A year after the pandemic hit and as the distribution of vaccines unrolls, lockdown measures are fortunately receding and the real estate industry has found a completely new environment. Landlords and tenants now face new challenges, working conditions and customer needs.
Real estate transactions expert Braiden Goodchild, Director of PwC, provides an outlook on real estate investment and development trends. He shares his perspective on the future of this industry and the importance of technology and ESG solutions for the new era of real estate. Braiden also has direct experience in tech having co-founded a tech start-up earlier in his career.
The views are expressed by Braiden are his own and do not reflect PwC’s views on the matters discussed below.
Which are the real challenges the commercial real estate industry is facing?
This is a broad question, especially now, since commercial real estate is undergoing systemic change which for some sectors has been accelerated by the pandemic. Retail shopping centers have been shuttered for a very long time in some parts of the world. Some retail shopping centers that were at the lower quality end of the spectrum might not come back, but what will be the reimaginations of those facilities? Can those act as fulfillment centers? Can some of that space be used for educational purposes? And then on the other side of the spectrum, I think there are people desperate to get back into retail shopping centers, to have that experience, have that tactile feel, an experience that you can only replicate by going somewhere or feeling that buzz, even getting different types of cuisine…
Hence, there’s a large dichotomy, not only in retail, but other sectors including office. Clearly, large parts of the office workforce have fundamentally changed their working patterns. Some might stick and some might evolve, and some might not continue because perhaps those weren’t desirable in the first place, but what is probably going to become an axiom is that the office sector is going to become much more service oriented. So what does that mean? Well, you know, the days of signing a 20-year lease to a large bank tenant and basically trading off a credit yield and that as a relative return to fixed income, that will become a different model. It will become a much more service oriented, much more laser-focused on the consumer ―and the consumer of course, being the tenant,― and being much more experiential, community-focused, and aligned to specific brands.
“There are people desperate to get back into shopping centers, to have the touch feel experience again. (…) What is probably going to become an axiom is that the office sector is going to become much more service oriented”
Thus the landlords that will probably succeed will be the ones that embrace this type of change to adapt to new business models, and this implies obviously adopting an entirely new suite of technology to be able to meet these new demands. This is not just technology around workspace meetings and how to expedite certain office services. It is also around ESG. A lot of these tenants are now demanding or strongly encouraging these aspects, plus now there is a lot of legislation coming out particularly in the EU, such as reductions in emissions, increases in societal utility and stronger governance frameworks.
For real estate, that’s a pretty big step change. Real estate is one of the largest contributors to greenhouse gas emissions. Somewhere in the range of 40%, the third largest polluter in the world after China and the US is concrete; a lot of real estate is built from concrete. So we are talking about technologies around how to make your buildings more efficient, provide a better reuse of energy, not letting heat escape, and being able to really market those parts of the building.
Real estate is undergoing a massive era of disruption, be it regarding technology or ESG, whether that’s the focus on service or operations. It is going to be very different and I guess the redeeming quality is that real estate has probably never looked more attractive for large institutional investors, who are looking for a secure income even if WALTs come down there are strong covenant underpins. Moreover, the investment criteria of that institutional capital, particularly from an ESG perspective is going to demand a lot more from the real estate industry. So it’s a phenomenal time to be delivering creative solutions to help industry embrace change.
How is digital transformation helping to adapt to the new commercial real estate business model?
In terms of digital transformation from a landlord perspective, you can look at it in two ways: how to increase your top line and how to take cost out of your expense profile. And there’s a couple of ways to do that. How can you embrace technology to have shorter vacancy periods? How can you leverage technology to illustrate to prospective tenants that your space is ESG compliant and will contribute positively to the occupier?
There is a lot of data involved, and it’s about being able to access it, being able to actually understand what you need, what you have, and ultimately the type of data that you need as a baseline to improve your performance. How can you be more efficient with less resources and obviously technology needs to lead the way, such as smarter buildings, new ways of facility management, different types of operations, being smarter around where resources are being deployed. Maybe in the new office world, entire floors of an office building do not need to be cleaned every day, maybe it is needed only where the “people” heat maps are showing up. And how do you understand where the heat maps are? Well, obviously you need to have the technology in place to track that.
What do large companies in the real estate industry want from start-ups? What are their expectations regarding these solutions?
Before answering what they want, I think it’s also important to answer what is the prevailing view, more broadly. The industry realizes they need to innovate, certain players are embracing change quicker than others and are open to more innovative solutions. This is why we are seeing certain pension funds and also private equity that also have traditional real estate investments look into PropTech. Particularly, what they’re looking for from startups is obviously innovation, someone to help them grow, the triple bottom line, whether that is revenue, whether that is reducing a cost or whether that is increasing some type of social capital.
The maturity of businesses that they look at also ranges quite significantly. Some institutions are reluctant or less able to move forwards because it’s harder to get through their investment committees at an earlier stage, in the case of PropTechs. They typically need to see a level of recurring revenue, some strong customer traction, ideally from institutional players, assuming that the solution isn’t going to be white labeled for that organization, whereas others are willing to incubate the businesses a little more. Unfortunately, the exercise here is finding the right capital for the right opportunity.
“Real estate is undergoing a massive era of disruption, be it regarding technology or ESG, whether that’s the focus on service or operations”
Which do you think are the most disruptive solutions we can find in the market nowadays?
Anything that changes the business models is a paradigm shift in business model, those would be the ones that are most disruptive. Going back to offices, lots of real estate organizations are now developing their own internal real estate as a service proposition, rather than using external parties. Some sectors are offering solutions around that, including PropTech, and the pandemic has also created spin-off opportunities for other sectors of course. We know there will likely be some impacts that extend not just in the near term, but potentially in the midterm. Clustered areas of housing, clustered areas of accommodation will have to rethink how they provide their services, particularly when there’s a high density of people.
What is the impact of the COVID-19 pandemic in terms of investment?
People that were looking at PropTech before the pandemic are certainly continuing to look at PropTech, and probably the numbers will increase each year. PropTech level of investment has increased substantially since 2009, the last global financial crisis, while net new investors are looking at PropTech now. I mean, PwC just held their scale up event and we saw a lot of names that attended that necessarily wouldn’t have attended in the pre-COVID era. It is true that it’s easier to attend given that you only need to click a button and you’re in the conference versus being somewhere physical. But there is also some realization that there is a confluence of events occurring in real estate that requires different ways of thinking. And I think certainly people are more open to PropTech.
“There is a confluence of events occurring in real estate that requires different ways of thinking. And I think certainly people are more open to PropTech”
I mean, PropTech has been around for a very long time in various software solutions. A lot of that software was ahead of its time. Now, at least we’re starting to see the right type of capital being able to support startups and scale-ups, and hopefully that will obviously produce great outcomes for the industry and, likewise to those PropTech providers.
How can commercial real estate companies identify the cost reduction levels in order to improve the liquidity position?
That’s an excellent question and I spend a lot of time speaking to clients about it. It applies for investors that have large portfolios that are global, but also applies to smaller funds. We’re seeing difficulty in getting that baseline data created, to see what they’re currently doing and where they need to go, and then introducing the very solutions that can get them there. But the first point is always mapping out what their objectives are, and then peeling that back into the strategies that will get them there. And then the next layer is finding the technologies that will assist in that purpose.
How can they assess and implement controls to mitigate risks created by the new working conditions?
Well, I think it needs to come from a top-down approach, and that needs to be completely embraced by leadership. It’s going to be difficult to lead from the middle on issues such as these. And I think a lot of forward-looking organizations are instituting top-down controls and tying those objectives —whether it’s ESG, whether it’s cost,— to compensation. Ultimately, a great motivator to alter behavior is to tie it to overall remuneration. So I think that can be a tool and it can be a pretty powerful way to usher in a new kind of era.
Do you think that PropTech is a new FinTech?
Unfortunately, I don’t know enough about FinTech to effectively juxtapose it to PropTech. FinTech seems very broad to me, so maybe PropTech could even be a sub-stream of it, so it could be a bit of an amorphous boundary. Certainly, if we think about what FinTech has been —which is a sector of technology that has brought in a tremendous amount of growth capital,— do I think PropTech is well positioned to have a similar run? Yes, I do. Why is that? Well, it’s being driven by regulation, it is being driven by structural change in real estate and, ultimately it is being driven by competitive forces, that with the advent of new technologies weren’t as omnipresent as they are now.
“the first point is always mapping out what their objectives are and then peeling that back into the strategies that will get them there. And then the next layer is finding the technologies that will assist in that purpose”
