting.
And that is why product is the other great change, alongside the changing nature of the customer. Only the best spaces, the ones that really do provide the product or service that a user needs and when they need it, will pull oﬀ this business model. They will need to understand exactly how their buildings are operating (environmentally as much as anything else), how exactly they are being used (which areas are quiet or busy, popular or underused, etc.) and also exactly who their customers are and the appropriate space they need to help them get their jobs done.
In short, in a #SpaceAsAService world, all the incentives for a landlord are aligned with providing fantastic workplaces where the user experience for everyone who enters their properties is so perfectly attuned to their needs that they keep coming back, and are prepared to pay a premium for it.
This is why we are entering into a golden age for office real estate. Everyone is now incentivized to be better than everyone else and the bar continues to be raised.
Antony Slumbers is a former property developer, tech entrepreneur and consultant who advises commercial real estate institutions, developers and professional services companies on the impact of new technologies on the real estate industry.