Rethinking Real Estate: A Roadmap to Technology’s Impact on the World’s Largest Asset Class [1st ed. 2020] 978-3-030-13445-7, 978-3-030-13446-4

Table of contents :
Front Matter ....Pages i-xxi
Introduction: Real Estate Value in a Changing World (Dror Poleg)....Pages 1-8
Front Matter ....Pages 9-9
Retail Properties in Context (Dror Poleg)....Pages 11-17
How to Think About the Future of Physical Retail (Dror Poleg)....Pages 19-24
Forces Reshaping Physical Retail (Dror Poleg)....Pages 25-40
The Challenges to Retail Landlord Innovation (Dror Poleg)....Pages 41-47
Landlords of the Future (Dror Poleg)....Pages 49-52
Rethinking Physical Retail Properties (Dror Poleg)....Pages 53-55
Front Matter ....Pages 57-57
Offices in Context (Dror Poleg)....Pages 59-68
Forces Reshaping Supply of Office Space (Dror Poleg)....Pages 69-84
Forces Reshaping Demand for Office Space (Dror Poleg)....Pages 85-96
Office Landlords in the Twenty-First Century (Dror Poleg)....Pages 97-104
Rethinking Office Buildings (Dror Poleg)....Pages 105-106
Front Matter ....Pages 107-107
Housing and Lodging in Context (Dror Poleg)....Pages 109-123
Forces Reshaping Lodging (Dror Poleg)....Pages 125-145
Forces Reshaping Housing (Dror Poleg)....Pages 147-161
Rethinking Housing and Lodging (Dror Poleg)....Pages 163-165
Front Matter ....Pages 167-167
Logistics and Industrial in Context (Dror Poleg)....Pages 169-172
Forces Affecting Supply and Demand for Industrial Real Estate (Dror Poleg)....Pages 173-184
Industrial Landlords in the Twenty-First Century (Dror Poleg)....Pages 185-190
The Liberation of Things, People, and Cities (Dror Poleg)....Pages 191-197
Rethinking Logistics and Industrial Properties (Dror Poleg)....Pages 199-202
Conclusion: Property’s Unreal Future (Dror Poleg)....Pages 203-217
Back Matter ....Pages 219-306

Citation preview

Rethinking Real Estate A Roadmap to Technology’s Impact on the World’s Largest Asset Class Dror Poleg

Rethinking Real Estate “Dror’s unique ability to take the complexity of a rapidly evolving industry and simplify it for others is remarkable. This book is a must-read for any real estate professional, investment professional, or entrepreneur looking to educate themselves on the macro trends disrupting the largest asset class in the world.” —Ryan Simonetti, CEO & Co-founder, Convene “A thought-provoking exploration of technology’s impact on how commercial real estate is used, operated, and valued.” —Guy Vardi, Chief Innovation Officer, Silverstein Properties “A definitive overview on how technology—across industries—is transforming real estate at a fundamental level. For anyone that uses, operates, or invests in real estate— which is everyone—this is a book that provides a critical layer of context on how our physical world will change over the coming years. Read this book!” —Ed Walters, General Partner, Tamarisc Ventures “Rethinking Real Estate is the rare book that is as entertaining as it is informative. Dror brilliantly ties together history, strategy, and his own experience working with some of the real estate industry’s best companies and smartest minds to paint a picture of where the world’s largest asset class stands today, and where it is headed in the future. I work on building the future of real estate every day, and still I learned something new on every page!” —Packy McCormick, VP, Experience, Breather “A must-read for owners of real estate interested in creating the best possible tenant experience and maximizing returns. Prepare to gain a deeper understanding of your tenant’s requirements and view the value of your real estate in an entirely new way.” —Robert S. Friedman, President, Harbor Group Management Company “The book is a tour de force, exploring the mechanics of disruption. Dror provides historical context supported by a factual analysis on the decisions taken by real estate companies to survive in the new economy. It is a book on innovation and how embracing change with technology will play a critical role in the future of all business!” —Christopher Bledsoe, Co-founder & CEO, Ollie “In real estate, much of what has worked in the past will not work in the future. Dror’s book gives a clear view of how real estate is changing and what we can all do to prepare for it.” —Clint Myers, Partner, Rise of the Rest at Revolution Ventures

“Dror Poleg has once again shown that his innate grasp of complex concepts within our dynamic industry is second to none. No other author could weave the past, present, and future of different asset classes of real estate together in a more compelling manner. Poleg Dror manages to draw important parallels to other industries, imploring us to not replicate the mistakes of our predecessors as the pace of innovation within PropTech continues to accelerate unabated. Rethinking Real Estate serves as a perfect sequel to our PropTech 101 exploration; for those of you who want to delve intellectually deeper into the ecosystem, there is no wiser docent than Dror.” —Zach Aarons, Co-founder and Partner, MetaProp Ventures; Co-author of PropTech 101 “A must-read for anyone interested in learning about the evolving relationship between the digital and physical worlds.” —Matthew Boras, Investor, RXR Properties “A lot of real estate and tech discussions focus too narrowly on activities like building, operating, or marketing real estate assets. Dror doesn’t make this mistake. While he presents real estate from the perspective of existing, familiar real estate sectors, he makes sure to explain the impact of tech on activities that shape demand for real estate—everything from efficient customer acquisition and robotics to emerging capital stacks. Dror offers a framework to understand how quickly technology can be used to challenge existing assumptions. His framework proves useful to begin to think about what might, just recently, seemed like science fiction as autonomous trucks and micromobility challenge core assumptions about the very value of location.” —Shaun Abrahamson, Managing Partner, Urban US Ventures “Over the past thirty years, I have watched the real estate world move from a monolithic institution that simply ‘never’ changes to an industry in the midst of major disruption. Dror was one of the first to understand the dramatic changes affecting the real estate industry. I previously shared his ideas with tens of thousands of subscribers to my Real Estate Philosopher newsletter. Dror has now taken his brainpower, creativity, and knowledge of the real estate industry and condensed his insights into a single book. Sometimes you ‘should’ read a book and other times you ‘must’ read a book. If you are in the real estate industry, at any level, this is a must read.” —Bruce Stachenfeld, Chairman, Duval & Stachenfeld LLP “If you’re even remotely interested in commercial real estate, this book will force you to rethink this sector from a whole new perspective. The paradigm shift happening across all asset types is here masterfully broken apart by Dror who brings a unique and global perspective to proptech. It’s a very timely and insightful publication; Dror asks a lot of open-ended questions about innovation, disruption and future of living and working in general.” —Marcin Pokorski, Vice President of Strategic Marketing, Eastdil Secured

“A fantastically detailed overview of the many ways technology is—and will—impact real estate in the years to come. A must read for anyone in the industry.” —Mike DelPrete, University of Colorado Boulder, USA “A must read for landlords, investors, or entrepreneurs who want to make money with real estate assets.” —Guy Blachman, Founder & CEO, Carson Living “It’s a confusing time to be a real estate professional. Nearly every segment of the industry is being upended by monumental social, economic, and technological changes. Rethinking Real Estate provides a roadmap to this new, ever-changing world. Dror is a clear writer and his book provides numerous case studies that illustrate how abstract concepts play out in real-world conditions. I give the book to my clients and recommend it to anyone seeking to understand how these changes will impact the industry in the near and far term.” —David Friedlander, Innovation Consultant; Host, Change Order Podcast

Dror Poleg

Rethinking Real Estate A Roadmap to Technology’s Impact on the World’s Largest Asset Class

Dror Poleg Rethinking Real Estate Brooklyn, NY, USA

ISBN 978-3-030-13445-7    ISBN 978-3-030-13446-4 (eBook) https://doi.org/10.1007/978-3-030-13446-4 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

To my family, old and new.

Preface

Technology is undermining the foundations of real estate asset value. It is changing the way humans use retail, office, residential, lodging, and industrial space. It is redefining the meaning of location, visibility, and accessibility. It is democratizing access to capital, relationships, and information. It is eroding the power of regulation and the validity of zoning laws. It is even questioning the very idea that land is a scarce and finite resource. No asset is safe. Office landlords in central London, retailers on Fifth Avenue, hotel operators next to Disneyland, and logistics facilities outside Shanghai are being challenged by new types of competitors and consumer behaviors. Value is shifting away from the assets themselves, toward those who can understand the needs of specific end users and deliver comprehensive, on-­demand solutions. The structure of the industry itself is changing. Venture capital funds are investing in property managers, real estate developers are investing in start-­ ups, coworking operators are buying buildings, landlords are becoming coworking operators, listings sites are partnering with property developers, hotel operators are acquiring home-sharing sites, Big Data companies are employing brokers, retail investors are funding large commercial projects, institutional investors are buying single-family homes, furniture designers are launching their own hotels, start-ups are hiring architects, restaurants are being used as offices, and many apartment buildings are de facto hotels. Meanwhile, customers are becoming increasingly sophisticated, demanding, and fickle. Competition is no longer a zero-sum game where assets have a fixed value and everyone fights for a square on the Monopoly board. Winning requires constant experimentation, a laser focus on the needs of specific customers, ix

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familiarity with new tools and management methods, and an understanding of strategic concepts such as “disruption”, “network effects”, “value activities”, “transaction costs”, and “the long tail”. Technology enables companies from different industries and of different sizes to compete directly with one another. The battlefront is expanding to new sources of value, including data, partnerships, value-added services, branded experiences, short-term access, community, and more. This introduces a variety of new ways to make money, and to lose it as well. The good news is that the biggest new companies that are rewriting the rules of real estate—Airbnb, WeWork, Common, Opendoor, Invitation Homes, and even Uber—are not classical tech companies. Their initial growth was not based on developing a new technology or solving a complex challenge of engineering. Instead, they identified a gap in the traditional market and stepped in to fill it with a new process or a new experience. This means that they did not do anything that a traditional landlord could not have done, at least in theory. The flip side of this is that there is no single technology you can buy in order to future-proof your real estate business; there is no silver bullet. To succeed in the new world, you’ll have to think differently about your customers, competitors, the tools available to you, and the structure of your organization. You’ll have to understand the strategic dynamics that govern tech-powered industries and understand the historical and social context of technological change. This book is here to help.

Who This Book Is for This book is intended for anyone interested in the evolution of real estate as an industry, as a financial asset class, and as a consumer product. It explores the impact of technology on all asset types—from retail and office buildings, through residential and lodging projects, to industrial facilities and even agricultural land. Its insights are relevant for real estate investors, lenders, architects, developers, owners, operators, regulators, brokers, lawyers, accountants, and those who work with or use real estate. It can also guide the efforts of real estate technology entrepreneurs, venture capital investors, and students who are making their first steps into the industry. The goal of this book is threefold: (1) to bring the reader up to speed on the possible impact of technology on the utility and value of different real estate assets and the industry as a whole; (2) to provide the reader with a solid understanding of some of the business models, tools, and strategic dynamics

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that will govern the industry over the next decades; and (3) to highlight practical strategies the reader can use to identify risks, take advantage of emerging opportunities, evaluate new competitors, and transform her or his organization, project, venture, or career. The book is based on three years of research and over 1000 conversations, interviews, and consulting engagements with executives from the world’s largest real estate companies, venture capital funds, and technology firms. Some of the ideas and analyses herein have been publicly presented and privately discussed with executives from companies such as the Blackstone Group, Starwood Capital, British Land Company, Nuveen, AvalonBay Communities, Brookfield Asset Management, Dubai Holding, MetaProp, Land Securities Group, Westfield, RXR, Jones Lang LaSalle, Ivanhoe Cambridge, Tishman Speyer Properties, J.P. Morgan Asset Management, and CapitaLand. They are now summarized and made available to all. Any errors or opinions remain exclusively the author’s.

What This Book Is Not This book is not a “get rich quick” guide or a magic crystal ball. It is neither an exhaustive list of every real estate start-up or innovation, nor is it a recommendation to adopt a specific solution or investment thesis. Instead, this book aims to equip the reader with insights and a frame of reference that would allow her or him to make decisions and evaluate new solutions and investment opportunities with confidence. Importantly, the book introduces a way of thinking about real estate that encourages and enables readers to continue to grow their own expertise and navigate the exciting period ahead.

How to Read This Book Each core section is focused on specific real estate uses and asset types. The chapters within each section include the historical context for the category in question; an overview of its importance to investors; an analysis of how technology impacts certain aspects of supply, demand, design, operations, and value; and some thoughts on the challenges and opportunities for landlords, investors, and entrepreneurs. Each section is self-contained and can be read on its own. However, each section contains insights, strategic concepts, and examples that are relevant to

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other property types and provide the foundation for the concluding chapter at the end of this book. The retail section includes a review of structural barriers to innovation that apply to all types of real estate companies. The office and housing sections include insights about disruption, value chains, aggregation, and operating models that every practitioner should thoroughly understand. And the industrial and logistics section looks at the evolution of zoning and the future of autonomous mobility, topics that impact every type of real estate asset. In short, we recommend reading the whole book! Brooklyn, NY

Dror Poleg

Acknowledgments

I thank the Almighty for the health, the strength, and the privilege to dedicate my time to things that fascinate me. This book is the outcome of two decades of living, studying, and working in technology and real estate ventures across four continents. It is a business book, but it is also very personal. Real estate is an excuse to study how people live and behave. All those empty buildings have enough space within them to fit a broad range of interests, including history, anthropology, economics, politics, business strategy, and design. Real estate assets are also perfect objects for my obsession with finding the cracks in even the most stable structures. My parents taught me that nothing is earned without hard work. I did my best. And yet, this book (and much else besides) would not have been possible without the incredible sacrifices of my grandparents and parents who have lost so much and managed, somehow, to create even more. Mom and Dad, I could write a whole book about you, and perhaps one day I will. For now, let me just say: Thank you, I appreciate everything. My sister and brother, Dana and Tamir, thank you for always being there, for everything you’ve taught me, and for inspiring your little brother to always want to know all the answers. I also owe a special thanks to my uncle Michael, who sparked my interest in history and books at large. While my family taught me how to survive and stay curious, someone had to teach me to settle down and finish what I started. I thank Tamara, my wife and anchor, for her support, patience, and proofreading. During this long year, full of joys and sorrows, your love inspired and enabled me to accomplish something I have never accomplished before. Thank you! I’m forever indebted to Wanching Leong, who edited this book, for her ongoing effort, weekly check-ins, constant stream of insights and suggestions, xiii

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and faith in my ability to complete this project. That last sentence is so cumbersome because it’s the only one she didn’t get to review. Thank you, Wanching. I could not have done this without you! I also wish to thank Marcus Ballenger and Jacqueline Young of Palgrave Macmillan for their infinite patience and support for this project, and Balša Delibašić for bringing the bibliography and formatting up to par. So many other people helped and inspired me along the way. As this is a book about land, it might be easiest to thank them in geographical order. On the Australian front, I would like to thank Michael Danby, who invited a young student from the Middle East to work in Parliament and get an early glimpse of how the world works, and Dr. Esther Milne, who gave me the confidence to share my views and write in English. In China, I thank Alon Shlank and Erez Applerot for inviting me to join an incredible adventure and introducing me to the world of institutional real estate. I also thank my colleagues Eli Ginossar, Akiva Pearlman, Audrey Chew, Samuel Hibel, Joseph Chieng, Yuki Cai, and Matan Elipaz for sharing their knowledge about construction, architecture, finance, leasing, and sales. I also thank David Galil for arguing with me about hundreds of books and articles, for being my most avid reader, and for never letting me sell myself short. In London, I thank Jack Sibley for his thoughtful comments on so many parts of this book, Antony Slumbers for being my “intellectual doppelgänger” across the pond, and Juliette Morgan for showing an early interest in my work and giving me a microphone and a projector. I thank Charlie Green for his insights, for allowing me to test some of the ideas in this book on a live British audience, and for his (usually) prompt replies to my various questions. I am also thankful to Nicholas Lyons for introducing me to London’s private equity universe and to David Orman for his unending enthusiasm and our many discussions over the years. In New York, I would like to thank Bruce Stachenfeld, Elsa Ben Shimon, Guy Blachman, Ben Rollert, and Jerry Kestenbaum for their friendship, support, and encouragement to focus on the topic of this book. In particular, I thank Packy McCormick for providing constant encouragement, prompt feedback, and valuable suggestions. I thank David Friedlander for being a partner-in-curiosity and for bringing together many others who inspired and encouraged me to keep writing, including Harley Courts, Dr. Jeff Wilson, Adam Chaloeicheep, and Roger Krulak. Thanks boys! On the Israeli front, I thank the friends who helped me stay focused on this project: Yoni Segev, Roy Travin, Nir Duek, Iftach Yaari, Lior Berrebi, Omri Peled, Guy Rahamim, and Alexandra Segev—thank you! I also owe a special

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thanks to Tal Melamed, for giving me the confidence to put my ideas to paper … and then to let them go. In addition, I would like to thank many other friends, colleagues, and clients who contributed their insights to this book or provided direct and indirect support: Aaron Block, Adi Biran, Aharon Friedman, Anja Jamrozik, Anthony M. Townsend, Blake Nucci, Brad Hargreaves, Chris Bledsoe, Chris Brooke, Duke Long, Ed Walters, Eliad Benari, Eliot Baum, Emanuel Luria, Ernest Muller, Franco Faraudo, Gil Shefler, Guy Vardi, Helen Lewer, James Hawkey, Jamie Cameron, Jonathan Sattler, Jonathan Wasserstrum, Karen Hollinger, Laura Kozelouzek, Leigh Speakman, Lenny Rozental, Lisa Picard, Matt Boras, Michael Beckerman, Michael Kupin, Mike DelPrete, Mike Miklavich, Nikki Greenberg, Ofer Yardeni, Or Bokobza, Philippe Weissberg, Rabbi Levi Shmotkin, Ron Mosseri, Ryan Simonetti, Salomon Tenenbaum, Sam Silverman, Shmuel Salviati, Yitzhak Samun, Zac Aghion, Zach Aarons, Zachary J. Valenta, and Zachary Shull. Each one of you made a real and tangible difference. Thank you! Finally, I thank my father-in-law, Fred Sager, a beloved friend and supporter who really wanted to read this book, but did not make it.

Contents

1 Introduction: Real Estate Value in a Changing World  1 Section I  Retail   9 2 Retail Properties in Context 11 3 How to Think About the Future of Physical Retail 19 4 Forces Reshaping Physical Retail 25 5 The Challenges to Retail Landlord Innovation 41 6 Landlords of the Future 49 7 Rethinking Physical Retail Properties 53 Section II  Office  57 8 Offices in Context 59 9 Forces Reshaping Supply of Office Space 69 10 Forces Reshaping Demand for Office Space 85

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11 Office Landlords in the Twenty-First Century 97 12 Rethinking Office Buildings105 Section III  Housing and Lodging 107 13 Housing and Lodging in Context109 14 Forces Reshaping Lodging125 15 Forces Reshaping Housing147 16 Rethinking Housing and Lodging163 Section IV  Logistics and Industrial 167 17 Logistics and Industrial in Context

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18 Forces Affecting Supply and Demand for Industrial Real Estate 173 19 Industrial Landlords in the Twenty-First Century

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20 The Liberation of Things, People, and Cities

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21 Rethinking Logistics and Industrial Properties

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22 Conclusion: Property’s Unreal Future203 Notes219 Bibliography259 Index291

List of Figures

Fig. 13.1 Value chain integration of traditional hotels, brands, and lodging REITs Fig. 14.1 Supply availability for hotel owners, hotel brands, OTAs, and home-sharing companies Fig. 14.2 Michael E. Porter’s five generic categories of value chain activities Fig. 14.3 Value chain integration: IBM versus Dell (simplified) Fig. 14.4 Key value creation activities for Marriott, Airbnb, and Sonder Fig. 14.5 The trajectory of disruptive innovation in the lodging sector Fig. 15.1 The trajectory of disruptive innovation in the multifamily sector

119 131 134 136 138 144 153

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List of Tables

Table 9.1 Table 9.2 Table 9.3 Table 9.4 Table 10.1 Table 11.1 Table 13.1 Table 13.2 Table 14.1 Table 15.1 Table 15.2 Table 22.1

Landlords’ “About Us” The gap between office supply and demand Customer benefit categories The stages of disruptive innovation Trends reshaping demand for office space The evolution of WeWork’s business model Examples of hotel franchisors, property owners, and managers Transaction costs associated with lodging, office, industrial, and multifamily properties The five stages of real estate grief (hotel edition) Alta unit mix Venn’s capital stack Michael E. Porter’s attributes of good strategy

69 72 73 76 86 103 118 121 141 148 155 208

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1 Introduction: Real Estate Value in a Changing World

“I had never seen such ugly cows in all the land of Egypt,” said the Pharaoh. “The lean, ugly cows ate up the seven fat cows that came up first. But even after they ate them … they looked just as ugly as before. Then I woke up.” Joseph listened intently and interpreted the dream as follows: the kingdom’s farmland was about to experience seven years of unprecedented yields, followed by seven years of drought. He told the Pharaoh that “the abundance in the land will not be remembered, because the famine that follows it will be so severe”. In order to prepare, Joseph advised the Pharaoh to “collect all the food of these good years that are coming … to be kept in the cities for food”.i As the biblical story shows, humanity has been preoccupied with real estate yields since time immemorial. Even in ancient Egypt 3500 years ago, young upstarts were trying to guide powerful rulers to adopt more sustainable policies, reinvest their proceeds in new systems, and think strategically. And even the Pharaoh, owner of all the land in Egypt, was subject to disruption by powers that he could not understand or control. Farmland is the quintessential real estate asset. It is valued based on its inherent characteristics and bears relatively stable and predictable returns. Unlike other real estate assets, it does not require expensive maintenance or complex ventilation or electric systems, and its value cannot be depreciated— at least according to the IRS.ii Farmland is also a scarce commodity and its ownership involves little-to-no interaction with customers. Many of the words we now use to describe all real estate assets—landlord, yield, tenant, improvements—originate in the agricultural world. Many of the attitudes and assumptions we have toward real estate are equally ancient.

© The Author(s) 2020 D. Poleg, Rethinking Real Estate, https://doi.org/10.1007/978-3-030-13446-4_1

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An Asset Like No Other What makes something valuable? The answer may be clear to any reasonable person, but economists have spent hundreds of years arguing about it. Adam Smith and Karl Marx didn’t agree on much, but they both thought that the value of a thing was a function of the amount of labor required to produce it. But how much labor goes into producing land? Figuring out the value of property, including the improvements erected on it, is a challenge. Marx struggled with the idea that land “is essential to the production” of everything but “is not itself produced”.iii If land is not “produced”, then its value cannot be equal to the value of labor invested in its production. So why should anyone pay for it? Smith saw rent as a consequence of landlords’ power and not a result of any unique effort, stating that “the price paid for the use of the land, is naturally a monopoly price. It is not at all proportioned to what the landlord may have laid out upon the improvement of the land, or to what he can afford to take; but to what the farmer can afford to give.”iv Smith thought that being a landlord was an easy enough job. As he wrote in The Wealth of Nations, landlords’ “revenue costs them neither labour nor care, but comes to them, as it were, of its own accord, and independent of any plan or project”. This, in turn, led landlords to “indolence, which is the natural effect of the ease and security of their situation”. In 1844, Karl Marx quoted Smith’s view of landlords in his Economic and Philosophical Manuscripts. A century after Smith, and not long after Marx’s death, economics went through a revolution that turned the idea of value on its head. A new group of thinkers arrived at the conclusion that things do not have a fixed, objective value based on the cost of labor that goes into them. Instead, the value of a thing is subjective—and it is the result of the utility it provides to an individual buyer. And because each buyer is different, things are worth more to some people than they are to others. This means that simply owning something is not enough. To maximize the value of an asset, you have to market it to those who are willing to pay more for it than anyone else. This so-called revolutionary idea makes intuitive sense to any businessperson. Yet, in large part, many still assume that it does not apply to real estate assets, at least not completely. As Professor Andrew Baum of Oxford University’s Saïd Business School pointed out, unlike other businesses, real assets are valuable even when they do not have customers or generate any income. Landlords are called landlords for a reason: they own land, and land is inherently scarce and is thus inher-

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ently valuable.v The assumption of inherent value still drives many real estate owners and operators to the “indolence” highlighted by Adam Smith and Karl Marx.

Real Estate Value 101 What determines the value of a real estate asset? Valuation professionals commonly refer to four characteristics: 1. Demand: The quantity of people or entities who have the desire and ability to pay for the property; 2. Utility: The ability of the property to meet the needs of prospective owners (and their tenants). The broader an asset’s ability to serve different needs, the higher its utility; 3. Scarcity: The available substitutes for the property compared to the intensity of demand for it; and 4. Transferability: The freedom to buy, lease, encumber, or sell the asset at will. Based on the above, the ideal asset is one that meets the needs of the largest group of people, has limited substitutes, can be transacted freely by its owner, and exists within a reasonably liquid market. You may have noticed that there is a tension between “utility” and “scarcity”: if all landlords try to meet the needs of the largest possible group of people, the result will be an abundance of very similar assets—the opposite of scarcity. How did real estate owners deal with this tension until now? The short answer is that they mostly didn’t. Real estate assets are special. They are built on land, which makes them inherently scarce and immovable. Land scarcity protects landlords from “substitutes” and frees them to develop assets that appeal to a broad range of end users. In other words, natural constraints allowed and encouraged them develop average assets for average tenants. But scarcity is a double-edged sword. It makes it difficult for competitors to “move in” on your market (buildings can’t move). And it also makes it impossible for your own asset to move anywhere else. Other scarce resources such as oil and precious metals can be distributed to ideal customers who would pay the highest price. In contrast, real property is both a form of supply and a form of distribution; its ideal customer is whoever happens to need access to that location at that time. Once a real estate company makes a bet on a location, it is locked in.

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Lock-in provides an extra incentive for landlords to develop assets that can suit the needs of different tenants in succession. If a building can’t move, it needs to be able to adapt. For example, a typical office space in Midtown Manhattan served a law firm during one decade, a media company during the next, and a financial services firm in the decade after that. In fact, many office buildings probably serve all of these tenants at the same time. The common areas, floor plates, and technical specifications in such buildings are designed to adapt to all sorts of occupiers. It’s no coincidence that office “elevator music” is synonymous with “boring”, “vapid”, and “cheesy”vi; the lack of character is a feature, not a bug. This book argues that (1) technological innovations are undermining the natural scarcity of real estate assets; (2) being average is no longer a viable strategy; and (3) developing adaptable assets means something very different in the twenty-first century. We address these points in detail in the following chapters. Later in this book, we explore how real estate assets (as well as owners and operators) can evolve with the changing needs of tenants. But first, it’s important to understand real estate’s role in serving a very different group of stakeholders.

Real Estate’s Real Customers Buildings are not just physical assets; they are also financial assets. This is particularly true for commercial real estate projects that are owned by large investors. It is also true for small houses that are owned by individuals but have mortgages that are lumped together into various financial products. Real estate is not just a collection of assets; real estate is an asset class. Institutional investors such as pension funds, insurance companies, and endowments allocate the majority of their capital to traditional assets such as stocks, bonds, and cash. The remainder is invested in alternative assets, including real estate, venture capital, hedge funds, private equity, private debt, and commodities. “Alternative” means that these assets have unique characteristics and their financial performance has low (or even inverse) correlation with other assets. Alternatives are expected to provide institutional investors with a cushion in times of economic crisis, a boost in times of moderate growth, value preservation in times of inflation, predictable yields to smooth out cyclical investments, or a general avenue to experiment.

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According to the Willis Towers Watson’s Global Alternatives Survey, real estate accounted for around $1.4 trillion of the holdings of the largest 100 alternative investment managers in 2017.1 This represents the largest share (35%) of all alternative investments.vii In addition, institutional investors are exposed to real estate through other investments in operational businesses (consumer goods, manufacturing, healthcare, etc.) and in real estate-backed corporate debt. The growing popularity of commercial real estate among institutional investors led some to argue that real estate is no longer an “alternative”, but an integral part of every large portfolio, alongside stocks, bonds, and cash.viii Traditionally, institutional investors allocated most of their real estate investments to core assets with “cash flows [that] are forecastable for long time periods with a low margin of error”.ix As J.P. Morgan pointed out, these assets are attractive because their performance displays low volatility, they are not correlated with stocks and bonds, and their income stream (rent) is often indexed to inflation. The archetypal core asset is a well-built and well-located office building in a city like London or New York, occupied by well-­capitalized tenants that signed long-term leases, with rents escalating annually based on the consumer price index or a similar mechanism. Apart from core, institutional real estate investment strategies include: • Core plus: investments in stable assets that can benefit from minor improvements while displaying limited downside risk; • Value add: investments in assets that can benefit from improved occupancy, more efficient operation, financial restructuring, or a modest “face lift”; and • Opportunistic: investments in new developments, adaptive reuse, emerging markets, distressed repositioning, and non-performing debt involving significant risk and the potential for high returns. In conclusion, commercial real estate is a servant of two masters: the people who live and work within its buildings and the financial investors who own its equity or debt. Such investors prefer stable assets that generate predictable returns and are easy to exit. But in recent years, large investors have been pushed into more speculative investments.

 The data is now two years old but such allocations change slowly due to the conservative nature of such investors and the illiquid nature of the assets in question. 1

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The Alternatives Within Alternatives As of Q1 2019, the world is awash with capital. Private equity managers are sitting on over $1 trillion of committed capital they are yet to invest.x Of that, nearly $300 billion is allocated specifically to real estate.xi More aggressive estimates put the amount of “dry powder” allocated to real estate alone at over $1.5  trillion.xii The glut in investment capital is creating competition for investors and drives up the price of quality assets. As a result, investors who previously focused almost exclusively on core strategies are forced to settle for lower returns or make riskier bets in pursuit of higher yield.xiii Pension funds offer a case in point. Such funds have to make regular payments to retirees. These payments are more or less fixed and known well in advance. To be able to fulfill payment obligations, pension funds invest their members’ savings, hoping that the returns will match the size and timing of their obligations. Note that both size and timing are important: it’s not enough for a pension fund to make a great investment, it needs this investment to generate concurrent cash flows to cover monthly payments to retirees. As of Q4 2018, the unfunded promises to workers by government pension funds was estimated to be somewhere between $1.6 trillion and $4 trillion.xiv In order to meet these obligations, America’s public pension plans have “increased their allocations to opportunistic investments by a measure of six times between 2006 and 2016” while their “exposure to core properties has remained flat”.xv Institutional investors are moving from buy-and-hold assets like office and multifamily toward more operationally intensive alternatives such as student housing, aged care, self-storage, cold storage, schools, and data centers.xvi As a UBS white paper pointed out, “historically, the operational risks involved have put many core investors off entering into more alternative sectors.”xvii But now they have little choice. This process also expedites the “institutionalization” of real assets that were previously too small for large investors. For example, commercial real estate now includes single-family homes, driving a consolidation of tens of thousands of small houses into huge, centrally managed portfolios.xviii Other niches, including cold storage and certain types of farmland, are also increasingly owned by large investors. It’s important to note that the shift toward alternative real estate is not simply a result of investors moving money toward non-core assets. It is also a result of the traditional core assets themselves becoming less stable. A central theme of this book is that technological and cultural changes are making all real estate assets riskier. To be precise, these changes reduce the inherent value

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of real estate assets and make them more dependent on their operators and their distributors. This does not mean that real estate assets will become less valuable. It means that preserving and enhancing their value will require more active management. Management, in turn, will be increasingly reliant on technology.

Venture Capital’s High-Hanging Fruits As we are writing this book, investment in technology is at an all-time high. In 2018, the venture capital industry invested $130.9 billion across 8948 U.S. venture deals.xix For the first time, investment eclipsed the high watermark set during the dot-com boom in 2000. But, as they say, this time it’s different. And it is indeed different, in at least one meaningful way. As the name implies, the dot-com era was about the online world. Everyone was launching websites, companies were valued based on clicks and pageviews, and consumers were sharing digital music and video files. The top three spots on the world’s billionaires list were occupied by people who worked at software companies; two of them worked at Microsoft. Number 8 on the list was a fellow named Masayoshi Son, founder of Softbank Group, who was best known at the time for being the Japanese partner of Yahoo!. This time it’s physical. As of July 2019, seven of the world’s top ten technology “unicorns”—venture-backed private companies with a valuation over $1 billion—are competing in offline industries with hard assets and complex regulation. This list includes WeWork and Airbnb in real estate; JUUL Labs in nicotine; SpaceX in space exploration; and Didi Chuxing, Grab, and DoorDash in logistics and transportation.xx Uber and Lyft, two other companies from this category, graduated from the unicorn club when they became public companies earlier in 2019. Unlike their dot-com predecessors, today’s unicorns are not operating in a virtual Wild West, where the laws of gravity don’t apply and the laws of government have not yet been written. Instead, many of them are trying to change mature industries with entrenched competitors and complex regulation. It’s hard. And it requires a lot of capital. Even if they succeed, it is still not clear whether many of these unicorns will generate the type of returns that venture investors require and expect—which is why venture investors previously shunned many of these industries. But investors no longer have a choice. More accurately, they have limited options. The low-hanging fruits have been picked: the industries that could be

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easily transformed have already been transformed. Investors must look for new industries that are large enough to justify the risks. Real estate is an ideal candidate. It involves trillions of dollars in assets, it is highly fragmented, and it is rich with inefficiencies and untapped value. In recent years, the biggest names in venture capital have shown a growing appetite for property-related ventures. Sequoia Capital, Andreessen Horowitz, Greylock Partners, and Khosla Ventures have all made multiple investments in the space. Towering above them all is Masayoshi Son, who led Softbank and its various backers to multibillion-dollar bets on WeWork, Katerra, Opendoor, OYO, and Compass. Softbank is also the largest investor in other related sectors such as logistics, transportation, property insurance, and utilities. In parallel, a new breed of funds emerged to focus exclusively on ventures that target real estate and the built environment. Such ventures are most commonly grouped under the terms PropTech, CREtech, or UrbanTech. Since 2015, fledgling managers such as Fifth Wall Ventures, MetaProp, Corigin, Tamarisc Ventures, and Urban.US have collectively raised over $1  billion. Their backers include property giants such as Hines, Prologis, Gecina, PGIM, CBRE, Cushman & Wakefield, and Mitsui Fudosan. Meanwhile, large property companies such as Brookfield, Blackstone, CapitaLand, Ivanhoe Cambridge, and JLL have set up their own dedicated venture funds or made direct investments into technology companies. As Aaron Block and Zachary Aarons point out in PropTech 101, the real estate industry is finally facing a “wave of tech-enabled innovation that is reshaping the ways in which property is bought, sold, leased, financed, designed, built, managed, and marketed”.xxi Data from CREtech.com, a real estate tech insights and intelligence company, estimates that over $50 billion have been invested in private PropTech companies since 2010. A separate analysis by Unissu, a London-based PropTech data and service provider, estimates a total of $70 billion in investment since 2000, with most of the activity occurring in recent years. These numbers are significant. But the main impact on how real estate assets are used, operated, and valued will not come from real estate tech. Instead, it will come from innovations that are transforming other industries and changing the way people socialize, move around, eat, and find meaning. Let’s see how.

Section I Retail

2 Retail Properties in Context

A lady walks into a store. It is different from any store she had ever seen. One could say it wasn’t exactly a store at all. Instead of stacked shelves and busy shopkeepers, the space is laid out like the living room of an expensive residence. The store didn’t look like it was designed to sell, in the traditional sense of the word. Instead, it was designed to generate an emotional response; to entertain, to create an experience. Shopkeepers from earlier generations would have been perplexed by what an auditorium, a restaurant, an exhibition, and a roof garden were doing inside a store.xxii Shopping had never felt so free: For the first time, the lady could “circulate on her own, unattended, without interference from anyone”.xxiii Her gaze falls on a pair of gloves. She reaches out, plucks them off the shelf, and tries them on. They feel good. She turns around and walks out without saying a word to anyone or paying for the goods she took. The street is full of people walking and cycling. There are no cars in sight. Is this the future of urban retail? Perhaps. But the scene above describes the department stores of London, Paris, and New York of the 1890s. The woman was a thief. And she wasn’t alone: shoplifting by well-to-do women exploded with the advent of modern department stores.1 Why would a woman risk stealing something she could easily afford to buy? At the time, the experts blamed retailers. In 1901, Dr. Paul Dubuisson published a study on the way stores were designed and described “the special folly which seizes a woman the moment she crosses the threshold of a great department store”.xxiv Dubuisson called this phenomenon the Department Store Diseasexxv: a form  See, for example, Elaine S. Abelson, When Ladies Go A-Thieving: Middle-Class Shoplifters in the Victorian Department Store (New York: Oxford University Press, 1989). 1

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of “female hysteria” or unconscious behavior. Émile Zola, who was nominated for the first Nobel Prize in Literature, wrote of how “women with the mania of stealing” were victims of “the temptation exercised on them by the department stores”.xxvi Such theories may seem sexist, classist, or plain ridiculous to twenty-first-­ century readers. But they were common at the time2 as intellectuals tried to make sense of new consumer behaviors. One famous case was that of Ella Castle, a wealthy American lady caught red-handed stealing fur handwarmers in London in 1896. Following her release on mental grounds, the New York Times asserted that “every reasonable and humane person will rejoice”.xxvii Even Sir Arthur Conan Doyle, the author of the Sherlock Holmes detective series, wrote in the London Times that Mrs. Castle should be sent to the “consulting room and not to the cell”.xxviii New retail experiences dazzled the senses, but one did not have to leave the house in order to shop. As economist John Maynard Keynes wrote about life at the beginning of the twentieth century, “the inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep.” Members of the middle and upper classes could enjoy “at a low cost and with the least trouble” all the “conveniences, comforts, and amenities” that were previously not available even to the “richest and most powerful monarchs”.xxix Such was the period of the Second Industrial Revolution, from the 1870s to 1914. It was a perplexing time for retailers and consumers. Traditional markers of wealth and class were quickly eroding. Sophisticated advertising nurtured new social anxieties, driving some consumers to spend in order to show that they could—inspiring sociologist and economist Thorstein Veblen to coin the term “conspicuous consumption” in 1899.xxx Those who did not have enough to spend could access new forms of credit or installment programs.3 Shopping became an experience and a popular pastime. Global trade exploded, giving rise to new prosperity and dangerous trade tensions. The world felt like it was getting better and worse at the same time. And everything was accelerating.  See, for example, Tammy Whitlock, “Gender, Medicine, and Consumer Culture in Victorian England: Creating the Kleptomaniac”, Albion: A Quarterly Journal Concerned with British Studies 31, no. 3 (1999). 3  On the credit front, The Manchester Guardian Society was formed in 1826 to track and share information about customers who don’t pay their debts. In 1899, the Retail Credit Company was founded in Atlanta and started compiling a list of creditworthy customers (the company is now called Equifax). In 1919, the General Motors Acceptance Corporation (GMAC) was established to offer car-buyers the option to pay in installments. 2

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Sounds familiar? The rise of new retail concepts at the time was facilitated by innovations in manufacturing, mass media, and transportation. Trains reduced shipping costs and created busy central stations as well as shopping districts in the heart of cities; trams powered by horses and electricity contributed to the agglomeration of shops along high streets; newspapers and magazines with broad circulation made it worthwhile to invest in branding and standardization across regions and states; cash registers allowed family-owned retailers to open new stores and trust non-family employees; low cost or free rural mail made it feasible to distribute catalogs and goods to consumers in new regions; and new production methods brought about an explosion of consumer goods and drew more farmers to the cities. During this period, several retail concepts emerged, including branded chains, mail-order catalogs, high street shopping clusters, and household names such as Macy’s, Saks, Bloomingdales, Le Bon Marché, and Barnes & Noble. After World War I, and more so after World War II, rising car ownership, growing urbanization, the expanded reach of the radio and, later, the television facilitated the emergence of additional retail concepts such as climate-­controlled shopping malls, supermarkets, hypermarkets, convenience stores, specialized category killers, and fast fashion chains—as well as new retail giants such as Walmart, Kroger, Macerich, GGP, Toys ‘R’ Us, IKEA, Inditex, H&M, and Best Buy. The department store, however, towered above them all (at least at the beginning). In fact, it is not an exaggeration to say that the emergence of the department stores was a watershed moment in the history of consumer society. What seems like a simple concept today was a triumph of audacity and innovation at the time, in many cases introducing real estate technologies such as elevators, escalators, massive glass windows, animatronic mannequins, complex lighting, heating, electricity systems, and even soda fountains.xxxi Department stores also pioneered the use of customer data, including “harvesting” the addresses provided by children in their free playgrounds and following up with unsolicited direct mail to their parents.xxxii Stores drew constant media attention and allowed consumers to experience everything the world had to offer. They also served as cultural centers and exhibited new inventions that were not yet for sale, including the first airplane to cross the English Channel and the first color television.xxxiii In addition to introducing technical and technological innovations, department stores were also cultural pioneers. In London, Selfridges was allegedly first to introduce lavatories exclusively for female customers.xxxiv In Tokyo, Matsuzakaya allowed customers to keep their street shoes on as they walked into the storexxxv—a faux pas in other establishments.

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The presence of department stores at the heart of the world’s largest cities—in North America, Europe, and Asia—sparked heated debates and even violence around issues that went on to define the twentieth century, including the rights and behaviors of women and minorities, the destruction of traditional middle-class jobs, the ideological struggle between socialism and capitalism, and the impact of globalization on local culture. In the extreme case of Germany, vandalism and the burning of Jewish-owned department store buildings preceded the effort to eliminate the Jewish people themselves. Today, retail is at an inflection point similar to the one at the end of the nineteenth century. In the U.S., department stores survived multiple challenges over the years, most notably the move of affluent (and mostly white) shoppers from urban centers to the suburbs in the 1950s and 1960s, and the emergence of new suburban competitors such as power centers and superstores since the early 1980s. But this time feels different. In 2019, the world’s most delightful, perplexing, and menacing retailer is not a retailer at all—it is a technology company that operates a vast logistical network in tandem with the world’s most popular shopping website, Amazon. com. And the “everything store” is just the beginning. An even bigger challenge comes from the other extreme from small, digitally savvy retailers that chip away at a single category of the department stores’ business, whether cosmetics, home goods, or apparel. Department stores aren’t the only ones fighting for their lives. Other retail concepts and companies that thrived over the past 150 years are struggling to remain relevant. These include malls of various kinds, some supermarkets, apparel stores, category killers such as electronics and office-supply stores, and more than a few smaller stores with excellent high street locations. In the next few chapters, we explore: (1) the main drivers behind the transformation of all physical retail; (2) emerging retail uses and tenant categories; (3) the flow of retail spending to non-traditional retail spaces; (4) structural challenges to retail landlord innovation; (5) ways of monetizing physical space in a world of online and omni-channel sales; and (6) the innovation efforts of the world’s largest retail landlords. But first, it’s important to understand retail’s significance to the real estate industry as a whole.

Retail Real Estate by the Numbers Retail assets are a key component of the world’s largest real estate portfolios. The NCREIF Property Index (NPI) tracks the value and performance of office, apartment, hotel, industrial, and retail properties owned by or, on

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behalf of, tax-exempt institutional investors. In Q1 2019, just over 22% or $140.9 billion of the NPI’s value came from retail properties, third in importance only to office (35%) and apartment buildings (26%).xxxvi Combined with industrial assets—which are often used as retail storage and fulfillment centers—the total weight is as high as 39%. Retail plays an even more important role in the public real estate universe, where smaller, non-institutional investors can buy shares in real estate investment trusts (REITs). As of Q1 2019, the market capitalization of U.S. retail REITs was $171.5 billion, significantly higher than offices ($93.7 billion) or apartments ($121.3 billion).xxxvii Note that while investment in REITs is open to the general public, it is also popular among large institutional investors. Retail salesperson is (still) the most common job in the U.S., followed by retail-related categories such as cashiers, fast-food employees, and delivery truck drivers.xxxviii As a result, the performance of retail real estate assets is important to the financial well-being of society as a whole. As impressive as those numbers are, they don’t tell the whole story. Most retail assets included in the figures above are self-contained projects such as single-building shopping malls, multi-building shopping centers, and standalone big box retail structures. However, a significant amount of retail space is located on the street level of office and residential projects, and its value is often included within the totals of those other categories. In some cases, large strips of high street retail (inline shops) are owned by a single landlord and managed as a single retail property. Queen Elizabeth, through the Crown Estate in the U.K., owns dozens of stores in London’s Regent Street shopping district, amounting to millions of square feet of the most valuable commercial space in the world.xxxix Retailers themselves are also among the world’s largest landlords. Walmart owned 6869 properties across the world as of January 2018.xl Most of its portfolio consists of retail stores in the U.S., but it also includes logistical facilities and assets in Africa, Asia, and Europe. The company does not publish a breakdown of its portfolio, but it has been estimated to be worth as much as $200 billion.xli This means Walmart’s real estate portfolio is ten times larger than the largest retail REIT. The scale of Walmart’s portfolio is unique, but other retailers also have significant real estate holdings. At the end of 2017, McDonald’s owned over 45% of the land and over 70% of the buildings that house thousands of its fast-food restaurants,xlii representing about $30 billion in real estate value. IKEA’s property division, Ingka Centres, owned €9.5  billion worth of real estate as of November 2018. It plans to continue to grow its portfolio across Europe, Asia, and North America.xliii IKEA’s real estate does not only house its stores, but also includes shopping malls with other tenants. Sears, another

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struggling department store operator, spun off nearly 250 of its stores into a separate REIT in 2015,xliv representing billions in real estate assets. Even Amazon is a major owner of physical real estate, mostly logistical facilities which will be covered in more detail in the “Logistics and Industrial” chapters. Note that the assets owned by REITs, large private investors, or a handful of large retailers represent only a portion of the world’s total retail space. There are no exact figures for the value of all retail properties on earth, but we can estimate it with a simple back of the envelope calculation as follows: global real estate as a whole is worth more than $200  trillion.4 Commercial real estate—including office, industrial, and hospitality—represent less than 30% of the total, with the bulk of the value being residential. Assuming retail projects are worth around 20% to 30% of all commercial real estate, this translates to $12 trillion to $18 trillion in value.xlv

Scale and Perspective Apart from its size, retail real estate is important in three other ways when considering the impact of technology and innovation on physical assets. First, it is uniquely positioned to instruct us about the future of other real estate assets. Commercial real estate as a whole is undergoing a tectonic shift and retail assets are the first to feel the tremors—or fall between the cracks. Retail landlords are the first to feel the impact of well-capitalized digital competitors, but they are not the last: many of the dynamics that are transforming physical retail have a direct impact on industrial real estate. Similar forces are making their way to office, residential, and lodging. Each of these asset types will be impacted in different ways, but retail offers lessons that are relevant to all. Many strategies that are par for the course for retail landlords are increasingly necessary for the successful operation of other types of assets. These include: • Creating a comprehensive experience rather than leasing individual spaces; • Curating and iterating the tenant mix to create synergies and tracking visitor metrics such as footfall and demographics;  Estimates of the value of global real estate vary. See, for example: Bert Teuben and Hanskumar Bothra, Real Estate Market Size 2017 (New York: MSCI, 2018); Savills World Research, Global Real Estate: Trends in the World’s Largest Asset Class (London: HSBC Group, 2017); Paul Tostevin, “How Much Is the World’s Commercial Property Worth?”, Savills Group, last modified June 18, 2018, http://www.savillsstudley.com/blog/article/246253/commercial-property/how-much-is-the-world-s-commercial-property-worth.aspx.

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• Drawing significant revenue from non-fixed rents and promotional activities; • Establishing meaningful brands and membership clubs across multiple assets; and • Focusing on multiple constituencies—tenants, tenant employees, tenant customers, and the local community as a whole—and not just the legal entities that signed a lease. Second, retail provides a vital reminder that while technology is important, there are other factors that impact how real estate assets are used and, ultimately, valued. These include general economic indicators, demographic changes, migration patterns, cultural preferences, and more. Think, for example, on the role played by income inequality in the meteoric growth of dollar stores and other off-price chain stores in the U.S.xlvi Or how the aging population impacts the design, location, and performance of malls and convenience storesxlvii in Japan or America’s suburban malls. Or the effect of the seemingly cultural decline in the share of income spent on “things”—especially apparel— and the growth in spending on “experiences”. Finally, retail provides the clearest indication that well-managed companies can thrive under any condition. In the same vein, poorly managed ones can fail for reasons that have nothing to do with technology: expanding at the wrong time and in the wrong locations, taking on too much debt, hiring the wrong people, failing to experiment with new initiatives before it gets too late, and, most importantly, losing touch with customers. In the next few chapters, we will see how technological forces are pulling physical retail apart, and what retail might look like once it is put back together.

3 How to Think About the Future of Physical Retail

Describing where retail is headed, or even where it currently stands, is almost impossible. In perusing reports from some of the world’s leading consultancies, one is bombarded with descriptions of new technologies that will imminently change the way we shop: virtual reality, augmented reality, and mixed reality; smart mirrors, smart payments, smart shelves, and smart appliances that shop for their own replenishments; 3D body scanners and 3D printers; robotic salespeople and artificial intelligence (AI)-powered personal shoppers; and the list goes on. With so many different predictions, it’s hard to make sense of it all. Should we focus on the forest or the trees? Let’s focus instead on the ground. What are the structural forces that are paving the way for the emergence of new retail concepts and force the unraveling of others? And—on more literal ground—what are the relevant lessons for owners and operators of physical space? To try to answer these questions, we will rely on one of the most powerful ideas in economics, and on insights from the people who make their living betting on new concepts and industries.

Transaction Costs, Bundling, and Unbundling In 1991, Ronald H. Coase won the Nobel Prize in Economics for “his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy”.xlviii “Transaction cost” is a term businesspeople use frequently, referring to anything from brokerage fees, through taxes, to credit card payment charges. In economics, the term has a more specific meaning: transaction costs reflect the

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resources required to consummate an exchange between two or more willing parties. For example, when Party A has a TV to sell, and Party B wants to buy a TV, transaction costs include the time, effort, and money it takes for the parties to find one another, decide whether the other can be trusted, inspect the goods, hash out the terms of the deal (price, payment terms, warranty), draw up the relevant paperwork, execute the payment and, once a deal has been struck, ensure that both meet their side of the bargain.xlix Adapting Coase’s theory for consumer markets, economist Mike Munger grouped transaction costs into three key challengesl: 1. Triangulation: The cost of the parties finding one another and agreeing on price and other terms; 2. Transfer: The cost of transferring the goods and the payment; and 3. Trust: The cost of ensuring each party will honor the terms of the deal, including warranty and after service. This simple premise has dramatic implications for the structure and competitiveness of whole markets, industries, companies, and products. In fact, Coase argued that transaction cost is one of the main reasons that companies exist at all: if companies had free, on-demand access to the employees, tools, and supplies they lack at any given moment, they would have no need to employ anyone or invest in equipment. Coase developed his theory in the 1930s and focused on industrial firms. Like most of economics, the theory is not scientific, but it provides a valuable framework that we’ll use throughout this book.

Lessons from the Music Industry To understand how Coase’s theory on transaction costs can apply to modern businesses, let’s look at a contemporary case study. In April 2003, Steve Jobs launched Apple’s iTunes music store. For the first time, music lovers could pay 99 cents to download an individual song. This meant that people who only wanted to listen to one song did not have to purchase the whole album. The music album was officially unbundled. In fact, consumers were already downloading individual songs before the iTunes store came about. But it was illegal to do so. “Consumers don’t want to be treated like criminals,” Jobs said. Instead of standing in their way, he gave them a legal path forward—and built an incredible business in the process. Over the next decade, Apple’s music store sold over 25 billion songs.li

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If consumers wanted to buy individual songs, why didn’t the music industry sell them this way to begin with? The answer lies in transaction costs. Historically, 99 cents were not enough to cover the cost of designing, manufacturing, shipping, storing, and selling a physical record. Also, the process of going to a store and opening your wallet for each individual song was too cumbersome. It made more sense to group together a number of songs and release them in a single bundle: a music album. Technology dictated certain transaction costs which, in turn, dictated the format of the product artists created. Steve Jobs understood that technology changed the underlying transaction costs and, as a result, the basic assumption of what could be economically feasible. The iTunes store made it easier for consumers to find their favorite songs, cheaper to transfer the payment and the “goods”, and cheaper for labels to enforce digital property rights. iTunes’ success proved that paid downloads could compete successfully with free downloads if they also offered a superior customer experience. Many customers preferred a friction-free purchase on iTunes to a free but cumbersome experience on pirated platforms such as Napster and Kazaa. But iTunes’ unbundling revolution didn’t last long. As of Q1 2019, the leading music provider in the world is Spotify, which relies on a different business model. Spotify charges a flat subscription fee and provides streaming access to all the music in the world.lii Buying music, even for 99 cents, is no longer popular. Most consumers now prefer to pay for unlimited access. Did Jobs pick the wrong model? Subscription services have been around even before Apple launched the iTunes store. Spotify itself launched in 2006 and finally became profitable in 2019. In 2003, Jobs stated his view that consumers “want to buy their music on the Internet by buying downloads just like they bought LPs, just like they bought cassettes, just like they bought CDs”.liii Was he wrong? No. He was relying on feedback from actual users who were adamant that they did not want “subscription”—they wanted ownership. Did the customers change? No. The transaction costs did. Today, high-speed mobile connectivity is fast and ubiquitous. As a result, streaming a song off the Internet is (usually almost) as fast as playing a file from your phone. Once this friction is eliminated, the advantages of owning your favorite tracks disappear—and the value of on-demand access to all the music in the world becomes infinitely more attractive for most users. Technology enabled the unbundling of the music album into individual songs and then facilitated the bundling of all the songs into a single subscription package.

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Note that the abundance of music available online created a new “cost” for consumers: the time and trouble it takes to sift through all the new content and figure out what to listen to. Spotify did not simply introduce an “all you can eat” model for music; it used a new interface and complex algorithms to make it easier for consumers to discover music they love. Innovation reduces friction, which often causes an increase in the volume of transactions and introduces new friction. To remain successful, platforms need to constantly adapt their offerings in order to reduce friction for both sellers and consumers. And indeed, in 2015 Apple, taking a page out of Spotify’s playbook, launched Music, a subscription service with algorithmic recommendations. The cycle of bundling and unbundling is a characteristic of any industry that is impacted by changes in technology. A common refrain among venture capital investors and technology executives is that in any business, there are only two ways to make money: by bundling or by unbundling. The quote was popularized by Marc Andreessen, who credited Jim Barksdale, his co-founder at Netscape and former CEO of AT&T Wireless. We will explore examples of this dynamics throughout the book. As we have seen above, transaction costs help us understand the underlying assumptions behind the structure of marketplaces, companies, and products. Having an understanding of how changes to these costs enable new bundling and unbundling opportunities is a powerful tool to evaluate the vulnerabilities of existing business ideas and the feasibility of new ones. Let’s see how it applies to physical retail.

Who Killed the Department Store? Retail destinations are among history’s oldest and most successful platforms, set up to reduce friction for both sellers and buyers. As R.H. Coase pointed out, in medieval England, village fairs and markets were set up to provide merchants with physical facilities, security, and a court for settling disputes under a franchise from the King himself.liv Why couldn’t each merchant simply set up a stall wherever he or she liked and start selling? Because it was too expensive to “advertise” across the sparsely populated countryside, there was no way to verify the trustworthiness of the customers that were around, and there were always bandits and thieves about. In other words, there were transaction costs. For their part, consumers also preferred these arrangements because they could compare prices from different vendors, educate themselves about the

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quality of various alternatives, and exchange (re)views with other buyers. Once villages became larger, the legal system became more robust, local policing became more efficient, and retailers no longer relied on government-­ provided retailing grounds. As the original transaction costs declined, scattered individual stores emerged alongside traditional village markets and fairs, and ultimately overtook them in importance. Modern department stores emerged in the nineteenth century to address the new friction introduced by the growth in the number of goods and the emergence of urban middle-class consumers. Department stores addressed triangulation by providing a central, urban location where all the latest goods could be explored at leisure. A fixed price policy made it easier for (mostly) women who did not wish to bargain, and also made it cheaper for the store owners to rely on employees with limited training who were not themselves master negotiators. Department stores addressed transfer by operating a centralized cashier, extending credit to customers, and providing home delivery and other logistical support. And they facilitated trust by carrying only quality merchandise, launching private label brands, and employing a liberal return and refund policy. In short, department stores bundled together goods and services in a way that lowered transaction costs. The unraveling of suburban (and many urban) department stores began long before the introduction of e-commerce. Cheaper, mass-manufactured goods facilitated the emergence of discount retailers. New advertising formats enabled national brands that outshone the home-branded goods sold in department stores. Automobiles made it easier for consumers to reach new locations and introduced new friction—traffic and lack of parking spots—for shoppers in urban locations. Credit cards and other financial innovations made it easier for shoppers to spend their money anywhere. Multiplex cinemas offered a new way for consumers to spend their free time. In short, department stores were unbundled into separate components … only to be bundled into massive shopping malls that offered consumers the ultimate friction-free shopping experience: everything under one roof, including sprawling parking lots, a variety of dining options, and the latest forms of entertainment. A physical retail space is, in essence, a platform to facilitate transactions between sellers and buyers. To remain relevant, platforms need to continuously adapt to the emergence of new technologies. To do so successfully, their owners should understand how technology eliminates old transaction costs and introduces new ones. The definition of “transaction costs” might seem too spurious or vague—accommodating any charges that impact a price or a

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decision. But that’s not a bug, it’s a feature: In reality, transactions are often affected by “costs” of very different kinds. Factors that didn’t matter to buyers and sellers in one era become critical in another. Over the next few pages, we will consider how new technologies and business models will shape physical retail in the coming years.

4 Forces Reshaping Physical Retail

Do transaction costs still matter? Looking through the lens of triangulation, transfer, and trust, it may seem that many of the challenges that shaped the retail platforms of the past have been conquered. We live in an age of abundance, where retailers offer “everything” on demand, consumers have access to real-time pricing and reviews, and seamless shopping experiences make it almost too easy to complete a transaction. Digitally powered abundance questions the necessity of physical retail. At the same time, they give rise to new forms of scarcity and friction that can make physical space more valuable than ever.

The Rise of DNVBs It is easier than ever to start a new retail brand. Social media and search engines enable newcomers to reach target customers with unprecedented ease. Online clout is driving offline sales. Emily Weiss launched the beauty blog Into the Gloss in 2010. Four years later, she leveraged the blog’s readership and Instagram following to launch Glossier, an e-commerce cosmetics line. In 2018, the company opened its first flagship retail store. The space, located in New York City’s (NYC’s) SoHo shopping district, feels less like a sales floor and more like a staging ground for immaculate selfies. Before committing to a full lease, Glossier experimented with pop-up locations and smaller showrooms. The company is set to continue to grow, both online and offline. As of Q3 2019, Glossier has raised over $185 million in venture capital from ­investors such as Sequoia Capital, Index Ventures, Lerer Hippeau Ventures, and Andy Dunn.

© The Author(s) 2020 D. Poleg, Rethinking Real Estate, https://doi.org/10.1007/978-3-030-13446-4_4

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Andy Dunn made his fortune from selling another digitally native retail business to Walmart for $310 million in 2017. Dunn co-founded Bonobos, an apparel brand for men, in 2007. The company pioneered the concept of “guideshops”, which are physical stores where customers can try on clothes, get expert advice on styling and sizing, and create a Bonobos account. The stores are physical, but all transactions take place online, where items can be customized by mixing a variety of cuts, widths, lengths, and fabrics. In guideshops, customers may not be able to walk out of a store with the goods they want, but they can get access to many more items that a traditional store is typically not able to stock. Orders are delivered promptly and for free. After delivery, the guideshops also serve as logistical centers for returns and exchanges. Particularly since the advent of e-commerce and especially with digitally native vertical brands, or DNVBs, returns are a major logistical and operational pain point for both retailers and shoppers. The U.S. Postal Service estimates that in 2017, over $113  billion worth of online purchases were returned.lv Most customers prefer to drop unwanted items at a nearby store rather than packing and shipping them back. Bonobos unbundled the traditional apparel store into separate components, connected by a digital layer: An online store with an “infinite” shelf, a logistics arm, and a network of physical locations that serve existing customers and help onboard new ones. Dunn calls this model a digitally native vertical brand. As he pointed out on his blog, DNVBs are not simply online retailers with a physical store. They are a distinct model, with distinct economics: “The product gross margins are at least double that of e-commerce (e.g. 65% versus 30%)” and “[t]he contribution margins can be 4–5× higher (e.g. 40%–50% versus 10%)”.lvi In February 2019, Bonobos had 61 shops across the U.S. With Walmart’s backing, it is expected to continue to expand. As Dunn pointed out, one of the key characteristics of DNVBs is their “maniacal focus” on the customer experience. This might sound banal: Was there ever a business that did not focus on its customers? Yes. And real estate offers the perfect contrast to DNVBs. For digital brands, losing track of the customer’s needs and attention is simply not an option. These brands earn their chops in the online world where attention spans are short, alternatives are infinite, and visitors can click away at any moment. Compare this to the traditional landlord scenario—dealing with a captive audience, locked into a specific physical location, and unable to leave easily. This is not to say that physical retail projects never face competition, but the speed and intensity are completely different. For landlords, the customers literally come with the ­territory. For DNVBs, if you don’t capture the customer, you have no ground to stand on.

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Bonobos is not alone. JLL predicts DNVBs will open over 850 physical stores across the U.S. by 2023,lvii selling everything from apparel and shoes, to cosmetics, eyewear, and lingerie. That estimate only takes into account brands that are already popular and well-funded. Honorable members of that list include Casper (mattresses), Allbirds (shoes), Dollar Shave Club (shaving supplies), Warby Parker (eyewear), Away (luggage), Everlane (apparel), and Glossier. Over the next decade, online channels are likely to spawn a plethora of new retail brands that will end up requiring physical space. Consider the fact that the highest earning YouTube star in 2018 was a seven-year-old who reviews toys for a living.lviii Social media is not the only reason that new brands are proliferating faster than ever. Operations, financing, and logistics are also being streamlined by new technological solutions. Digital infrastructure from Amazon Web Services enables digital businesses to scale quickly and with limited risk. Software as a service (SaaS) providers such as Shopify, BigCommerce, and Magento make it easy to set up a sophisticated online store. On-demand logistics providers such as Flexe and Postmates make it easy for upstarts to provide fast and relatively cheap delivery. Listings sites like AppearHere.com and TheStoreFront. com make it easier than ever to book pop-up retail space. Crowdfunding platforms like Kickstarter and Indiegogo enable designers and inventors to fund the development of products and retail concepts. And dozens of the world’s largest venture capital investors are eager to finance DNVBs and the tools that help them grow.

Physical Space in the Cloud Restaurants are also being unbundled by technology. Online marketing channels make it possible for well-known eateries to reach potential customers well beyond a single location. But unlike apparel or cosmetics, fresh meals can’t be simply shipped in a box, they have to be made nearby. But what if a single restaurant could have multiple kitchens in different locations? Not a whole restaurant, but just a kitchen that handles delivery. In fact, what if there were no restaurant at all, but a branded online “façade” to attract customers and take orders, with the kitchen tucked away in a less expensive location? That’s exactly what is happening. Cloud kitchen companies such as Kitchen United and CloudKitchens provide food entrepreneurs with turnkey kitchens in various locations. These kitchens are fully staffed, sometimes fully supplied, and fully integrated with food ordering and delivery providers such as UberEats, DoorDash, GrubHub,

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and Postmates. Cloud kitchens want to be the Amazon Web Services or Microsoft Azure of the food world by providing on-demand access to critical infrastructure that scales quickly and doesn’t cost millions to set up. Setting up a new location with CloudKitchens costs around $20,000 plus two months of rent. Compare this to the cost of opening a full-scale restaurant, which ranges from a few hundred thousand to millions of dollars. In March 2018, Travis Kalanick, co-founder of Uber, invested $150 million in CloudKitchens, buying out most of its existing investors.lix Kalanick is planning to turn the company into a holding company for a variety of other businesses that take advantage of innovation in transportation and software to repurpose real estate assets. Kalanick calls the new platform City Storage Systems. The company is not only investing in digitally enabled businesses, but it is also acquiring real estate assets that these businesses can make more valuable. By February 2019, the company has already acquired $40 million worth of space in New York, with financing from Blackstone.lx The battle for the future of retail is not limited to online and offline—the web or the store. Retail transactions can also take place in a variety of new settings and locations. Brands such as MUJI, West Elm, and Shinola are partnering with hotel developers to launch hospitality concepts that double as showrooms for apparel, household goods, and accessories. And office operators are integrating retail into their buildings. In 2018, WeWork launched WeMRKT, a platform that promotes and sells products made by its members across the world. In the same year, Convene, an upscale flexible office space operator backed by Brookfield and RXR, acquired the New Store, a boutique convenience store chain, with plans to integrate the retail concept into its office locations.lxi In early 2019, WeWork launched a standalone café/retail store offering called Made by We. The company aims for Made by We to “act as a new town square” where people can “support mission-driven products and small businesses … and gather for events that help people build a life powered by connection and purpose”.lxii Apart from shopping, Made by We is a space for casual work and events. Visitors can pay by the minute to simply sit down at a table and enjoy fast Wi-Fi and an inspiring atmosphere. This is not unlike WeWork’s original coworking model, but it differs in two respects: it takes place in a street-level retail store, not an office floor; and it is available to anyone who walks in, not just to WeWork members. Using retail spaces for casual work is also happening elsewhere. Industrious, a WeWork competitor, partnered with Macerich to add coworking spaces to

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some of the company’s malls across the U.S. The combination creates a more vibrant environment for office employees and helps fill malls with a regular flow of young, educated consumers. Industrious is also paying hard rent at a rate commensurate with a junior retail anchor of a similar size (30,000 square feet or so). In another example, Spacious, a New  York-based start-up, is operating pop-up coworking spaces within restaurants that are otherwise closed during the day. Customers can buy daily or monthly passes that allow them to grab a seat, use the Internet, and access the bathroom and coffee dispensers. Unlike working from a Starbucks, customers can stay for as long as they like, without the pressure of pretending to eat or drink. In August 2019, WeWork anounced plans to acquire Spacious and integrate it into its offering. Not everyone wants to work. Some customers just want to take a break. Bunkitsu, a Tokyo bookstore, charges an entrance fee and allows customers to simply grab a chair and enjoy being surrounded by books. Guests can browse and make a purchase, but the store’s basic product is time. Similar “time cafes” have popped up in various parts of the world in recent years, from Chiang Mai’s Maya C.A.M.P to Manchester’s Ziferblat. Some operators are trying the opposite approach. At Shiru Café, the coffee and the seat are free. Customers pay by sharing their personal data. Located next to Brown University in Rhode Island, the café requires customers to share their student ID, email address, degree, date of birth, and professional interests. Customers are exposed to advertising inside the space and consent to receiving additional marketing information from the café’s corporate sponsors.lxiii In essence, the café is a customer acquisition channel for digital advertisers. Free is the lowest transaction cost. Or is it? This specific establishment might fail to make ends meet, but it highlights a broader shift on the true cost of “free” in the way retail space can be monetized.

Online Business Models, Offline Imagine having free access to a private space where you can spend hours browsing, shopping, working, socializing, taking a break, or playing with friends. Imagine doing that every day, for many years, across many different locations, without having to pay anyone. Imagine getting what you need from any given site and letting somebody else worry about the cost of development, maintenance, and security. Imagine, on the other hand, the true cost of spending all of your time in a space that you don’t own or control, under the surveillance of entities you never formally chose to transact with, exposed to commercial offers that you wish you could avoid, and governed by a legal agreement that you’ve never read.

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This is how the web works. Over the past two decades, online businesses perfected the way in which time spent on-site is monetized. Their business models are efficient enough to allow most apps and websites to provide a variety of services for free. The most common models include: • Advertising-supported access: Allowing customers to spend as much time as they like in exchange for regular exposure to ads. • Freemium subscriptions: Providing access to a limited version of the product (or limited access to a full version of the product) while charging for full access. • Affiliate lead generation: Providing content or tools that facilitate sales for a third party which, in turn, pays for any leads it receives. • Add-on sales: Providing the core product for free but including strong incentives for customers to spend more on additional components such as virtual goods, credits, or special capabilities. • Asymmetric pricing: Charging only some customers for access and using them as “bait” in order to attract other paying customers. This model is used, implicitly, by some dating apps. It is also common in the offline world,  with nightclubs that provide free entrance to female customers in order to attract male customers who pay a cover charge and (allegedly) spend more on drinks. In order to employ these business models successfully, online companies rely on their deep understanding of their customers. They collect and analyze piles of data and are able to predict the lifetime value , as well as the cost of acquiring, each type of new customer. They also understand what triggers different behaviors and which elements of the customer journey prompt visitors to leave, engage, or make a buying decision. The wealth of customer data and the deep integration of (online) space, content, and commerce make it possible to assign a specific dollar value to each individual “visitor”. Google and Facebook have made billions from enabling advertisers to bid for each glance, visit, or click. Online, every visit is logged, cookies allow operators to follow their customers around, and all data is digital and structured in a way that makes it easy to analyze. Real estate sites are not websites. But soon, real estate operators will be able to access data that is just as detailed. Artificial intelligence can “weaponize” existing security cameras to determine what visitors are wearing, what they have in their hand, whether they are alone or speaking to anyone, or whether they are happy, sad, or unwell. And just as with online methods, a lot can be gleaned without requiring customers to provide self-identifying data. Artificial

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intelligence can already estimate visitor gender, income levels, and spending habits by analyzing images of customers’ shoes as they walk into a space— without having to scan anyone’s face or ID.

Retail Enters the Home The home is also becoming a retail space of sorts, not just as a destination for deliveries, but as a place to pick, choose, and try on merchandise. Warby Parker’s “Home Try-On” program sends customers a box with five pairs of eyeglasses that they can try for five days. Customers can keep the pair(s) and use the box to ship back the others. Companies such as Stitch Fix and BirchBox send shoppers packages with curated samples or whole items to try on. The cosmetics giant Sephora operates a similar “subscription box” service, sending customers samples of new and exclusive products each month. This kind of “small box retailing” may seem simple, but figuring out how to mail customers items that they’ll love and choose to keep, without the customers even seeing the goods in advance, is a complex challenge that keeps many a data scientist up at night. While the boxes are small, sales in this category are growing. Stitch Fix made $1.2 billion in sales in 2018.lxiv Homes are also becoming spaces for activities that were previously reserved for retail locations. Peloton sells fitness bikes and treadmills bundled with a digital subscription service that provides live and on-demand classes, activity tracking, and online moral support. The company was founded in 2012 and has raised nearly $1  billion in venture capital. In September 2019, it became a public company, raising $1.6 billion in its initial offering.lxv Consumers that can’t fit a whole fitness machine into their apartment have other options. Mirror.co, a start-up founded in 2016, is offering a connected fitness device that fits into any home. The device is … a mirror. The company’s reflective piece of glass screen hangs on the wall and displays hologram-­ like fitness instructors that provide guidance and real-time feedback. Mirror is connected to an online database of interactive classes and syncs with wearable devices to take into account the user’s heart rate, movements, nutrition, and musical tastes. With over $87 billion spent each year on health club membership, the effort to unbundle physical gyms is surely worthwhile. And once consumers have a connected device at home, especially a mirror, it can serve as a channel to discover, try on, and purchase other goods.lxvi But retailers don’t need to deliver an expensive mirror or treadmill in order to turn homes into shopping arenas. Smaller and cheaper devices such as

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smart speakers are good enough. Amazon, Google, Apple, and Facebook are all competing for a foothold in living rooms in order to take orders for regular purchases and respond to inquiries. In 2017, Amazon launched Echo Look, a camera and smart speaker that keeps track of daily outfits and recommends new ones based on the e-customer’s style.lxvii The company also patented a “blended-reality mirror” that allows customers to try on virtual clothes and see how their outfits would look like in different locations, such as the beach or a club.

Alternative Consumer Space Technology is not just empowering new competitors and drawing consumer spending to new physical locations. It is also luring shoppers into whole new worlds. In 2018, video game Fortnite grossed $2.4  billion dollars, more annual revenue than any computer game in history.lxviii This revenue was not derived from selling copies of the game itself (it is free to play). Instead, a large chunk of it came from selling “skins” and “emotes” for virtual avatars including clothes, accessories, haircuts, make-up, and dance moves for virtual characters. Selling virtual goods inside games is not new, but such goods are usually tools, skills, and extra lives that help players progress within the game itself. In Fortnite’s case, the goods do not seem to have any purpose other than making the users look cool and allowing them to show off their spending power—a form of conspicuous consumption on steroids. Fortnite is not only an alternative to spending on “things”, it is also an alternative to spending on “experiences”—accumulating shared memories with new and old friends. In February 2019, DJ Marshmello (an actual person), performed a live music set inside Fortnite. The event was attended by ten million people who were using their digital avatars to dance to the music and chat with each other.lxix As we have seen above, technology is enabling the emergence of new retail competitors and is diverting consumer spending toward non-traditional retail assets and environments. This will likely intensify with the introduction of more sophisticated digital marketing tools, new delivery methods by unmanned vehicles and drones, additional connected devices inside the home, and more immersive virtual reality experiences. These developments call into question the necessity of many physical retail locations. But they also create new opportunities that retail landlords and operators can use to reinvent their offering and remain relevant.

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Abundance as Friction Technology cannot eliminate transaction costs. Reducing friction in one part of the customer journey introduces new friction elsewhere. Eliminating one pain point makes other pains more palpable. This might sound abstract, but it has tangible business implications. Let’s look at what they mean in practice and how operators of physical stores are leveraging them to their advantage. Consumers are a click away from an astronomical number of goods. Amazon alone lists over three billion products across its 11 online marketplaces worldwide.lxx At some point, the task of deciding what to buy becomes a cost in itself. Typing in different search terms, reading numerous reviews, and looking at dozens of products that look virtually the same can take many minutes—and minutes are an eternity for online shoppers. In a world of abundance, curation becomes more valuable than ever. In 2018, the world’s largest online retailer launched a chain of offline stores called Amazon 4-Star. Unlike the company’s online “everything store”, the physical stores only feature products that are rated four stars and above, are top sellers, or are new and trending on Amazon.com. The product mix covers popular categories such as consumer electronics, kitchenware, home goods, toys, games, and books. Goods are featured in a way that draws on data from the online mothership, including items that are popular with nearby shoppers. And just like on the online store, each product has a digital tag that displays its real-time star-rating and different pricing for Amazon Prime members and regular folk. As of Q1 2019, 4-Star stores are open in New York, California, and Colorado. When my wife and I visited the New  York City location in September 2018 the store felt completely unremarkable, stocked with a jumble of random products, quite like Amazon’s online store. And yet, we ended up buying a bunch of things. Online, we only use Amazon to buy things we know we need. There is intent. But offline, we ended up discovering new things to buy. It also felt more pleasant, more social, and more satisfying to walk out with the goods in hand, without having to wait for them to be delivered. But not all shoppers are as gullible as us. Some are more discerning. This brings us to Sephora, which uses curation to solve a different online-induced problem. Founded in 1970  in Paris, France, Sephora is one of the world’s leading cosmetics retailers. It is wholly owned by LVMH, the luxury goods conglomerate behind brands such as Louis Vuitton, Christian Dior, Moët & Chandon, Marc Jacobs, and Bvlgari. Sephora contributed to the demise of many traditional department stores by unbundling the cosmetics section into a chain of independent stores. But that’s old news.

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These days, Sephora is facing new competitors of its own. Remember Glossier from a few pages ago? Sales by online beauty retailers have grown by more than 23% in 2017, outpacing the overall e-commerce market.lxxi Even Amazon launched a private label beauty brand, Find, which sells make-up and vitamins.lxxii Beauty products are easy to ship but, in theory, don’t lend themselves well to online purchases. Sephora originally attracted shoppers by empowering them to try products freely, instead of relying on sales associates as was customary at department stores. Such an experiential buying process is not available online. Do shoppers no longer wish to try products before they buy them? They do, but that does not have to prevent them from buying online. According to research firm Nielsen, consumers have been “flocking to beauty products with simpler ingredients” in recent years.lxxiii Sephora noticed that shoppers in its physical stores find a product they like, and then use their mobile phones to google their ingredients. While doing so, they might come across a better price online and abort the offline purchase. In 2018, the company launched Clean at Sephora, a seal of quality for cosmetic products that avoid using unwholesome ingredients.lxxiv By curating products based on a standard that shoppers care about, Sephora reduces the “leakage” of sales from its stores. The company also offers an app that augments the offline buying process with recommendations and advice. This is a wonderful illustration of the thinking required to thrive in the digital age. Sometimes a simple paper sign or printed icon can make a big difference. Operators of physical spaces need to understand how technology impacts user behavior and use that understanding to design experiences that delight customers and make business sense. Faced with competition from lesser-known online rivals, Sephora did not try to undercut them on price or out-Google the world’s most popular search engine. Instead, it used a physical quality seal to eliminate the need to visit Google in the first place. Sephora cannot compete with the Internet’s unlimited selection. Instead, it creates value through curation—limiting the options for customers and making it easier for them to choose the right product. In the process, it reinforces the power of its brand as an arbiter of quality.

Landlords as Curators The power of curation is not limited to the retailers themselves. It can also be used by landlords and operators of whole retail projects. In 2018, Brookfield Properties, one of the world’s largest landlords, launched an experiment in

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NYC’s West Village. The company used a strip of stores it owns to launch “Love, Bleecker”, a residency program for “emerging artists, designers, and wellness savants”.lxxv In practice, this means providing online retailers and influencers an opportunity to open their first offline store. The residency lasts for one year, during which the emerging brands can experiment and see whether their business works well offline and can sustain a longer lease or expand to additional locations. Brookfield is not alone. In 2018, Macerich, one of the largest mall owners in the U.S., launched BrandBox, a solution that combines physical space and a set of services that enable digitally native brands to set up a physical store. The spaces allocated for BrandBox within Macerich malls are designed with modular walls and special shelving units that allow for fast build-out and high tenant churn. Each brand can take 500–2500 square feet and choose from three main store formats and several design themes. Macerich’s team helps brands work with architects and fit out, recruit and train employees, and prepare for opening. Once they are in operation, BrandBox retailers get access to a dashboard with data on foot traffic, conversion, customer flows, and sales,lxxvi similar to what they measure in their online stores. The first BrandBox area is located inside one of the top-performing malls in Macerich’s portfolio, Tysons Corner Center in Virginia.lxxvii This indicates that the company is treating the new initiative as an important part of its offering, and not just as a short-term effort to repurpose unused space. Other landlords are experimenting with similar programs. Simon Property Group and Kimco Realty, two of the world’s largest retail real estate investment trusts, are dedicating permanent parts of their malls to showcase a temporary lineup of emerging brands.lxxviii Related Properties has a “floor of discovery” in the retail portion of Hudson Yards, one of the world’s largest mixed-use projects. The floor features a selection of digitally native brands, new eateries, and marketplaces. Retail landlords have always been curators. They mix and match the brands and merchandise that add up to a successful retail destination. But their level of involvement is changing: brands need to be rotated more frequently and landlords are expected to provide a plethora of services to help emerging concepts make their first steps in the offline world. Pop-up marketplaces such as AppearHere.com are also trying their hand at managing whole projects. In February 2019, the company’s CEO announced plans to take over entire department stores.lxxix Showfields, another start-up, aims to build a new kind of department store, relying mostly on digitally native brands. The company opened its first location in New York’s fashionable NoHo neighborhood in March 2019.

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Companies such as Appearhere and Showfields believe that their ties with emerging brands and their understanding of what customers want will enable them to use of physical retail spaces better than traditional department stores or individuals landlords. The next step for such companies can be acquiring their own buildings, with funding from investors who believe in their ability to operate these better than traditional companies. Innovative hospitality, office, logistics, and residential companies such as Airbnb, WeWork, Clutter, Common, and Starcity are already experimenting with similar strategies. In the past, landlords would wait for brands to become large enough to be willing to sign long leases and to be creditworthy enough to satisfy lenders and third-party investors. Today, landlords can’t afford to wait. Technology has fragmented the retail market into smaller, fast-moving brands. Someone needs to step in and create platforms that curate the best brands for the benefit of shoppers and reduce the cost of setting up a store for emerging retailers. That doesn’t sound too different from the original department stores of the nineteenth century.

Retail Space as a Service Another source of friction is the abundance of new and unfamiliar consumer products. A variety of new consumer electronics inventions are trying to change how humans listen to music, use the bathroom, and brush their teeth. Consumers need to experience these products and receive guidance from skilled salespeople before they can decide to buy them. B8TA is an operator of physical stores that make it easy for shoppers to discover, try, and learn about innovative products. At the same time, it provides makers and designers with on-demand shelf spaces in great locations. B8TA’s physical stores are designed and fitted out with the latest technology to create an optimal retail experience. They are staffed with well-trained employees that make use of proprietary software and tools to introduce innovative products to potential buyers. The company also operates an online store, which it plans to expand over the coming years. As retail stores become more complex to manage and require integration with online sales channels, many brands will no longer be able to open a store on their own. B8TA fills an important gap, one that landlords would do well to address. A similar dynamic is happening in the office world, where many tenants can no longer keep up with the complexities of setting up and operating a workspace. Instead, they opt for turnkey solutions from operators such as WeWork, Breather, and Convene. We will address this shift in detail in the Office section.

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From Sales to Monetization Traditionally, retail spaces have been used to consummate a transaction between a buyer and a seller. The value of a space was thus a derivative of the sales revenue it could generate. Rent was charged as a percentage of sales, or as a fixed amount that reflected what in-store sales could support. Real estate is now facing a revolution that will reshape the way space is monetized. Already, a growing number of retail spaces are not used for direct sales. Instead, brands are using stores to acquire and onboard new digital customers, to handle returns and service for goods purchased online, and to increase brand loyalty and engagement with existing customers. As Melissa Gonzalez, founder of retail consultancy Lionesque, pointed out, “[t]he physical retail experience is often an anchor location that drives a halo effect across channels for brands and retailers.”lxxx The “halo effect” refers to the increase in online sales following the opening of a physical store. Online space is often seen as free or inherently abundant, especially when compared to scarce real estate space. But while the cost of web online “space” is trivial, the cost of online traffic is not. The explosion of venture capital-­ backed, digitally native brands has driven up the cost of advertising online. Digital channels are also prone to various forms of “click fraud”, which results in brands paying for website “visits” from customers that don’t really exist. In many cases, setting up a store and acquiring customers offline is cheaper than doing so online. This is especially true now that offline rents are stagnating or declining. Physical stores also add a sense of stability and reliability to a brand, which is particularly important when trying to stand out among hundreds of online-­ only, fly-by-night rivals. Philip Krim, co-founder of online mattress retailer Casper, pointed out that the company’s sales grow faster in markets where the company opened physical stores. The company’s customer acquisition costs have dropped over time, in part thanks to such openings. Casper also ­cooperated with Target to feature its mattresses in the latter’s big box retail stores. The company plans to open up to 200 physical stores of its own by 2022.lxxxi Casper is also experimenting with new services. In 2018, the company opened The Dreamery, a physical location where customers can book 45-­minute nap sessions. For $25, customers get a soft drink, a pair of pajamas, and a private space to relax with a Casper mattress. Beyond the potential “hospitality” revenue, Casper is using the space to let potential customers test drive its mattresses.

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BA&SH, a French womenswear brand, takes an even more radical approach. Every Friday afternoon, visitors to its New York City store can borrow some of the clothes on display, for free, as long as they return them by the following Monday. The goal is to make shoppers feel trusted and “part of something” while allowing them to try on the company’s products and become long-term customers. It also helps reduce the cost of delivery and returns. The emphasis on customer acquisition costs (CAC, in tech parlance) highlights the way modern retailers think about their business. Retail is no longer product-centric, focused on the margin between the cost of producing a widget and the price at which it is sold in store. Instead, it has become customer-­ centric, focused on the cost of onboarding a new customer compared to the lifetime value generated through the relationship with the customers (CLTV, or customer lifetime value). In the CLTV model, the value over the lifetime of the customer relationship is spread across different channels and touchpoints. The retail giants of the twenty-first century are those who will be able to link these touchpoints into a single ecosystem, serving the customer not just online and offline, but also across different physical assets.

From Stores to Ecosystems The integration of physical stores into digital ecosystems is most visible in China. Over the past decade and a half, the emergence of online commerce coincided with emergence of the country’s middle class and government efforts to encourage domestic consumption. Many Chinese consumers made their first purchases of branded goods online before these brands had a physical presence in their city. Many international retailers relied on online sales data to guide their physical expansion in the country. E-commerce was less of a disruptive force and more of a contributor to shaping China’s overall retail industry. As a result, the country’s e-commerce giants are entwined with its offline retail market. Alibaba, China’s largest digital retailer, has subsidiaries or shares in companies that operate hundreds of physical stores of various sizes and formats. It also has several initiatives that aim to integrate existing physical retailers into its ecosystem. Alibaba’s vision for the future of retail is summarized in the introductory video to what the company calls “New Retail” initiatives. According to the video, the company believes that the key to saving physical retail is the “complete digitization of all commerce”lxxxii resulting in the seamless integration of online and offline commerce.

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In practice, Alibaba group’s New Retail initiatives include: a chain of cashier-less supermarkets that also serve as logistics hubs for 30-minute delivery to anyone who lives within two miles of a store; a platform that provides mom and pop convenience store owners with access to advanced analytics, payments, and supply management tools; a partnership with Starbucks that includes integration of ordering, payment, and delivery of coffee and meals across China’s largest cities; and investment in operators of physical supermarkets, cinemas, and furniture stores. Alibaba has dozens of other initiatives that mesh offline and online retail. Of particular interest is the group’s 2017 acquisition of a majority stake in InTime, an operator of dozens of malls and department stores across China. The group uses InTime as a testing ground and launchpad for new ideas, including: smart mirrors that integrate directly with Tmall.com, Alibaba’s branded goods portal; a variety of sensors and analytics tools; using the stores as fulfillment centers for online orders; and even a paid membership program that confers discounts and benefits across online and offline sales channels. China’s other technology giants, most notably JD.com and Tencent, are collaborating on similar initiatives. Alibaba’s membership program brings to mind Prime, Amazon’s membership program launched in 2005. Indeed, Amazon is building its own version of a seamless physical and digital experience. Prime, which counted around 100 million members as of Q3 2019, was originally limited to a simple value proposition: free two-day shopping for online orders. Over the years, Amazon has added a variety of benefits to the program, including music streaming, video streaming, cloud storage, one-day delivery for qualifying orders, and more. In 2018, Amazon introduced two-hour grocery deliveries.lxxxiii The deliveries were based out of branches of Whole Foods, a grocery chain Amazon acquired in 2017. Customers can use their Amazon account to pay in over 450 Whole Foods branches, and Prime members receive special discounts on their offline purchases. Amazon is also using Whole Foods branches as pick­up locations for non-grocery items purchased on Amazon.com. As of Q1 2019, Amazon’s foray into the world of groceries and perishable goods has shown mixed results and might require billions in additional investment before it turns a profit.1 But the company is not likely to give up until it figures it out. And while Amazon is trying to integrate offline grocery stores into its digital empire, Walmart is working its way toward the future from the opposite  For a good analysis on why perishable goods are difficult for Amazon to handle under its current structure, see Ben Thompson, “The Value Chain Constraint”, Stratechery, last modified February 26, 2019, https://stratechery.com/2019/the-value-chain-constraint/. 1

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direction. The world’s largest retailerlxxxiv captured less than 5% of e-commerce spending in 2018, compared to Amazon’s 48%. Walmart is better positioned to succeed in grocery deliveries and is investing billions in logistics and retail technology that are relevant for all retail categories. In 2017 Walmart acquired Bonobos, the archetypical DNVB apparel brand for $310 million.lxxxv As mentioned above, Walmart is already one of the world’s largest owners of real estate. Amazon, Alibaba, JD.com, and other giants are increasing their physical footprint, bringing larger chunks of both retail and industrial space into their ecosystems. They are no longer merely “retailers” or “websites”. They are also becoming landlords, operators of physical spaces, and platforms that enable other retail brands to reach their consumers. They hold the power to make disparate real estate assets more valuable by bringing them into their ecosystems. This is a power that most traditional landlords don’t have. The good news is that even the biggest online retailers need physical space. The bad news is that while physical retail spaces will not be replaced completely by the digital world, they will be subjugated by it. The value of a physical retail location will be increasingly dependent on its integration into larger retail ecosystems that include other physical locations as well as other digital channels. Looking ahead, the question is not whether consumers will continue to visit physical spaces to shop, to pick up goods they acquired online, or to experience new things. The question is which companies will capture the value generated in the process. These new ecosystems don’t just challenge landlords to innovate. They question the existence of landlords altogether: Is a “real estate company” the appropriate entity to develop and operate physical retail spaces, to determine the tenant mix and programming for these spaces, and to draw shoppers to them? The answer is not clear. We do not mean to say that all retail landlords must develop their own hardware and software and become vertically integrated with logistics operations and branded retailers. But landlords do need to have an understanding of all these businesses and technologies and figure out how to position ­themselves (not just their assets) in order to remain relevant and avoid becoming commodity components of ecosystems controlled by others. As they attempt to do so, they face structural, financial, and cultural challenges.

5 The Challenges to Retail Landlord Innovation

Landlords and the Economics of Tech In 2017, Westfield Corporation, a large retail landlord, established OneMarket, a platform to facilitate the sharing of data and know-how between retailers, brands, venues, and other partners. Westfield’s main U.S. and U.K. portfolio has since merged into Unibail-Rodamco, forming Europe’s largest commercial real estate company and one of the world’s largest retail landlords. Following the merger, OneMarket was spun off as an independent company. As of July 2019, it seems to be burning cash quickly while not generating significant traction.lxxxvi The initiative seems to have fallen between the cracks during the change in ownership and management at its parent company. OneMarket’s failure to take off shows how hard it is for landlords to sustain long-term investment in the development of innovative tech platforms. Building competitive advantage with technology is a long and arduous process that requires perseverance and significant outlays. Consider the financial losses incurred by Amazon over nearly two decades while it reinvested its free cash into research and development of new initiatives. It is hard to imagine a real estate company showing similar resolve, much less so a real estate investment trust (REIT) that is traded in a public market and is expected to generate regular dividends. Consider AmazonGo, Amazon’s futuristic convenience store concept. In Seattle, Chicago, San Francisco, and soon New York City, shoppers can walk into the store, take whatever they like, and walk out—just like the lady in the nineteenth-century department store. But this time, no “hysteria” or illegal activity is involved. Various scanners, cameras, and sensors across the store

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figure out what goods are picked up, and the customer’s Amazon account is charged automatically, as if by magic. As tech strategist Ben Thompson pointed out,lxxxvii AmazonGo is not just an example of what technology can do, but of the “economics of tech” as a whole. The economics boil down to the difference between fixed and marginal costs. Convenience stores, for example, have human employees who are paid by the hour. These humans spend a certain amount of time on each customer. As a result, more customers lead to more work and, in turn, more costs. This does not mean that traditional retail operators do not enjoy economies of scale. But even at scale, a major share of their costs grows in tandem with sales. Traditional retail scale means distribution efficiencies, leverage with suppliers and providers, and pooled marketing expenses. But an employee’s time costs almost the same whether you have one store or one thousand. Now, let’s consider the economics of tech. Technology companies make extremely high upfront investments—developing proprietary hardware, software, and products—but then have much lower marginal costs to serve any additional customer as the business grows. This is also the logic behind venture capital investment in technology companies: “spend a lot of money up-­ front to develop and build a product, and take advantage of minimal marginal costs to make it up in volume”.lxxxviii In Amazon’s case, this means that the operating costs of its unmanned checkout system are more or less the same whether it works for five minutes or five hours, regardless of how many items are sold each day. As a result, Amazon’s brick-and-mortar store can achieve much higher operating margins than its “traditional” competitors. The high upfront investment required to develop the technology also means that unless Amazon opens hundreds or thousands of stores, it will never recoup its investment in developing the initial technology. And indeed, Bloomberg reports that the company is hoping to open 3000 such stores across the U.S. by 2021.lxxxix One could argue that real estate companies also make large investments and then reap dividends as people use their space over many years. In addition, technology can never be just a one-time, upfront investment since software, databases, and hardware require ongoing maintenance and updates. This is true, but there is still a difference between traditional real estate and technology investments: Done right, technology reaps far larger dividends through leaps in efficiency and reductions in the cost of opening and operating each store, and in the amount of space required to generate the same amount of revenue. The returns are of a different order of magnitude, and so is the risk.

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Amazon is willing to bet huge sums in upfront investment in order to redefine the economics of offline retail and build a product that, once ready, can scale quickly and efficiently. Note that we’re using the word “bet”, as it is not yet clear whether Amazon will be able to scale its unmanned retail stores. Most traditional landlords and retailers do not have the audacity or the capital to build comparable advantages.1 But even landlords that have the necessary vision and financial resources face structural constraints that limit their ability to innovate.

Limiting Structures and Misaligned Incentives The world’s largest retail landlords are structured as public REITs or as private equity funds. REITs are expected to generate regular dividends and, as such, are not ideal vessels for investment in ventures that incur years of upfront losses. In addition, U.S. REITs have a regulatory requirement to invest 75% of their assets in actual real estate and to distribute 90% of their income back to their shareholders. This means that even if they have cash to invest, they are limited in their ability to invest in new initiatives. Private equity firms such as Blackstone or Brookfield have a better ability to stomach losses while they wait for an ultimate payout. In fact, the structure of many private equity real estate funds is almost identical to that of venture capital funds. As the name implies, such funds are private. This means they face less ongoing scrutiny from the media and retail investors, and can make long-term bets that would be hard to justify in the court of public opinion. But private equity real estate funds have their own limitations. They normally have a mandate that defines what type of assets they can invest in. As a result, they are not able to concentrate their investments in “technology” or “services”, but only in actual buildings that have hard value and can be refinanced. Unlike traditional businesses, funds are structured in a way that focuses their efforts on the value of each building on its own. Each asset is acquired at a separate point in time, often with different partners, and with financing (a mortgage) from different lenders. As a result, the cash flow of each asset is subordinate to different interests, and the fund manager is limited in its ability to act in the long-term interests of the whole portfolio or firm. This means that investment in technology (or anything else) can be justified only if it has a positive and immediate impact on the individual building.  To be clear, we are not saying that landlords should start opening their own convenience stores; we are using Amazon as an example of why landlords would struggle to make other necessary investments in technology. 1

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The ownership structure of individual assets also highlights the fact that many landlords are simply smaller than they seem. For example, a firm might manage a portfolio worth $5 billion that generates $200 million in net operating income (NOI) each year. NOI refers to all revenue generated from the property minus operating expenses. A big chunk of this income goes to pay for financing, fund management fees, and other fees. As a result, the “$5 billion landlord” might have only a few million to spare each year. In addition, most real estate funds have a limited lifetime (seven to ten years or so) and generate most of their returns in their final years, when assets are sold at a premium. This limits their ability to make discretionary investments upfront. Many private equity firms manage several separate funds in parallel, including funds that are focused on similar assets and geographies. Here, too, each individual fund may have different investors and may be managed by different partners within the same firm. This makes it difficult to align the interests of all the managers and investors toward a strategy that benefits the long-term interests of the portfolio as a whole. Each individual fund is responsible for its own returns, and the assets within it are bought and sold based on these somewhat narrow considerations. The partners in most private equity firms are incentivized based on returns from assets and funds they currently manage.2 Unlike traditional companies, funds are structured in a way that pays out a portion of these returns as fees to the managing partners. These partners have no incentive to forfeit fees today in order to invest in speculative innovation initiatives that might benefit assets in future funds, or in funds managed by other partners in the firm. REITs have a better structure for long-term ownership of large portfolios and allow for a more centralized allocation of resources. But as mentioned above, they have their own limitations. To recap, the structure and mandate of large real estate companies often limits their ability to make significant investments in anything other than actual buildings (as opposed to technology and service platforms). Their structure incentivizes their managers to focus on the immediate operational income of individual buildings as opposed to long-term investment in technology and service platforms that encompass multiple buildings over longer periods. One way to address these challenges is to split landlords into separate entities with different mandates, management teams, and investors. Indeed, this is a common strategy in the lodging industry. But there are key differences between hotel and retail assets that limit the ability of retail landlords and  Short term compared to the decades or longer it might take to build a proper tech-enabled business.

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operators to bring together hundreds or thousands of assets under a single brand and service platform.

 eparation of Real Estate Assets and Branded S Operating Platforms In the hotel industry, it is now common to split businesses into separate companies, one owning the actual property (PropCo) and another responsible for marketing and customer-facing operations (OpCo). The OpCo is an operating business that generates revenue from sales and the PropCo is an asset owner that generates revenue from rent or management fees paid by the OpCo. Many Starwood, Accor, or IHG hotels, for example, are operated by these brands on behalf of third-party landlords or on behalf of affiliate entities that own the actual real estate. Hotel brands often operate as a franchise, providing guidance, and brand-usage rights, and marketing support to the building’s owner or manager. We explore hotel ownership structures in more detail in the Housing and Lodging section. This model is prevalent in the hospitality industry for five main reasons. First, it enables different investors to get exposure to separate products, according to their risk appetite and mandate. Some investors may only wish to own real estate assets, while others are happy to invest in operating businesses. Second, taking real estate off the books frees up cash that the operator can invest in branding, general marketing, technology, general management, and other activities that improve its ability to draw and serve customers in each of its buildings. Third, splitting assets and operations into separate entities may create tax efficiencies. Fourth, separate OpCos and PropCos leave room for various tax benefits and accounting maneuvers. These four reasons are equally valid for retail and hospitality assets. The difference between these types of assets lies in the fifth reason: transaction costs. Let’s see how.

 ransaction Costs in Retail Versus Hospitality T Projects Consummating an exchange between a hotel and a guest carries very high transaction costs. A traveler needs to find a place to stay in, often in a new location (triangulation); she needs to make an advance booking and secure it

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with a down payment of some sort (transfer); and she needs to believe the hotel and her room will actually be there once she arrives and that they will be safe enough to spend a night or take a shower in (trust).3 These transaction costs make it critical for hotels to have recognizable and trusted brand names, as well as centralized marketing and distribution platforms.4 When it comes to retail assets, the situation is more complex. A potential customer is often looking for a specific product, but not for a specific location (“I need to buy a new phone” vs. “I am looking for a room in central London”). This means that triangulation applies primarily to the cost of figuring out where the product is. This does not mean that the location of a retail store is irrelevant, but that the main driver behind the customer’s action is the product—compared to booking a hotel, when the customer must go to central London and can choose which specific hospitality product to pay for. In the retail case, the customer wants to buy a new phone and can choose which specific location to go to or order from. In other cases, retail customers are not looking to buy anything specific and are only looking to pass the time. A potential customer might choose to go to a retail project because it is easy to access by foot, car, or public transport. This means triangulation is less of a challenge because the customer simply goes to a nearby store or stores and has fewer options to choose from. More accurately, triangulation becomes a hyper-local problem, helping the customer decide which side of the street to go to. This creates other opportunities, but for now let’s focus on the fact that hotels and retail projects face different triangulation costs. Transfer costs were historically less of a challenge for retail projects, since products bought in a physical store were normally not booked or paid for in advance (at least not until recently). And trust is also less critical since the retail customer is only visiting the store for a few minutes, as opposed to spending the whole night or taking a shower. Most importantly, most retail projects aggregate multiple product brands. While a hotel attracts customers and communicates its value by putting a name (e.g. Hilton) on its front door, a retail project attracts shoppers by putting Zara, H&M, Uniqlo, Sephora, and dozens of other names on its façade. The customer often buys a product from a branded retailer within the landlord’s project, but not from the landlord itself.  For a detailed analysis of how hospitality platforms “commoditize” trust, see Ben Thompson, “Airbnb and the Internet Revolution”, Stratechery, last modified July 1, 2015, https://stratechery.com/2015/ airbnb-and-the-internet-revolution/. 4  Hotel operators are now competing with new types of branded booking platforms. We address these dynamics in the Housing and Lodging section. 3

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In short, when it comes to retail, the building is where the products are found; when it comes to lodging, the building is the product. As a result, the retail platforms that emerge to lower the cost of triangulation, transfer, and trust are focused on finding, paying for, and delivering products, not buildings. By helping consumers find the products they want, these platforms can substitute landlords altogether. For example, a customer who buys an item on Amazon or Taobao does not need to visit a store at all. In comparison, a customer who makes a booking on Expedia is still going to visit—and pay for— an actual physical room in a hotel (or apartment building). As a consequence, retail landlords that wish to remain relevant face a more complex challenge. They also face more severe consequences in case they fail. Some of the largest retail landlords are already hard at work to reshape their organizations, invest in innovative technologies and companies, and acquire new capabilities.

6 Landlords of the Future

In March 2019, Stephen Ross, the Chairman of Related Properties formally opened The Shops & Restaurants at Hudson Yards, a one-million-square-foot mall on Manhattan’s West Side. New York City is not famous for its shopping malls. And retail projects are not the most popular investment of Q1 2019. It remains to be seen whether this mall will do well, but it is already clear that its developer is taking a different approach, one that points a possible way forward for other companies in the space. To start with, the mall at Hudson Yards is located at the heart of the largest real estate development project in the history of the U.S., surrounded by 17 million square feet of offices, apartments, and retail spaces, representing a total investment of about $25 billion.xc In contrast, the classic American mall is a creature of the suburbs. Most of the 1500 or so enclosed malls built across the U.S. between 1956 and 2005xci are islands of commercial activity, flanked by giant parking lots, in a sea of low-density housing and highways. After 2005, hardly any new enclosed malls have been built, and many have shut down. Those classic malls were usually anchored by one large department store or more, taking up the most coveted ground-floor corner and entrances. The mall at Hudson Yards, on the other hand, is divided into smaller stores and its single luxury department store tenant, Neiman Marcus, is only on the fifth floor. As mentioned above, the mall also has a full “Floor of Discovery” dedicated to digitally native brands and new retail concepts. The mall also puts a strong emphasis on dining, as reflected in its official name, The Shops & Restaurants at Hudson Yards. It is telling that the word “Restaurants” is absent from the name of Related’s older New York City mall, The Shops at

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Columbus Circle. In 2003, when that mall opened, shopping was enough of an attraction. But the most interesting thing about Related’s approach is its relationship with the brands and infrastructure powering the new mall and the buildings that surround it. In addition to being a real estate developer and operator, Related also has a fund management business, Related Fund Management, that allocates third-party capital to real estate projects and other related operations and service companies. In addition, Related is affiliated with RSE, a private investment vehicle that invests in technology, media, dining, and entertainment ventures. RSE was established by Related’s Chairman. While RSE is a separate investment vehicle, its portfolio companies are listed on Related’s main website as part of the company’s “family of brands”. These multiple investment platforms give Related the flexibility to differentiate its projects from other real estate companies and potentially capture a larger share of the value generated by its operations. RSE is an investor in several of the tenants at the Hudson Yards mall, including Bluestone Lane Café, KĀWI, and Fuku. RSE is also an investor in Resy, a reservation management system that is used by Hudson Yards visitors to book tables at the project’s various restaurants. While RSE’s investments have some synergies to Related’s core business, the company uses its fund management business (RFM) to integrate its real estate and branded operating platforms more closely. In March 2019, for example, Related acquired Quiet Logistics, a provider of fulfillment services to digitally native brands such as Bonobos, Mack Weldon, and Away Luggage. The acquisition was done in partnership with Greenfield Partners, a logistics investment specialist. Related plans to use the new platform to offer tenants a more comprehensive solution—including physical retail stores, physical fulfillment centers, and the service layer required to sell across multiple channels. As retail analyst Richie Siegel pointed out, many independent brands “reject Amazon fulfillment services, mainly to avoid sharing their data”xcii with a potential competitor. (Amazon is notorious for launching private label alternatives for some of the best-selling products on its site.) In consequence, Siegel believes that “independent logistics companies like Quiet have a lot of running room ahead of them.” Unlike Amazon (or even Walmart), landlords are in a better position to align their interests with branded retailers. In 2005, Related acquired Equinox, an upscale gym operator. Related helped Equinox expand to some of the best locations across the U.S., as well as to new market segments and service categories. In turn, Equinox’s brand and devoted membership base helped anchor and differentiate some of Related’s residential and commercial projects. In 2019, Equinox opened its

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first hotel, located across from the Hudson Yards mall. The hotel is focused on wellness, providing guests with access to professional-grade sports facilities (“cryotherapy chambers”), specialized dining options (“jet-lag tonics”), and access to an “on-call sleep coach”. Equinox plans to open additional hotels in major global cities over the next few years.xciii The relationship between Related’s real estate development, fund management, and venture investment vehicles is not always clear, but they are often … related. This diversity of mandates, businesses, and management teams enables the group to do things that would be difficult for real estate investment trusts (REITs) and traditional private equity funds.

Innovating in Public Private companies can experiment over time, without the scrutiny of Wall Street analysts and mom-and-pop shareholders. But the world’s largest retail portfolios are (still) owned by publicly traded REITs. As mentioned above, such REITs are required to invest most of their capital into actual real estate assets and to distribute nearly all of their income back to shareholders on a regular basis. Can REITs innovate within these constraints? They are certainly trying to. Simon Property Group, a REIT, sponsors an early-stage venture capital fund, Simon Ventures, that invests in start-ups at the intersection of retail and technology. Its investments include Appear Here, a marketplace for short-­ term retail space; Foursquare, a location data platform; Bird, a ridesharing company; FabFitFun, a subscription box service for cosmetics products; Dirty Lemon, a beverage company; and MeUndies, a maker and distributor of underwear. The last two are digitally native brands that are experimenting with new ways to sell their wares. Dirty Lemon allows customers to order its health drinks by sending a text message. MeUndies offers a subscription for underwear—sending shoppers a new pair each month. Simon Ventures is also an investor in Deliv, a start-up that helps retailers handle last-mile fulfillment. This echoes Related’s investment in Quiet Logistics, but with two key differences: (1) Simon is only a financial investor and did not fully acquire the company, and (2) other retail REITs have also invested in Deliv, including Macerich, Westfield, and GGP. This means that none of the landlords get to control a unique technology or operating platform. On the other hand, retailers might appreciate the ease of using the same fulfillment solution across hundreds of malls owned by four of the world’s largest REITs.

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Simon is making an effort to integrate physical and online retail. The company is collaborating with Dropit, a start-up that enables shoppers to leave their bags at the mall and have them delivered to their homes. In January 2019, Simon company announced RetailConnect, a new “fulfillment as a service” solution that will help mall-based retailers “to fulfill e-commerce orders without allocating additional space, staffing, hardware, and software”. The service will operate out of specialized depots within select Simon malls, starting in the Dallas-Fort Worth area. The plan is to gradually enable brands to offer same-day delivery, in-store pick, and curbside delivery.xciv Simon also operates a program that allows shoppers to return goods purchased from select online retailers. Instead of packing, shipping, and waiting for a refund, shoppers can bring items directly to Simon malls and receive immediate credit. Just like Amazon and Alibaba, Simon is striving toward a seamless integration of online and offline shopping. And while Alibaba and Amazon are launching physical locations, Simon plans to launch a new consumer-­facing digital platform in 2019. Simon is able to fund such innovations within the constraints of a REIT, thanks to the size of its operations. The company owns and operates over 200 retail properties, including 118 shopping malls and had a market cap of over $57 billion as of April 2019. Allocating a fraction of its revenue to innovation can add up to tens or hundreds of millions each year. The scale of Simon’s portfolio also makes it easier to justify such investments—if successful, they can be deployed quickly across hundreds of properties. Having a foothold in many of the largest cities in the U.S. also makes it feasible (and worthwhile) for it to offer logistics solutions to online retailers. The growing importance of scale might explain the consolidation wave that is sweeping major REITs in recent years. In 2017, Unibail-Rodamco SE acquired Westfield Corporation to form the world’s second largest shopping mall owner and operator. In 2018, GGP, one of America’s oldest and largest retail REITs, was acquired by Brookfield Property Partners, one of the world’s largest owners and operators of commercial real estate. Brookfield has also made efforts to acquire Intu, one of the U.K.’s largest retail REITs. Brookfield has a variety of public and private investment vehicles and multiple mandates that allow it to invest in operating businesses as well as in retail, office, industrial, and other real assets. In theory, this puts it in a better position to build a platform that integrates physical and digital retail, fulfillment, and other relevant services.

7 Rethinking Physical Retail Properties

The convergence of digital and physical channels means that the business of retail landlords is increasingly governed by the economics of tech. As we pointed out earlier, these economics entail significant upfront investments that (may) lead to dramatic reduction in the marginal cost of serving each new customer. In other words, the growing role of technology is intensifying returns to scale in the physical retail industry. As a result, being big and integrated is becoming an advantage in the battle to remain relevant. Small landlords will not be eliminated, but they will have to rely on third-party operators or find new ways to partner with companies that can contribute operations and marketing resources (including existing OpCo, but also companies that have not yet emerged). Technology is shaking up all real estate assets but its challenge to physical retail is unique. Technology does not simply change the way retail spaces are designed, operated, and valued. Instead, it questions whether these spaces should exist at all. People need homes to live in and office spaces to work in. Goods need manufacturing and storage facilities. But in a world of digital storefronts and ubiquitous logistical networks, are physical stores necessary? In theory, the answer is no. Put differently, physical retail emerged to solve a set of temporary problems that might no longer exist. In the past, there were high costs for buyers and sellers to find and trust one another. There were high costs to transfer goods and payments. There were high costs to ensuring each side honors the terms of sale. Technology reduces or eliminates these costs. This does not mean that physical retail will cease to exist. It doesn’t even mean that it will ultimately be worth less or take up less space. But it does

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mean that, compared to other types of real estate, the evolution of physical retail is less constrained and harder to predict. Technology does not simply enable this evolution, it requires it. The bundling and unbundling of retail landlords and spaces will result in businesses that are very different from the ones that dominated the twentieth century. They will be not just different, but also harder to categorize and define. The word “landlord” might no longer be appropriate. Owners who want to succeed must become businesses that combine multiple assets with a thicker layer of services, mix new assets and capabilities, and have the infrastructure to tie everything together. In many cases, achieving this would entail splitting into separate specialized entities, possibly more than two. To succeed, the operating layer(s) will have to address new types of transaction costs and reduce new types of friction. Facing customers, that means: • Using curation to reduce the time required to sift through an endless number of options; • Providing real-time information on which goods are available in-store; • Providing multiple purchasing and financing options online and in store; • Providing delivery and pick-up options as well as easy ways to handle returns and exchanges; • Providing a place to discover new inventions and learn new life skills; and • Creating environments rich with the things that are becoming scarce in our world dominated by technology: human interaction, natural elements, things and activities that can be experienced with all five senses. Facing retailers, that means: • Making it easy for brands to set up physical stores with minimal upfront costs and commitment; • Providing an array of logistical and financial services that allow brands to focus on what they do best while offering services on par with those of much larger retailers; • Providing data and analytics to help brands improve their physical stores; • Helping brands get a full picture of their customers’ journey by integrating with systems used to manage other sales and marketing channels; • Providing easy access to a network of additional physical (and digital) locations to enable brands to scale quickly once they have a winning product; and • Creating an environment and an event calendar that attract customers who have many other ways to spend their free time.

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It’s no coincidence that many of these points sound like a description of early department stores. Those stores bridged a gap between “buildings” and “brands” and employed many of the strategies that are required to succeed in the twenty-first century: they created environments that surprise and delight, introduced new cultural and dining experiences, made use of the latest technologies, centralized non-operational management functions, provided free delivery, and tapped into the aspirations and values of existing and potential customers. By the end of the twentieth century, retail was dominated by malls that were carbon copies of one another, isolated from their surroundings, and filled with identical brands. Such malls reflected the peak of the era of mass manufacturing and mass media. As we will see in the Logistics and Industrial section, we now live in an era of small-batch manufacturing and fragmented distribution. This provides an opportunity for retail estate companies to make retail properties more exciting and more valuable than ever.

Section II Office

8 Offices in Context

Jay Chiat has always been a maverick. His firm, Chiat/Day, created the famous 1984 television commercial for the first Macintosh computer and helped Steve Jobs convince or, more accurately, force Apple’s board to air it during the Super Bowl.xcv In the ad, a group of pale workers in bluish-gray uniform is marching inside a bluish-gray building and then sitting down to watch an authoritarian Big Brother give an emphatic speech about the future. Out of the blue, an athletic woman in a bright white shirt and orange shorts runs into the room and hurls a hammer at Big Brother’s digital image. The workers are liberated! The ad was a reference to George Orwell’s dystopian novel 1984, a metaphor for the oppressive monotony of the modern workplace, and a jab at the dominant computer maker of the time, IBM, also known as “Big Blue”. It was an instant classic, winning multiple advertising industry awards. The Macintosh initially sold well but ultimately drove Apple into a crisis. A year after the ad was aired, Steve Jobs and the company parted ways. It would be over a decade before Jobs returned to Apple, and more than two decades until he came up with a product that would make computing truly personal— the iPhone. In 1993, Jay Chiat felt it was time to liberate his own employees. He initiated a plan to shepherd Chiat/Day into a new, mobile age. “You don’t have to come to work at 9am if you don’t need to be here,” he told employees. “By the same token, you don’t win any points for staying at the office late at night.”xcvi Explaining his plan to the media, Chiat said: “Most businesses are run like elementary schools—you go to work, and you only leave your office when you

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have to go to the bathroom. That sort of thing breeds insularity and fear, and it’s nonproductive.” Instead, his plan was “to structure things more like a university, rather than like an elementary school”. Chiat/Day’s Venice Beach, California office was re-designed to encourage free thinking and free movement. There were no corner offices. There was nowhere to hang photos of family or pets. Paper documents were frowned upon and discouraged. Those who insisted on printing or writing by hand could store their files in small lockers installed along the walls. There were no indicators of hierarchy and no titles on business cards. Everyone was expected to answer their own phone, make their own coffee, and carry around their own computer. The Chiat/Day office was designed by superstar architects to house a superstar creative team. It was colorful, open, and sprinkled with avant-garde furniture and even repurposed amusement park rides. It had a central library and digital equipment employees could borrow for the day. Under the new plan, employees did not have to be in the office. They could stay home, travel in search of inspiration, or spend the day at a café. Working remotely, they could use purpose-built software to chat with colleagues, share files, and access a central client database from anywhere in the world.xcvii Chiat’s vision was inspiring. It was prescient. And it didn’t work. Employees rebelled against the lack of privacy, the lack of structure, and the lack of dedicated space. “It was like working inside a migraine,”xcviii said one. In less than two years, “the more formal structures” of the office were returned.xcix Within less than five years, the whole thing was demolished and Chiat/Day moved to a new space in a different building. As Wired magazine summarized in 1999, “It was a bold experiment in creating the office of the future. There were no offices, no desks, no personal equipment. And no survivors.”c The company’s next office was yet another attempt at creating the workplace of the future. It was a self-contained campus built inside a large converted warehouse. The Los Angeles Times’ architectural critic described it as a hybrid of “Utopian commune and Orwellian nightmare”.ci * * * Just like Steve Jobs, Jay Chiat’s timing and execution were off. But his vision of the workplace as a university was on point. Less than a decade after Chiat/ Day’s new office debacle, Google created the Googleplex, a campus-like work environment where employees were free to move around, work in a variety of settings, and use software to communicate and share resources.

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A summary of the project by CWa (Clive Wilkinson Architects), the firm behind the Googleplex’s first buildings, states that the project’s primary vision was “to merge the idea of workplace with the experiences found in an educational environment”.cii As Nikil Saval points out in Cubed: A Secret History of the Workplace, the Googleplex was inspired by Stanford University, and its aim was “to make the normally wrenching transition from university life to corporate life as seamless as possible”.ciii The Googleplex was not the world’s first corporate campus, but it became a symbol of the new economy in the way it was designed to attract, empower, and even win over the world’s best and brightest knowledge workers. The project inspired thousands of other companies to fill their headquarters with bouncy balls, ping pong tables, elaborate snack bars, glass partitions, playful meeting rooms, and open-plan workspaces. It also popularized the idea of the office as a community of individuals who are “colliding” with one another to create innovative products and services. That word— “community”—appears again and again in CWa’s summary of Googleplex’s original brief. But not every company can afford to build its own Googleplex. And a growing number of knowledge workers are not working within companies at all—they are freelancers, contract workers, or working in small teams on new ventures of their own. In 2010, WeWork opened its first location in Lower Manhattan. The company enabled individuals and small businesses to work alongside each other, socialize over beer and flavored water, and share their knowledge and experiences. Its early locations were by no means Googleplexes. In fact, one could argue that they drew more inspiration from the fraternity house than from the university. But these coworking spaces allowed thousands of working people to access something that was previously beyond reach. The office was no longer corporate; it was personal. Shared offices have existed for decades, but WeWork was among the first to put community and collision at the heart of its value proposition. Sharing an office was reframed as a lifestyle choice, not just as a way to cut costs or avoid a proper lease. The presence of other people, the lack of privacy, and the distractions were not lamented; they were celebrated. By focusing on the needs and aspirations of individual consumers, WeWork managed to build a meaningful brand recognized by millions. In the process, it redefined the modern office and, more importantly for us, the modern landlord. While WeWork’s ability to mature into a stable company is still questionable, demand for its offering is not. We discuss the company’s business model in more detail later in this section.

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Why didn’t a company like WeWork emerge in the mid-1990s, when Jay Chiat was trying to reinvent the office? Part of the answer is that the enabling technologies weren’t ready. Companies did not have cheap and on-demand access to cloud storage, cloud computing resources, and cloud collaboration software. Employees did not have a high-powered computing, camera, and GPS device in their pocket. They also did not have the compulsion to constantly share photos and clips of their day at the office. In short, WeWork could not have existed before the iPhone. Chiat’s personal office revolution was possible only after the culmination of Steve Jobs’s personal computer revolution. In the following chapters, we will look at (1) how technology impacts the overall supply of office space; (2) how technology changes the way people work and impacts overall demand for office space; (3) what it means to be a successful office landlord in the twenty-first century; and (4) the challenges traditional landlords must overcome in order to succeed in this new reality. But first, it’s important to understand the significance of office buildings to the real estate industry as a whole.

Office Buildings by the Numbers Office buildings underpin the portfolios of many of world’s largest real estate investors. In Q1 2019, 35% or $218.9  billion of the NCREIF Property Index’s (NPI) value was derived from office properties, ahead of any other institutional real estate category, including apartment buildings (25%) and retail projects (22%).civ Office buildings also play an important role in the public real estate universe, where smaller, non-institutional investors can buy shares in real estate investment trusts (REITs). As of Q1 2019, the market capitalization of U.S. office REITs was $93.7 billion, third only to retail projects ($171.5 billion) and apartments ($121.3 billion).cv Note again that while investment in REITs is open to the general public, it is also popular among large institutional investors. The U.S. has over 10.5 billion square feet of office inventory, according to CoStar and CBRE.cvi While there are no exact figures for the value of all office properties on earth, we estimate it with a simple back of the envelope calculation. Global real estate as a whole is worth more than $200  trillion.1  Estimates of the value of global real estate vary. See, for example: Bert Teuben and Hanskumar Bothra, Real Estate Market Size 2017 (New York: MSCI, 2018); Savills World Research, Global Real Estate: Trends 1

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Commercial real estate—including office, industrial, hospitality, and professionally-­managed multifamily assets—represent less than 30% of the total. Assuming office buildings are worth around 40% of all commercial real estate, this translates to $22 trillion in value. Over the past few decades, office buildings in urban locations have been among the most sought-after of all real estate assets. Such buildings are generally valued at relatively high multiples of their net operating income (NOI),cvii thus displaying lower capitalization rates compared to retail, industrial, and hotel buildings.2 This reflects confidence in the steady growth of income generated by these buildings. This confidence is based on the fact that many office buildings are anchored by large and well-capitalized corporate tenants who sign long leases with clearly defined rental escalations. In addition to rent, such tenants often pay a share of the building’s maintenance, insurance, and taxes. As a result, an office building’s NOI is often insulated from unpredictable costs. NOI equals all revenue minus all operating expenses. Predictable income is another reason for the relative popularity of office buildings among institutional investors such as retirement systems, pension, and insurance companies. Such investors assemble their investment portfolios to match their future liabilities. The manager of a retirement system knows in advance that two million members will turn 65 and retire in 2022, and thus needs to ensure that its investments will generate enough income that year (and beyond) to cover the necessary pension payments. Office buildings that generate regular and predictable returns each year are more aligned with the needs of such investors compared to assets which might generate higher but more erratic returns. Consider a hotel building and an office building that were acquired for the same price. The hotel might generate more income over a ten-year span, but in some years, it might generate less than in others. This is due to the fact that most branded hotels are operated under management agreements and do not have a tenant-operator that pays fixed rent. Some years, the income from a hotel portfolio might not be enough to cover the pension or insurance fund’s obligations to its members or the building’s commercial mortgage payments. in the World’s Largest Asset Class (London: HSBC Group, 2017); Paul Tostevin, “How Much Is the World’s Commercial Property Worth?”, Savills Group, last modified June 18, 2018, http://www.savills-studley. com/blog/article/246253/commercial-property/how-much-is-the-world-s-commercial-property-worth. aspx. 2  For a detailed explanation of how cap rates are calculated and how they reflect demand, growth, and risk, see David Geltner et al., Commercial Real Estate Analysis and Investments, 2nd ed. (Mason, OH: Thompson South-Western, 2007), 14–15.

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Even when a hotel operator pays a fixed rent, its tenancy is considered riskier than those of an office building which often involve a diverse group of quality tenants and not just a single entity. When a hotel operator defaults on its lease, the landlord loses all income. When a single office tenant defaults, other tenants continue to generate income and might even take up the newly available space. The fungibility of tenants is another attractive characteristic of office buildings. Hotels are often custom-built for a specific operator. Mall tenants have idiosyncratic needs that extend to the building’s ventilation, electricity, and loading systems. Multifamily developers cannot easily change the number of bedrooms per unit or the overall apartment mix. Office spaces, on the other hand, are often standardized enough to accommodate many types and sizes of tenants with relative ease. Tenants often require significant build-outs within the space they lease, but the associated costs historically have been amortized over long leases or paid for by the tenants themselves. This fungibility is also true for the operators of office buildings. Hotels often live or die by the brand (as we explore in detail in the Housing and Lodging section). Operating a mall is as much art as it is science. Multifamily properties involve annual lease renewals. The tenants of office buildings, on the other hand, are often not even aware of who manages or operates their building, they do not expect the landlord to help market their business, and they sign long leases. As a result, office buildings are considered a more passive type of investment. As long as a building is well-maintained and represented by a decent broker, its income is expected to be relatively safe. The examples above do not mean to suggest that some hotel properties can’t achieve very high valuation multiples or that the NOI of retail projects cannot be stable and predictable in some locations. Nor do they imply that office operators and facility managers do not matter—they do. But these office service providers are often interchangeable, and their success is not contingent on their consumer marketing prowess, design aesthetic, membership reward program, or technology platform (compared to operators of hotel, retail, and even logistics facilities). In short, quality office buildings are the darlings of institutional investors. In a way, they are the ultimate real estate asset: at their best, they have stable and inherent value, generating bond-like returns regardless of who occupies, owns, or operates them. All of this is about to change. As we have seen in the beginning of this section, the personal office revolution has been brewing for more than 25 years. Over the next decade, the revolution will reach a boiling point that will

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r­edefine the meaning of the words “landlord”, “tenant”, “location”, “work”, “asset”, and “risk”. To understand how technology will reshape the office buildings of the future, let’s take a moment to understand its impact in the past.

A Short History of Office Spaces When and why did humans first step into an office? Some say it happened in ancient Egypt, when state administrators managed the supply of grain or oversaw large public projects such as the Pyramids. In the time of the pharaohs, circa, 2700 BCE, office work was “carried out in specific spaces assigned for different jobs” such as accounting, registration, and bookkeeping, “just like the contemporary conventional office workspaces”.cviii Starting from the fifth century BCE, large administrative buildings appeared across the Roman Empire and at the center of Greece’s democratically organized city-states.cix These buildings housed large bureaucracies that handled naval customs, taxation, and public and private finance, as well as the planning of projects such as water aqueducts and arch bridges. Around the same period, China’s Qin and Han dynasties also established new forms of centralized bureaucracies which required their own buildings. Even shared workspaces are not entirely new. The Harvard Business Review points out the similarities between coworking spaces and the workshops of fifteenth-century Florence, where artisans from different disciplines worked alongside one another on design, engineering, and “new media” projects.cx During the same period, innovations in printing, banking, bookkeeping, and shipping also increased demand for non-shared offices to house an increasingly complex bureaucracy. The office-dwelling institutions of the pre-­ industrial world reached their apex in the seventeenth century with the emergence of large central banks in Amsterdam, Stockholm, and London, and the establishment of large trading corporations such as the Dutch and British East India Companies. These developments, along with many others, were precursors to the emergence of the world’s first true “big businesses”—the American railroad companies—in the nineteenth century.cxi Railroads have existed for hundreds of years, but in the 1820s British engineers introduced the first steam-powered passenger trains and soon after, the technology found its way to the U.S. By the 1850s, steam-powered trains helped connect the financial and industrial centers of America’s East Coast and Midwest with new frontiers in the West. As Alfred B. Chandler pointed out in his classic book Strategy and Structure, the railroad companies had to rely on “whole new methods of

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management”cxii that included clear and detailed hierarchies and reporting lines.cxiii Their operators also relied on whole new communication technologies such as the telegraph and, later, the telephone. Railway companies quickly became the largest and richest organizations in the U.S., and then the world. Their scale and structure inspired leading companies in other major industries and shaped the way many American employees worked well into the twentieth century.cxiv Railroads also contributed to the growth and consolidation of other industries, including insurance, banking, advertising, retail, and newspapers. They even brought about the standardization of time zones across the U.S.cxv Access to reliable communication and transportation networks enabled the rise of huge firms that spanned multiple markets and employed thousands of people, which in turn absorbed or decimated local, family-run businesses.cxvi As Yale University sociologist Charles Perrow pointed out, the percentage of American workers employed by organizations with 500 or more employees was 0% in the beginning of the nineteenth century. By the year 2000, it was 50%.

The Industrialization of the Office Steam power and steel railways didn’t just drive up demand for office space, they also pushed up the buildings themselves. In New  York City, elevators powered by steam and, shortly after, electricity started appearing in wealthy homes in the 1850s. The introduction of Elijah Otis’s patented safety elevator in 1854 made higher floors more accessible and more desirable.cxvii In 1885, the world’s first steel-framed high-rise building was completed in Chicago and served as the headquarters of the Home Insurance Company.cxviii At ten stories high and boasting four elevators, the building is widely considered the world’s first modern skyscraper.cxix Other innovations such as incandescent lamps and new ventilation systems made it possible to fit more people into larger floor plates without having to rely on natural light or airflow. Office buildings proceeded to dominate and define the skylines of the world’s largest cities. But the biggest impact of industrialization was on the people inside the offices. Large companies did not simply use innovative machines to create large businesses; the companies themselves were becoming machine-like— more structured and more precise in their allocation of human and other resources As the eminent sociologist Max Weber pointed out, the “bureaucratic apparatus” of the companies that emerged during that period was supe-

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rior to other organizations in the same way that industrial machines were superior to older, non-mechanical modes of production.cxx And work itself was becoming “industrialized”. In the final years of the nineteenth century, Frederick W. Taylor, a mechanical engineer by training, made a name for himself as a management consultant to industrial firms such as Bethlehem Steel (known as the Bethlehem Iron Company at the time). Taylor’s approach to human efficiency, which he termed “scientific management”, aimed to provide an empirical basis for how work should be organized and how workers should be trained.cxxi Taylor’s initial focus was on the factory floor, but his ideas had a dominant impact on white-collar workers and office design, particularly after the 1920s. He advocated breaking down complex tasks into discrete activities that employees could easily perform—and that employers could easily measure. “Taylorism” manifested itself in open-plan offices with rows of desks, organized as a chain of math-like operations and manned by supervised workers that were discouraged from socializing or focusing on anything other than the assigned task. Following World War II, the corporate office became somewhat less machine-like. New layouts, furniture systems, and processes were introduced. Companies made their offices more pleasant, in part, to compensate employees for stagnating wages or diminishing job security. But the introduction of new technologies also played a key role. In the 1960s, computers started playing a bigger role in many industries. A growing number of employees had access to mainframe computers, either on premises or as “timeshare” units accessible over the phone.cxxii Basic cognitive tasks could now be automated or outsourced to machines. In summary, the innovations of the nineteenth and early twentieth centuries—the steam-powered train, telegraph, safety elevator, and electric lamp— gave rise to a world of large corporations with hierarchical structures that employed humans in offices designed to fit predefined workflows and repetitive tasks. Meanwhile, these technologies and others also made it possible to make buildings taller and larger, and to accommodate whole companies within a single location. Humans continued to perform plenty of repetitive tasks, but some could see that a big change was afoot. In the second half of the twentieth century, there were hints that the fragmentation of office work was starting to reverse its course. Writing in 1964, Marshall McLuhan observed that “the essence of automation is the opposite”cxxiii of that of industrial machines in its impact on how human work is organized. We’ll see what that means in practice when we look at forces reshaping demand for office space, later in this section. Still, the influence of Taylor’s

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scientific management remains widely evident even today. As technology strategist Antony Slumbers pointed out, many offices are still designed like Excel spreadsheets, where every person is doing something “structured, repeatable, or predictable”.cxxiv The best companies—and best offices—of the twenty-first century are already structured very differently from those of any other era. Various innovations are now making corporations nimbler and less hierarchical. They are pushing employees to perform more creative, less structured tasks. They are challenging real estate companies to become technology companies, and they are creating opportunities for technology companies to take over real estate assets and become landlords. Let’s explore how.

9 Forces Reshaping Supply of Office Space

Below are descriptions from the websites of four providers of office space (Table 9.1). Can you pick the odd one out? The first are from the “About Us” page of three publicly listed real estate investment trusts (REITs), with a combined market capitalization of over $40  billion. These descriptions are fairly standardized across the industry; dozens of other major landlords use very similar terms. The fourth is from the introduction of the We Company, parent of WeWork, valued at $47 billion as of July 2019, and much less by September.cxxv The We Company doesn’t have an “About Us” page; its website links to a blog post written by its three founders. Let’s take a moment to examine the difference between these four companies. The three REITs describe what they do and what they own. They speak about business assets in business terms. The We Company, on the other hand, describes what it enables others to do. It speaks like a consumer brand and it tries to tap into the aspirations of individual people. The REITs’ description is concrete; We Co’s is abstract. We can argue about the value and merits of each of these companies, but one thing is clear: the first three are focused on their assets, and the last one is focused on its customers.

Table 9.1  Landlords’ “About Us” 1 We are “a preeminent owner, manager, and developer of office and retail assets”. 2 Our company is “one of the largest owners, managers, and developers of Class A office properties…” 3 We “buy, sell, and manage commercial property…” 4 Our company’s guiding mission is “to elevate the world’s consciousness”.

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Do landlords not care about their customers? They do, but with two important caveats. First, for a typical office landlord, the customer is the corporate entity that signs the lease and “occupies” the space. This entity, known as a tenant or an occupier, pays the rent, and its creditworthiness contributes to the value of the building. This leads to the second caveat: Tenants are interchangeable and are valuable only in relation to their ability to contribute to the value of the asset (the building). As we pointed out above, the asset is valuable because its tenants are interchangeable. But isn’t this true for any business? The customers of Starbucks, H&M, Hilton, or KPMG are also interchangeable, and they matter only because they contribute to the value of each of these businesses. But office buildings are not “businesses”; they are real assets. Understanding the difference between the two is critical. As Professor Andrew Baum of Oxford University’s Saïd Business School pointed out, a “real asset [is] a store of value even when it is vacant and produces no income.”cxxvi In other words, real assets are unique because they are valuable even when they do not have customers or generate any income. Landlords are called landlords for a reason: they own land, and land is inherently scarce and is thus inherently valuable. WeWork is different because it is not really a landlord; it is a business. It hardly owns any real estate (yet). Even worse, it is usually a tenant, which means it is obligated to pay rent, regardless of whether the buildings it operates are generating any income. And that is exactly the point: WeWork’s structure compels it to focus on its customers—without them, its business is worth nothing. On the other hand, the structure of REITs and other traditional real estate investment companies incentivizes them to focus first and foremost on their physical assets. Put differently, a traditional landlord’s main assets are its buildings. WeWork’s main assets are its customers and its brand. This is not to say that WeWork is invincible or that its operating model should be copied. Quite the opposite. As of Q4 2019, WeWork continues to be dependent on external funding to remain in business, and its parent company failed to convince investors that it is worthy of an IPO. Its business model is riskier than that of traditional real estate owners and/or operators. And its founders were distracted by a variety of seemingly irrelevant investments in cricket farms, wave pools, and early education. On the other hand, WeWork managed to double its membership and to grow its revenue by more than 50% during each of the years leading up to its planned IPO in 2019.cxxvii Over the next few years, the company will try to transition to a more sustainable model—by reducing its reliance on ­corporate-­level venture funding and by increasing the use of more traditional real estate debt and equity.

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In 2017, WeWork partnered with Rhone Group, a private equity firm, to raise a $400 million real estate investment fund.cxxviii The purpose of the fund, dubbed WeWork Property Investors, is to acquire properties where WeWork is an existing tenant, or to acquire properties that could be repositioned once WeWork becomes their tenant-operator. This kind of “tenant in tow” strategy is common in the private equity world. WeWork and its partners used the strategy to acquire prime buildings on New York’s Fifth Avenue and London’s Devonshire Square. In these projects, WeWork affiliates play the role of co-owners, co-operators, and tenants. This sets the scene for potential conflicts of interests, but affiliated property and operating companies have existed in real estate for decades and there are standard governance structures to address such situations. It is tempting to conclude that WeWork’s risky model and inherent conflicts of interests are good news for traditional real estate companies. They aren’t. Whether or not WeWork survives, the strong demand for its type of offering points to a future in which the value of even the best office assets become less predictable and more dependent on specific operators. WeWork does not represent a passing fad or a marketing gimmick. It is the most well-­ known among hundreds of companies that emerged over the past decade to fill a gap between what most landlords offer and what a growing number of urban tenants want (see Table 9.2). Other notable new office companies include The Office Group (TOG), URWork, Convene, Breather, and Industrious. Each of them offers turnkey access to well-designed shared or private spaces, flexible terms, and a layer of hospitality services under a meaningful consumer brand. The brands and design aesthetic of these companies are recognized and appreciated by individual employees, not just by the CFOs or office managers of corporate tenants. The supply and take up of flexible space in the world’s 20 major office markets quadrupled between 2015 and 2018, according to data from PGIM and others.cxxix JLL predicts that 30% of the office market will be flexible by 2030,cxxx up from less than 2% in 2018. We believe the number could reach even higher, particularly in view of efforts by traditional landlords to integrate flexibility and other services into their core offering. We will look at an example of this later in this section. Even today, a high percentage of all new leases in most major office markets are either by flexible operators (WeWork and others) or their tenants. If WeWork matures and becomes a healthy, sustainable business, it would likely look less like a tech start-up and more like a hotel franchise, public REIT, or private equity firm—and possibly be a combination of all three. This book is submitted to the publisher weeks ahead of WeWork’s planned IPO

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Table 9.2  The gap between office supply and demand What landlords offer Fixed, multi-year term Empty space that requires months of planning and build-out before moving in Multiple points of contact involving interaction and negotiations with brokers, property managers, contractors, installers, utility providers, maintenance teams Single location (or one location at a time) High upfront costs for fit out, IT, deposits, legal, brokerage, and other fees A variety of confusing and unpredictable charges (maintenance, insurance, taxes) A solution for the tenant’s current projected needs

Focus on the creditworthiness of the entity that signs the lease Market data on cost increases Physical space

A brand that projects quality, financial stability, and appeals to the CFO (or no brand at all)

What tenants need ➔ Flexible term ➔ Move-in ready space ➔ Single point of contact with ongoing customer service ➔ A network of on-demand meeting, work, and event spaces ➔ Pay as you go, only for what you use ➔ One clear and predictable monthly fee ➔ A solution for the tenant’s ongoing needs (including the ability to expand, contract, and change the layout) ➔ Focus on the productivity and well-being of talented employees ➔ Analytics on how to make the most productive use of the space ➔ Programming, experiences, and digital tools to help employees access value-added services, make new connections, and find inspiration ➔ A brand that projects meaningful values and appeals to every individual in the company—and their friends

and will be available in print several weeks after its current target date of September 2019. Regardless of WeWork’s fate, the more pressing question is how traditional office REITs and private equity firms can evolve to compete with companies of its kind, and whether they need to. We will address these questions later in this section. Before we do, let’s continue to explore how non-traditional landlords are reshaping the office market.

Eating the Landlord’s Lunch In July 2018, WeWork announced that it would no longer serve meat at any of its locations or reimburse employees for business meals that include meat. The company cited research showing that “avoiding meat is one of the biggest

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Table 9.3  Customer benefit categories Functional benefits are focused on the basic attributes of a product and are linked to the consumer’s basic motivations and needs. For example: An office space is functional if it can fit the necessary number of employees, is safe from fire and the elements, has basic power and Internet connectivity, and includes basic amenities such as bathrooms. Experiential benefits refer to what it feels like to use the product or service. They include cognitive stimulation, variety, and sensory pleasure. For example: The experiential benefits of an office space can include a beautiful view, delightfully fresh air, multiple rooms with inspiring furniture, or the sound of chirping birds or a water spring. Symbolic benefits refer to the symbolic meaning that a product or service confers upon its user, to what using the product says about the customer. Symbolic benefits do not correspond to specific attributes of the product or service itself. Instead, they relate to the customer’s underlying need for social approval or personal expression. For example: By taking a stand on an environmental issue, WeWork enabled its customers and employees to feel like they are part of a positive movement—that they are doing something meaningful and good by simply going to the office.

things an individual can do to reduce their personal environmental impact.”cxxxi Whether the research is valid is beside the point. Seen through the lens of classic marketing theory, WeWork’s denial of meat is not a limitation on its employees, but a benefit to its customers. More precisely, it’s a symbolic benefit. As Kevin L. Keller, Tuck Business School’s renowned marketing professor, pointed out, Benefits represent what “consumers think [a] product or service can do for them”.cxxxii Such benefits fall into three main categories: functional, experiential, and symbolic (see Table 9.3). WeWork’s physical product, services, and brand provide customers with clear functional, experiential, and symbolic benefits. Telling a friend that you work out of a WeWork location doesn’t only say something about your building, it says something about you—your lifestyle and values. A study published in the Harvard Business Review found that a significant number of WeWork members feel the company plays “an active role in shaping their professional and organizational identities”.cxxxiii In contrast, most individuals working inside traditional office buildings don’t even know their corporate landlord’s name, let alone the landlord’s values or policies. It’s time for landlords to get up-close and personal—or team up with a branded operator who will. This is not to say that all landlords must ban meat and join the environmental movement. Different customers value different things. But landlords need to figure out what matters to their customers. Office buildings are increasingly expected to offer symbolic benefits alongside functional and experiential ones. More importantly, landlords must decide

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who their customers are. One-size-fits-all is no longer an option, at least not for those who plan to maximize the value of their assets. A simple Google search provides a simple illustration of how the office market is becoming more focused on the needs of specific customer groups. If you type “Coworking for…” into the search bar, Google will show you a list of popular searches that begin with those words. When we tried it in April 2019, the suggestions included coworking for designers, lawyers, creatives, artists, moms, doctors, introverts, and parents. Customer segmentation and experiential and symbolic benefits are becoming more important because urban professionals have more alternatives than ever on how and where to perform their work. The supply of places to work has grown dramatically over the past decade, but not in the traditional sense. This abundance of workspaces is not a result of the construction of new office buildings. Instead, it’s a result of both sustaining and disruptive innovations in several industries. The word “disruption” is often used to describe any type of new company, service, or technology. To understand what’s happening to the office market, we need to go back to its precise academic definition.

Disruptive Innovation 101 Professor Clayton M. Christensen of Harvard University introduced the theory of disruption in his seminal books The Innovator’s Dilemma (1997) and The Innovator’s Solution (2003). The books’ main focus is enterprise technology, but their insights provide a relevant framework for the market for office space. According to Christensen, most new innovations are sustaining innovations. They are focused on improving the performance of an existing product along the dimensions that matter to mainstream customers in the largest markets. They aim to satisfy demand (and demands) from existing customers in existing markets. For example, an established automotive company will invest in sustaining innovation to make its cars faster, safer, or more efficient in consuming fuel. Disruptive innovations, on the other hand, do not attempt to improve on existing products, and usually don’t target mainstream customers in existing markets. Instead, disruptive innovations result in new products, new value propositions, and new business models and focus on new or under-served customers. Judging by prevailing industry standards, these products are usually worse than those currently used by mainstream customers. But disruptive

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products also have new and different features that are initially valued only by a small group of customers. Products based on disruptive innovation, said Christensen, “are typically cheaper, simpler, smaller, and, frequently, more convenient to use”.cxxxiv For example, a new automotive company might come out with an electric scooter that is slower, less comfortable, and less safe than a car. But the scooter is much cheaper than a car, does not require a parking spot, is available on-­ demand, and can be picked up (and dropped off) on every street corner. Disruptive innovation does not happen in a vacuum. Christensen identified two critical elements that indicate a market is ripe for disruption. The first is that the average product in the market has reached a level of improvement that is “good enough” for most customers. For example, office buildings used to compete on whether or not they had elevators, air-conditioning, fire safety systems, ample bathrooms and, later, Internet connectivity. In other words, buildings competed on basic functional benefits. As a result of a series of sustaining technological and design innovations, almost all office buildings are now reasonably suitable for most customers; they are “good enough”. This is not to say that all office buildings are now the same, only that most of them can now provide functional workspaces that meet the basic needs of mainstream tenants. To continue with the automotive analogy, buildings are “good enough” in the same way that a Toyota Corolla is good enough for most people who need to fulfill the basic task of driving. The second indicator that a market is ripe for disruption is the fact that established companies show clear signs of what Christensen calls “overshooting”. As they seek higher prices and margins, existing market leaders keep adding features and sustaining innovations and reach a point where “they give their customers more than they need or ultimately are willing to pay for”.cxxxv Overshooting is not restricted to adding specific product features and is often more about increasing the level of complexity or sophistication of each feature. To use an office building as an example, consider the number and speed of elevators, the height and size of windows and ceilings, the quality of the marble in common areas, the brand of bathroom faucets, or the complexity of heating, cooling, and ventilation (HVAC) systems. All of these features matter, but at some point, their quality or complexity exceed the level that mainstream customers are willing to pay for. Customers might appreciate these features, but they would be equally satisfied without them—especially if it saved them money or provided them with other benefits instead. Overshooting is not just a waste of resources; it often means that a product or service is missing features that customers do need and are willing to pay for. By ignoring these features—and focusing on upgrading historical product

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dimensions—incumbents are leaving an opening for new entrants. A popular example of this dynamic is the evolution of the shaving razor. For decades, Gillette continuously added blades and features to its razors in an effort to increase price and margins, starting with one blade and going all the way up to five, while also adding an electric vibrating handle, an extra trimmer blade, and a gyroscopic head. In 2011, Dollar Shave Club (DSC) launched its brand of cheaper shaving handles, made in original equipment manufacturing (OEM) factories in China and South Korea. By that point, the world was awash with razors that were good enough. Instead of adding more blades, DSC offered customers something different: fresh shaving razors delivered regularly to their doorstep for $1 a month. The company’s razors were only good enough, but the overall experience was great. DSC customers could avoid the hassle of going to a store, they would never run out of blades, and they wouldn’t have to pay for features they don’t need.cxxxvi The new entrant redefined the dimension of competition in the market. As DSC’s original YouTube ad put it, customers could “shave time” and “shave money”. In addition, customers could feel like they are part of a meaningful movement, outsmarting everyone else by using a cool online brand that was created by people like them, for people like them. In 2016, Unilever acquired Dollar Shave Club for $1 billion, in an effort to turn it into a mainstream brand and compete directly with Gillette. Gillette, for its part, launched its own Internet-based subscription service in 2017. Three years after the Unilever acquisition, DSC’s latest model, dubbed “The Executive”, costs $9 per month and features … six blades. The evolution of DSC provides a textbook example of disruptive innovation, in five clear steps (see Table 9.4). Table 9.4  The stages of disruptive innovation 1 A market becomes abundant with options that are good enough for most customers. 2 Incumbents are overshooting what customers are willing to pay for and leave an opening in the market for offerings with less or different features. 3 A new entrant launches a product or service that is good enough, shifting the dimension of competition to other features, including experiential and symbolic benefits that are detached from the product itself. 4 Initially, the new entrant appeals to low-end customers or to people who would otherwise not be part of the market at all (non-customers). 5 The new entrant builds on its initial success by improving its product, ramping up marketing, and capturing a growing share of mainstream customers, usually with the backing of deep-pocketed investors or acquirers.

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Incumbents are often late to respond to disruptive innovation. If they respond at all, the market would have begun to evolve gradually toward a new equilibrium in which traditional and no-longer-new companies compete, once again, along clearly defined dimensions and price. We will address the challenges of responding to disruptive innovation later in this book. Before we do so, let’s continue to explore how sustaining and disruptive innovations are creating an unprecedented abundance of office space. Offices are not razor blades. Manufacturers can’t simply flood the market with new supply. Office buildings are built on land and, as such, are inherently scarce. And yet, without any changes in zoning or a divine act of creation, the supply of places to work has increased significantly over the past decade. This glut in supply is driven by six distinct dynamics: densification, intensification, repositioning, mixing, repurposing, and alternation. Let’s look into each of these in turn.

Densification: Doing More with Less Densification refers to increasing the number of workers who can fit into a similarly sized office. According to furniture company Knoll, the average space allocated per office worker decreased by 40%, from 227 square feet in 2001 to 135 square feet in 2011.cxxxvii A separate study by CoStar Portfolio Strategy indicates an 8% decline from 2011 to 2017.cxxxviii The data in both studies is sampled mostly from new leases and, as such, reflects a gradual change in the market and not a complete transformation. Various other studies reflect similar trends—even more so in Europe than in the U.S. WeWork’s coworking spaces provide an extreme example of densification in action. The average space per employee in some of the company’s coworking spaces is as low as 50 square feet—about a tenth of what American companies allocated to employees in the 1970s.cxxxix The size of individual offices in some WeWork locations can be as small as 26 square feet. Note that these numbers refer to the actual space allocated per person within the space at full capacity, and do not take into account the number of additional people who share access to the space at different times. WeWork achieves this level of density through a combination of software, hardware, and services. It uses building information modeling (BIM) data from its hundreds of locations, and algorithms to optimize layouts and minimize the amount of “dead space”.cxl Laser scanners using 360-degree spherical photography captures precise building dimensions and other structural and system data when WeWork takes over a new space.cxli These may be dismissed

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as gimmicks, but WeWork does achieve some of the highest prices per square foot in the industry, despite occupying many older buildings in non-prime locations. A private office for one person at a typical WeWork location in New York City (NYC), for example, costs about $1000 per month in 2019. These offices are normally smaller than 45 square feet each. A similar space under a traditional lease based on current market rates would cost about $225 ($5 per square foot). A traditional lease would also require the tenant to pay an additional 30% or so for public and service areas, bringing the rent to $292.50. Adding maintenance, utilities, and other costs, we can round the total to $300 per month, still 70% lower than WeWork’s fee. Regardless of its efficient design, the biggest reason WeWork is able to condense more people—and revenue—into less space is the fact that the company does not actually sell space. Unlike traditional landlords who charge their customers by the foot or the meter, WeWork’s fee is based on desks or “heads”. Some people even pay to belong to WeWork’s member community, without the usage rights of any particular space. This speaks to the value of WeWork’s community, events, services, flexibility, and member discounts. They also pay for symbolic benefits, as mentioned above. Prefabricated phone booths or micro meeting rooms are also contributing to companies’ ability to densify their space. New York-based ROOM designs and sells soundproof booths that one or two employees can use for virtual meetings and calls. The tiny booths are equipped with their own electric ventilation and lighting system. They are used by organizations such as Google, Nike, Salesforce, J.P. Morgan Chase, and even NASA.

Intensification: Doing More with Existing Supply If densification helps condense space, intensification helps condense time. It refers to the improved allocation of resources to their most productive uses, around the clock. The most famous example of this dynamic is Airbnb, which facilitates the temporary use of apartments or rooms that would otherwise be empty. In recent years, similar platforms have emerged in the office world. LiquidSpace and PivotDesk help connect short-term tenants with landlords or with other tenants who wish to sublease part of their space. The platforms also offer additional services such as design, furniture rentals, and maintenance that reduce moving costs. These types of sublease agreements are not new, but software and services make the market for such agreements more

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liquid and efficient. The result is an increase in space that can be put to productive use. Marketplaces are not the only model that contributes to intensification of office use. Montreal-based Breather operates a network of over 500 spaces in cities such as New York, London, and Toronto. Unlike Liquid Space and PivotDesk, Breather designs and furnishes each of its spaces and installs special access control systems on their doors. In line with the spirit of our times, Breather spaces are not just functional and convenient, they are also highly Instagrammable—they look great in photos. Breather customers can book a space on the company’s website or app for hours, weeks, or months. In many cases, customers can “move” into the space without speaking to a human or signing any paper contracts. Just like Uber, Breather uses dynamic pricing for its spaces. The company’s algorithms determine the price for each space based on real-time demand and historical data. It also shows recommendations for spaces and locations that customers (i.e. tenants) might like. The allocation of offices via digital channels results is a more intensive (and profitable) use of existing spaces. Interestingly, it also impacts the kind of buildings customers end up using. Breather, for example, provides office space to some of the world’s leading technology and services companies. These office spaces are often in Grade B and Grade C buildings. As a result of the digital booking process and Breather’s design, the company’s customer-tenants end up using spaces in buildings that they wouldn’t have otherwise considered. Breather’s cancellation policy and 24/7 customer support also make it easier for customers to “bet” on a new location and go outside of their comfort zone. The last point is worth reiterating. The channel through which office space is marketed impacts the customers’ location preference. It also impacts the way spaces are designed and laid out, prioritizing those that photograph well and can be easily described. The effect of this is incremental. Tenants are unlikely to rent or book spaces in a completely new area, but they do stray a little farther from where they originally planned to rent—in the same way we end up buying something different than what we originally searched for when we browse Amazon.com or, indeed, a well-designed physical store. When Marshall McLuhan famously said “the medium is the message”, this is what he meant: every new medium (print, radio, TV, web) is not simply a new way to transmit the same old content to the same people; instead, the essence of each medium reshapes the content itself and changes the consumptions preferences of the audience. In this case, the content is office space. We explore the implications of digital channels in more detail in the Housing and Lodging section.

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Repositioning: Making Old Spaces Desirable Breather is not the only operator bringing fresh customers to older buildings. TOG uses digital marketing, contemporary design, community management, and superior customer service to reposition whole buildings across the U.K. TOG locations include furnished private offices, a coworking area, communal meeting rooms, and event spaces. Some include additional amenities or specialized equipment that members can share. For example, Henry Wood House in central London was built in the 1960s and originally served as an ancillary office for the British Broadcasting Corporation (BBC). In 2012, the BBC decided to leave the building as part of a broader push to reduce headcount and cut costs. The building was not attractive to contemporary tenants. According to one of the architects brought in to work on the renovation, it was “a tired old BBC” facility.cxlii In 2013, TOG signed a 21-year sublease with the building’s owner, Derwent London. Within nine months, TOG transformed Henry Wood House into a magnet for creative and technology professionals. Beyond private and shared workspaces, the building now features a gym, bicycle storage, showers, a library, dining and coffee lounges, a roof deck, and a film screening room. Older buildings often have more character than shiny new ones. In many cases, they reflect standards from a more civilized age—higher ceilings, solid brick walls, cast iron, or brass details. They also have more stories to tell—and a general quirkiness that appeals to professionals who are looking to “escape the grind”. Repositioning office buildings is not a new strategy, but TOG’s approach is different from that of traditional landlords. The company does not have tenants, it has members. The difference is not merely semantic; members get access to events and common areas across the TOG portfolio. They can interact with each other on the TOG&CO app. And they enjoy discounted products and services from TOG’s partners. While other coworking companies may offer similar benefits, TOG is unique in its focus on repositioning whole buildings (as opposed to simply taking space as a tenant within larger properties). Each TOG building has a boutique brand of its own, drawing on its history and location, and focusing on a specific group of customers. This type of branding strategy is common in the world of high-end hotels. Marriott operates dozens of hotels with singular brand identities and characters, including the Algonquin in New York, Hotel Banke in Paris, and the Prince Gallery in Tokyo. These hotels allow guests to access the standard benefits of booking

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with a large operator while enjoying a one-of-a-kind experience and access to unique features. One such feature that TOG offers at Henry Wood House is a professional TV and radio production studio that members can use, for a fee. The building’s creative tenants get to share valuable resources they could not acquire on their own. After being occupied by a giant media corporation for half a century, Henry Wood House is now filled with 70 companies with nearly 1000 individual members, on flexible leases, sharing resources to create content for streaming services and social media.

Mixing: Workspace as an Amenity Hotels are not just a source of inspiration for office landlords; they also provide their own take on the future of work. A growing number of hotel operators are mixing coworking spaces and even private office suites to their properties. Unlike the business centers of old, these are larger areas designed for a new kind of professional customer. In some cases, the space is branded and operated separately from the rest of the hotel. Office uses are bleeding into hotel buildings. The trend is apparent across markets and operators. Marriott’s Moxy Hotels include a “living room” that doubles as a work area during the day and a party lounge at night. The DoubleTree Hilton in Vail, Colorado, has a coworking space called Pivot62. The Tryp by Wyndham Hotel in Dubai includes a coworking space called NEST. The Eaton in Hong Kong features a members-only coworking space called Eaton House. And the lobby of the Ace Hotel in New York is one of the most popular workspaces in a city that has more office buildings—and more coworking spaces—than anywhere on earth. CitizenM, one of the fastest-growing hotel chains in the world, takes the balance between rest, work, and play to the extreme. The guest rooms are tiny, each 14 square meters or 150 square feet. Instead of check-in counters and a front desk, there are digital check-in kiosks. The rest of the lobby operates as a mash-up between a coworking space and a trendy bar. Most CitizenM locations have an additional floor with private spaces for meetings and focused work. The hotels prioritize what price-conscious guests are trying to achieve: work, have some fun, and spend as little time as possible in their rooms. While some flexible office operators are adding gyms to their buildings, some gym operators are starting to add coworking spaces to theirs. Equinox has lounges with comfortable tables and chairs, power outlets, and Wi-Fi, that some members use for regular multi-hour work sessions. In 2017, Life Time

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Fitness dropped the word “Fitness” from its name and started adding workspaces to its locations across the U.S. The company sells “Life Time Work” memberships that provide access to its premium workspaces as well as its gyms and various classes. The convergence of work and leisure is not restricted to large cities and developed countries. In fact, it is more apparent in smaller travel destinations and emerging markets. Companies such as ROAM and Selina operate hospitality projects in Southeast Asia and Latin America that include coworking spaces, cheap accommodation, and shared activities that foster a sense of community among guests. These projects cater to the growing number of “digital nomads” who travel the world while working as freelancers or as location-­ independent employees. Workspaces are also being integrated into retail projects. Macerich is an owner and operator of 48 shopping centers. In 2018, the company brought Industrious, a coworking operator, to operate flexible office space in the space that was previously occupied by a department store. Macerich indicated plans to expand the integration of office spaces to its other retail properties across the U.S. Other retail landlords are experimenting with similar initiatives. Brookfield and Unibail-Rodamco-Westfield have coworking and flexible meeting spaces in a few of their malls. A 2019 study by JLL predicted that coworking area within retail projects would grow at an annual rate of 25% through 2023.cxliii Some malls survive by allocating some of their retail space to office use. Other malls need to be fully repurposed. Westside Pavilion is a 584,000-square-­ foot mall in Los Angeles. Its two largest tenants, department stores Macy’s and Nordstrom, shut down in mid-2018. For lack of better alternatives, the mall is now being transformed into a new office complex for a single tenant—Google.

Alternation: Part-Time Workspaces Even retail spaces that are doing well are not always busy. High-end restaurants, for example, are often closed during the day and open only for dinner. Likewise, pubs and bars do most of their business after 5:30 pm, once most people get off work. Such venues are often located in trendy areas, next to public transport. Software and online marketing channels make it possible to turn these underused assets into workspaces. New York-based Spacious converts restaurants into shared workspaces, for eight hours each day. The company provides Wi-Fi, coffee and water, and sets

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up an iPad for member registration and check-in. Each location also has a staff member to handle inquiries from members or walk-in guests. But most customers do not simply walk in—they find Spacious online and buy a day pass or a monthly membership that provides access to any space in the Spacious network. The restaurants alternate as office spaces during the day. In the evening, the restaurants go back to their original use. Monthly Spacious memberships cost $129, about 75% less than membership in a typical New York City coworking space. Put differently, for less than $130 a month, creative professionals get access to a decent workspace in a great location in one of the most expensive cities on earth. By driving demand through an online booking system, Spacious can cut costs and change its roster of locations based on whatever arrangements it can make with restaurant owners. It does not need to own any property or to sign leases. Spacious is also experimenting with other ways to secure space. In January 2018, TGI Fridays shut down its branch on New York’s 16th Street. The restaurant occupied a two-story building facing Union Square. The landlord was planning to sell the building and, we are told, did not wish to bring in a new long-term tenant that would restrict any redevelopment plans by a future buyer. Instead, the landlord reached an agreement with Spacious to convert the deserted TGI Fridays space into a pop-up coworking space. The agreement with the landlord does not require Spacious to pay traditional rent and allows it to operate in the building for a minimum of six months, and up to five years. The landlords get to share some of the income generated by Spacious while having a tenant that keeps the building clean and presentable to potential buyers. BrewDog, a Scottish brewer and operator of pubs across the U.K., runs a program called DeskDog that allow customers to spend their workday in a pub. Starting at £7 per person, the company provides Wi-Fi, a table with power outlets, unlimited coffee, and a pint of India pale ale. The mix of hot desks and cold beers might not be for everyone, but it works for some.

Anywhere I Lay My Desk With no offense to NYC’s restaurants and London’s pubs, the most radical coworking pop-ups we’ve seen hail from San Francisco. In April 2019, a local entrepreneur named Victor Pontis launched WePark, a movement to set up shared workstations in empty parking spots, along city streets. WePark “members” feed the nearby parking meter, set up wheeled or collapsible desks, and proceed to work on their computers. WePark was launched

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on Twitter and drew the attention of dozens of media outlets, including the BBC, NBC, CBS, Fast Company, and The Times of London. Within days, it inspired similar initiatives in Europe and Asia. WePark is not likely to topple any of the world’s office landlords any time soon. Its principal aim is to raise awareness to the amount of public land used for parking instead of more productive uses such as housing or communal spaces. But it does highlight how easy it is for modern professionals to set up a workstation anywhere they wish. With a computer in their pocket, wireless connectivity, and digital channels to drive demand, workers are pouring out of office buildings and into a variety of other assets. Technology makes it possible to fit more people into existing office buildings. It helps to reduce time and keep spaces otherwise empty occupied throughout the day. It facilitates the repositioning of older buildings. It frees up space in retail projects. And it allows spaces to toggle between office and other uses. As a result, the supply of “office space” is no longer a function of government zoning or how much developers can build. Instead, it evolves in new and unpredictable ways. Many of the experiments describe above will fail. Many of the new operators will be acquired or run out of cash. But demand for more flexible, more diverse, and more meaningful work environments will continue to grow.

10 Forces Reshaping Demand for Office Space

The growing popularity of flexible and alternative office locations is driven by dramatic changes in the nature of demand. Technology makes it harder to predict demand for office space. It makes it harder to pick good tenants. It makes it harder to determine what tenants want. And it makes it necessary to provide more specialized office solutions, very different from those offered by most traditional landlords. Demand for office is being reshaped by nine trends, listed in Table 10.1. To understand their impact, let’s break down each of them in turn.

The Instability of Traditional Public Companies The corporations that occupied the world’s first skyscrapers could expect a long and relatively stable life. The S&P 90 index—the precursor to the S&P 500—started tracking America’s leading publicly listed companies in 1926. In the 1920s and 1930s, a company that was included in the index could expect to remain on it, on average, for over 65 years.cxliv By the middle of the 1960s, the average life expectancy of a firm on the index was halved to 33 years, and by 1990 it was only 20 years.cxlv Innosight, a consulting firm, forecasts the number to continue to shrink and reach 14  years by 2026.cxlvi It’s becoming harder to pinpoint companies that are likely to maintain their market position for over a decade. Technology makes it easier than ever for new companies to emerge—and, on the flip side, for established companies to fall out of favor. Social media, mobile app stores, search engines, and other digital marketing channels enable

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Table 10.1  Trends reshaping demand for office space 1 2 3 4 5 6 7 8 9

Traditional public companies are becoming less stable. A growing number of the world’s largest companies are private and do not disclose traditional financial data. Many of the fastest-growing companies (and tenants) that are publicly listed are losing money as a matter of strategy. The impact of automation and artificial intelligence is profound, yet unclear. Human work is becoming more conceptual, less structured, and less predictable. Corporate structures are less hierarchical, less structured, and constantly in flux. The job market is bifurcated, with specialized talent becoming more valuable and the “average” office dweller no longer existing. The workforce and work itself are becoming more diverse. Flexible and remote work are going mainstream, both within and outside traditional organizations.

small companies (or individuals) to reach millions of customers across the world and get exposure that was heretofore established only for large companies with significant marketing budgets. Mastery of digital customer acquisition and viral content are force multipliers that weren’t available to small companies in the pre-Internet era. In addition, cloud providers such as Amazon Web Services and Microsoft Azure also enable new companies to launch products faster and access world-class infrastructure on a pay-as-you-go basis and at a marginal cost that was previously exclusive to large companies.

The Opacity of Private Companies Beyond the faster rate at which public companies rise and fall, the S&P itself is no longer as important as it was previously. Emerging technology firms remain private for longer, sometimes indefinitely, and raise more private capital ahead of their initial public offerings.cxlvii As a result, landlords find themselves dealing with tenants that are very large but, at the same time, lack the transparency and financial stability of traditional public companies. As of June 2019, the valuations of private “start-ups” such as Bytedance, WeWork, and Airbnb are $75  billion, $47  billion, and $29.3  billion, respectively.cxlviii WeWork’s valuation will likely be updated by the time this book goes to print. None of these companies are included in the S&P, Dow Jones, or other traditional index. These companies are not just big; they are the largest pre-IPO companies ever. For comparison, Microsoft and Amazon

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were valued well below $1 billion when they went public in 1986 and 1997. Even Google, whose 2004 IPO was the largest ever for a tech company at the time, was worth “only” $23 billion.cxlix Multiple pre-IPO companies can reach incredible scale thanks to the explosion in private financing over the past two decades. Private assets under management rose from less than $1 trillion in 2000 to over $5 trillion in 2017.cl A lot of that capital is allocated to venture investment in new companies. Lyft raised nearly $5 billion before its IPO in March 2019—more than any other pre-IPO company in history.cli WeWork was hoping to break this record during its failed attempt to go public in 2019. In total, U.S.-based venture capital firms invested over $130 billion into start-ups in 2018 a fivefold increase since 2003.clii As Eric Feng of Kleiner Perkins pointed out, “there’s now one venture capital investment being made every hour of every day, 7 days a week, 365 days a year.”cliii These investments often have the explicit goal of disrupting existing industries and unseating large, stable incumbents. The relative decline in the importance of public markets is, to an extent, a technological phenomenon (it is also driven by monetary policy, tax policy, demographics, and other factors). For most companies, an IPO used to be the only way to raise the capital required to reach truly global scale and to signal the quality of their business to customers, partners, and lenders. The Internet has made it easier for companies to reach potential investors, and for investors to vet investment opportunities and access data about markets, founders, and competitors. The transaction costs associated with private investment have been reduced by technology. Meanwhile, the costs and risks of being a public company have remained constant or even increased. In the age of constant connectivity and online mobs, the prospect of ongoing scrutiny from thousands of small investors is not very appealing.cliv Private companies, on the other hand, only need to explain themselves to a handful of sophisticated investors. As a result, many innovative companies opt to stay private for as long as possible. Private markets are also significantly less liquid than public ones, which means that even if investors are aware of any issues or setbacks, they are not able to easily sell their shares and are thus incentivized to keep the information to themselves. The pre-IPO valuation of WeWork, for example, was mostly determined by a single lead investor, Softbank. That investor has little incentive to publicize its concerns about the company’s future performance from the public.

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The Unstable Nature of Newly Listed Companies The “economics of tech” are another reason for companies to stay private for longer. As we pointed out in the Retail section, technological innovation entails significant upfront investment to develop products and services that might one day enjoy low marginal costs and be difficult for competitors to replicate. This often means incurring massive losses over many years. As Jeff Bezos, Amazon’s founder and CEO, once said, “inventing and pioneering requires a willingness to be misunderstood for long periods of time.”clv Bezos would know: His company lost money for more than a decade following its IPO. It was constantly criticized by analysts, journalists, and shareholders. But once it finally turned a profit, it became the most valuable company in the world. Amazon’s survival and ultimate success emboldened other money-losing start-ups to take the plunge. After all, initial public offerings are a great way for founders and investors to “cash out”. But Amazon’s growth and profitability—after nearly two decades of losses—paved a path for more money-losing companies to go public and continue their experiments under public scrutiny. More than 80% of IPOs in recent years featured unprofitable companies. In 2019, the share of such companies was at its highest level since 2000 and reflected an overall upward trend since 1980.clvi Uber lost $1.8 billion million in the year before its IPO—more than any other pre-IPO company in history. That, too, is a record that WeWork’s IPO might break. The We Company lost nearly $2 billion in 2018.clvii Going public is no longer an indication that a company is stable enough to honor a long-­term lease.

Automation and AI Technology is not only making it harder to predict the growth and stability of office tenants. It also makes it harder to predict how much space tenants will need. In the twentieth century, business success was mostly correlated with physical expansion. Consider, the model used by the Commercial Real Estate Development Association (a.k.a. NAIOP) to predict demand for office space. The model relies on macroeconomic variables such as gross domestic product, corporate profits, and total employment, as well as forward-looking delivery

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and inventory data for non-manufacturing industries.clviii According to the model, employment in the financial sector had a very strong relationship with net absorption of office space between 1988 and 2014. But 2024 might be very different from 2014: Financial services jobs are among the most vulnerable to automation over the next few years, according to a 2018 analysis by PwC. Famously, Goldman Sachs reduced the number of stock traders who process orders from large clients in its New York City headquarters from 600 to two.clix Similar cuts were made elsewhere in the financial world. Goldman now employs thousands of computer engineers, but a former executive estimated that the company “probably needed one programmer for every 10 of the old-school traders who lost their jobs”.clx On the retail side, U.S. banks have closed nearly 9000 branches over the past decade,clxi with net change remaining negative even during the years of economic expansion.clxii Other white-collar jobs that are repetitive, predictable, and involve large amounts of structured data are governed by similar dynamics. In addition to finance, this includes sectors such as accounting, law, insurance, information and communication, and scientific and technical services. It also includes government agencies. Consider the potential impact of automation on the U.S. federal government, where documenting and recording information consumes about 500  million staff hours each year.clxiii This represents about $16  billion in wages, 250,000 full-time positions, and hundreds of millions in office rent. Or the U.K., where research from Deloitte and Oxford University estimated that up to 861,000 public sector jobs could be automated by 2030.clxiv Predictions about the ability of artificial intelligence (AI) to perform human tasks vary widely. In 2016, researchers from Oxford and Yale universities conducted a survey of 352 artificial intelligence researchers and used the result to form an aggregate forecast about AI’s capabilities over the next decade.clxv The forecast gave 50% chance that machines will be able to “accomplish every task better and more cheaply than human workers” by the year 2025, and a 50% chance that they will be able to do so by 2060. A more granular analysis by McKinsey & Company estimates that 50% of current work activities performed by humans can be automated using existing technology—putting 800  million jobs at the risk of being displaced by 2030.clxvi Asking the tenants themselves, a survey by the World Economic Forum found that “50% of companies expect automation will lead to some reduction in their full-time workforce by 2022, based on the job profiles of their employee base today.”clxvii

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In previous waves of industrialization and automation, improved productivity ultimately created more jobs than it eliminated, thus giving rise to new industries and freeing up income for the consumption of new goods. Human labor was diverted to new tasks in which it had a competitive advantage.clxviii But the process was not smooth. The twentieth century saw two world wars, a communist revolution in Russia and China, and other upheavals related to labor and trade relations. In short, technological innovation might lead to dramatic growth in economic activity and corporate profits while simultaneously reducing overall demand for office space. It will also lead to the creation of new jobs, but these jobs will not require the same amount or type of office space, as we will see later in this section. Hundreds of studies have tried to estimate the timing and impact of AI. It is not clear which ones will ultimately prove right, if any. What is clear is that traditional models that predict demand for office space based on macroeconomic output need to be re-evaluated.

The Dawn of the Conceptual Age The machines of our day and age are different from those of earlier times. In the industrial era, machines pushed humans to become more like them— working regular schedules, in specified locations, on clearly defined tasks, using structured inputs to produce structured outputs. Today’s “machines”, on the other hand, are trying to become more like us—learning our languages, adopting our facial expressions, and attempting to think intuitively and creatively. This impacts demand for office space in two ways: it affects the share of stable office jobs as a percentage of total employment and it changes the type of work people perform within office buildings. The way we work is changing. As author Daniel Pink pointed out in A Whole New Mind, “we are moving from an economy and a society built on the logical, linear, computerlike capabilities of the Information Age to an economy and society built on the inventive, emphatic, big-picture capabilities of what’s rising in its place.”clxix Pink credits this shift to what he calls the Conceptual Age to three As: automation, abundance, and Asia. • Automation (including AI) pushes humans to focus on tasks that only humans can perform. At the office, that means a net growth in work that requires interaction with other humans, abstract reasoning, critical thinking, deep expertise, and creativity, according to projections by ­ McKinsey & Company and Deloitte.clxx

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• Abundance refers to the idea that in an age of infinite choice, products are differentiated by brand, experience, and meaning. This ties back to our earlier discussion of symbolic benefits. • Asia refers to the offshoring of low-value production to developing markets. Note that “Asia”, in this context, also applies to other developing markets. As a result of automation, abundance, and Asia, office-dwellers in developed markets will increasingly focus on more creative and more conceptual work.1 Perhaps, as Marshall McLuhan’s predicted in 1964, true automation will “liberate” men in the same way that steam and cars liberated horses, turning them from a factor of production into a form of entertainment.clxxi

The Unbundling of the Corporation Creative and highly specialized jobs will grow in demand, but they will also grow on demand. Many jobs will not be stable or, more accurately, they will not be jobs at all. Professionals will be called upon to contribute to specific projects and join teams for set periods of time. This will happen both within and outside of corporations. For a blueprint of how creative or conceptual goods are produced, we can look to the entertainment capital of the world, Hollywood. Film credits include dozens of experts from a variety of disciplines, including finance, law, architecture, design, creative writing, music, material science, computer science, and often even history, criminology, and psychology. These people work together but they are not “colleagues”, in the traditional sense of the word. They are a group of creative and highly specialized practitioners who were assembled for a set period of time to produce something valuable and unique. This way of working is increasingly relevant for other industries. As Adam Davison pointed out in the New York Times, “[o]ur economy is in the midst of a grand shift toward the Hollywood model.”clxxii The model is being used to build bridges, design mobile apps, launch new restaurants, or develop cosmetic products. Many real estate projects are also developed this way. In fact, this model has been common throughout human history. The past 150 years have been an exception. Since the late nineteenth century, business has been dominated by large corporations with clear organizational charts. It  At the other end of the spectrum, automation will also create many repetitive, machine-managed tasks as well as increase the importance of complex physical labor. Our discussion is focused only on the consequences that are relevant for office jobs. 1

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was an era of mass manufacturing, mass media, and mass retail. A relatively small number of products were marketed using a relatively small number of print, radio, and TV channels, and sold in thousands of near-identical stores. As a result, companies could rely on a relatively stable organizational structure, workforce, and production schedules. As we pointed out in the Retail and Industrial sections of this book, business in the twenty-first century is very different: A long tail of physical and virtual goods and services are produced by complex networks of suppliers, marketed, and sold across millions of unique digital and physical channels. As sociologist Esko Kilpi pointed out, creative and knowledge-based work requires a mix of capabilities and tasks. This mix is constantly changing and is increasingly difficult to predict. As a result, recruiting is “becoming a matter of expensive guesswork” and planning which individuals will perform which tasks is “getting close to impossible”.clxxiii To deal with these challenges, companies are starting to resemble networks or ecosystems, rather than clearly defined entities. This unbundling is enabled, once again, by reduction in transaction costs. In the past, it was too expensive to find, vet, recruit, transport, and pay a new group of team members for each corporate project. Today, technology makes it easier and (often) more profitable to identify, contract, and coordinate a group of ideal professionals for a set period of time. Amazon is divided into dozens (perhaps, hundreds) of small teams that are working on experimental projects with no knowledge of what other teams in the company are working on. Some teams are even working in parallel on similar products or solutions to the same problem. Successful teams end up developing new products such as the Amazon Echo, Web Services, or Kindle. Other teams dissolve back into the organization (or the labor market). More and more companies are adopting similar models. Does this mean the end of big business? No—Amazon, Apple, and Microsoft are some of the largest companies ever. But it does mean that even within giant companies, there will be fewer large, homogenous teams working together in a single location over long and predictable periods.

The Bifurcation of the Office Job Market The growing dependence on specialized talent also means that, just like in Hollywood, many industries are now competing for “star” employees who require an inspiring work environment and other perks. And just like in Hollywood, the emergence of new digital companies means that talent wars are no longer a matter of a handful of studios chasing a handful of stars.

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Instead, there are often dozens of companies in each sector that are fighting for thousands and possibly millions of specialized employees. The “stars” are multiplying, and companies are willing to pay through the nose to attract them. The median salary at Facebook is $240,000. At Google, it is over $197,000.clxxiv These two companies alone employed more than 100,000 people in 2018. Employee perks are reaching new levels. Googleplex-style snack bars, gyms, and ergonomic chairs are no longer enough. Companies are offering paid sabbaticals, annual camping trips, and music festivals, and the opportunity to study on the company’s dime. Some, such as Spotify and HubSpot, are even offering (female) employees to pay for treatment to freeze their eggs.clxxv These spectacular perks and high salaries hint at another impact of technology. Job benefits in the Conceptual Age are distributed differently from those of earlier eras. In the U.K., Deloitte found that technology contributed to the loss of 800,000 jobs between 2001 and 2015. During the same period, technology also contributed to the creation of 3.5 million new jobs. Each of the new jobs pays “on average, an additional £10,000 per annum, resulting in a boost of £140 billion to the UK’s economy in new wages”.clxxvi The operative term in Deloitte’s finding is “on average”. While the newly created jobs pay more in aggregate, their distribution might be bifurcated: A relatively small share of people are earning much more than before, a larger share have less stable and less rewarding gigs, and fewer people overall have access to stable jobs that pay reasonably well. In other words, the share of people with stable office jobs is lower than in previous decades. A 2016 survey research by economists Lawrence Katz of Harvard University and Alan Krueger at Princeton University found that nearly 90% of all job growth between 2005 and 2015 was “characterized by being temporary or unsteady”. Over 60% of it was attributed to the rise of “independent contractors, freelancers and contract company workers”.clxxvii In 2019, Katz and Krueger released a paper that revisits their findings from 2016, in light of newer data from the U.S. census bureau.clxxviii The new paper provides lower (but still significant) estimates regarding the rise of unsteady jobs. More importantly, the paper describes the difficulty in measuring the increase or decrease of such jobs. Their unstable and informal nature makes it difficult to make exact estimates—not just about the future, but even about the present and the past. As far as landlords are concerned, the bottom line is the same: It’s becoming harder to predict the number of stable office jobs. In addition, a bifurcated workforce is one more reason that an average, one-size-fits-all office product is not likely to be in high demand.

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The Growing Diversity of the Workforce The workplace is also becoming more diverse than ever. For the first time in history, five generations are working side by side: Baby Boomers (born 1946–64), Gen Xers (1965–80), and Millennials (1981–96), flanked by members of the Silent Generation (1928–45) and Gen Z (1997–2012).clxxix We are using the U.S. names for these generations, but the same age distribution is true for other developed countries. Immigration and the globalization of talent also means that the workforce is becoming more diverse in terms of ethnicity, country of birth, and gender. This means the office of the future needs to accommodate an unprecedented variety of workers and needs. Even bathrooms aren’t as simple as they used to be: Google, LinkedIn, E&Y, Aviva, and a growing number of other companies are adding “gender-neutral” or “non-binary” toilets to their offices. Teams in innovative organizations don’t just vary in their composition. They also vary in their work styles. At music streaming company Spotify the workforce is divided into “squads” of six to twelve people who can decide how to work together, how to arrange their workspaces, and—sometimes— what to build. Such squads include a diverse team of software developers, designers, product managers, and others with relevant skills. Each squad is a “mini-start-up” of sorts, working with a “fair degree of autonomy and freedom”clxxx alongside other squads within the same “tribe” (another Spotify term). The company’s line managers “look after people with the same skill set across different squads” and often participate in regular work within their own squad. This diversity of skills is not exclusive to media or “virtual” companies. In one of my consulting projects with Breather, a flexible office provider, I ­collaborated with data scientists, behavioral scientists, architects, graphic designers, social media managers, construction managers, and financial analysts to develop physical office solutions.

Rise in Flexible and Remote Work Some technology companies are big enough to build campuses that encompass a diversity of environments. Amazon’s headquarters in Seattle has spaces to “re-focus, unwind, collaborate, meet friends for lunch, or get the benefit of a fresh vantage point”. This includes open workstations, meeting rooms, phone booths, pods for focused work, open areas with tiered “stairway” seat-

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ing, rooms with panoramic views, rooms with vintage furniture, and even a Harry Potter-themed library.clxxxi Other companies are looking to provide their employees with access to the same diversity of spaces and experiences. But most of them do not have Google’s or Amazon’s resources. They cannot build their own campuses or re-­ develop whole city blocks in London or New York. These companies must rely on existing landlords. And existing landlords are frequently letting them down. But even the biggest companies can’t reach and accommodate all the talent they need in a single location. Google’s New York office is larger than its California campus, and the company operates dozens of other offices in other cities. In 2018, Amazon famously split its headquarters in two, one half in Seattle and the other split further between Arlington and, probably, New York. Spotify’s headquarters are in Stockholm, but it has large offices in New York and London, and smaller offices in dozens of other cities.clxxxii These offices are not “regional headquarters” of “local branches”. They are a base for employees that contribute to the development of key products and services, as well as for some of the company’s key executives. If employees can collaborate across offices, why do they need to be in the office at all? Automattic Inc., the company behind WordPress.com and WooCommerce, is built as a fully distributed organization. Its nearly 900 employees are spread over 69 different countries. Various other software and digital media companies are also choosing to go “full remote”, including InVision, Buffer, and Zapier Inc. An analysis by Thinknum Media found that the number of remote job listings at 763 of the largest U.S. employers have more than doubled between Q1 2018 and Q1 2019.clxxxiii More traditional companies are also adopting more flexible work and employment models. PwC has a program for consultants and tax p ­ rofessionals who “are called in for a definitive period of time to do a specific role based on business needs”. The company’s full-time employees have the flexibility of working from home (telecommuting) several days a week, of sharing a full-­ time job with a colleague, and of condensing their weekly work hours into fewer workdays. Other large office tenants such as Citibank, American Express, and Accenture are experimenting with similar initiatives. Surveys by the Society for Human Resource Management (SHRM) from 2017 to 2018 found that 70% of organizations allowed some type of telecommuting, and 57% offered “flextime”—allowing employees to choose their work hours within predefined limits.clxxxiv This number reflects a dramatic increase compared to previous decades.

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For a growing number of employees, flexibility is not just a perk, it’s necessary. Gallup’s largest ever study about the future of work, published in 2019, found that over 50% of all employees (and 63% of millennials) would change jobs for flextime.clxxxv Employees value flexibility because it allows to balance other life goals, it offsets the creeping of work emails and calls into private time, and—most importantly—it gives them a feeling of control over their own lives.

The Most Demanding Office All this freedom and flexibility does not mean Frederick Taylor’s “scientific management” is finally dead. Quite the opposite is true: companies are relying on sophisticated tools to manage their flexible offices and measure the performance of their mobile and transient workforce. Offices are increasingly designed to accommodate a different number of people each day, and to allow employees to book desks, meeting rooms, and other resources on mobile apps and web-based digital portals. Sensors are installed to verify which rooms or desks are available and collect data that can be used to optimize resource planning and office layouts. Cameras and heat-­ based sensors surveil office floors to learn how different teams interact and which areas are most in use. Digital collaboration tools such as Slack, Airtable, G Suite, Virtual Reality hangouts, or good old-fashioned email make it easy for employers to track and quantify employee engagement and communication. They also make it harder for employees to ever stop working. Thinking back on that Apple ad from 1984, it’s now clear that Steve Jobs’s pocket-sized personal computers did not manage to kill Big Brother. But they did manage to liberate many employees from the bland, hierarchical offices of the twentieth century. What comes next?

11 Office Landlords in the Twenty-First Century

Office landlords are facing an unprecedented abundance of supply. This abundance is not the result of new construction. Rather, it is the result of individuals’ ability—and desire—to work from anywhere. Old office buildings, existing and repurposed shopping malls, hotel lobbies, restaurants, cafés, and homes are serving the “office” needs of some workers, some of the time. In addition, new operators use software and hardware to optimize the design of and access to existing office inventory—enabling customers to take less space. The inherent scarcity of the physical asset is no longer an adequate defense against new competitors. On the demand side, the situation is equally challenging. Landlords need to accommodate companies with unpredictable financial performance, dynamic structures, and increasingly specialized employees (or contractors). Tenants are managing their own spaces more efficiently, allowing employees to work remotely or in shifts. Seen from the tenant’s perspective, this translates into five key requirements: 1. Office buildings need to include a variety of different spaces optimized for different tasks and the work styles of different teams; 2. They need to be decked with systems that facilitate the booking and access to these spaces; 3. They must be flexible enough to accommodate sudden and constant changes in headcount and goals; 4. They must be located close to large talent pools and attractive enough for picky employees to want to come to work; and 5. They must be priced competitively—leaving enough money for salaries and experimentation (and competing with the growing number of alternatives).

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How can an office building accommodate all these demands? It can’t. As a result, the office of the future is not a single location; it is a network of spaces and services. The network must include spaces designed for the performance of specific tasks such as focused work, team brainstorming, client presentations, employee training, meetings, and more. Tenants don’t want “space”; they want a productivity solution to help them attract and retain the best individuals—and empower those individuals to produce their best work. The solution should include physical spaces, various services, and digital tools that enable companies and individuals to make the best use of their time. At its best, it should also empower individuals to lead healthy and meaningful lives. Will providers of office space really be expected to deliver so much? Yes. WeWork and a handful of other young companies are already working toward that future. Many of these companies might never reach the promised land, but some of them will. Can traditional landlords catch up? Some are already well on their way.

Landlords Learning to Fly It was a fine Wednesday morning in April. Two pigeons flew across the Hudson River into Midtown Manhattan. Just before they reached Fifth Avenue, the birds swooped down on a ledge overlooking a fountain in Rockefeller Center. The year was 1941 and the 14-building complex was the largest private construction project the world had ever seen. A report in the New York Times reveals that the two pigeons were in town on official business—carrying messages to the Rockefeller Center as part of a U.S. army drill, preparing for a scenario in which “normal means of communications were wiped out”.clxxxvi An ancient technology was being tested in the world’s most modern real estate project. Seventy-seven years later, Rockefeller Center is at the heart of a different experiment. This time, new technologies and business models are being tested in an old—and still glorious—real estate project. In 2017, Tishman Speyer, the current owner and operator of Rockefeller Center, introduced Zo, a suite of wellness, lifestyle, and corporate services accessible through a mobile app and web portal. The app and web portal enable tenants to access services and activities such as food delivery, last-minute childcare, IT solutions, wellness classes, personal grooming, medical appointments, travel planning, and other events.

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Zo “members” also receive access to a clubhouse located on the 33rd and 34th floors of 1 Rockefeller Plaza. The 2200-square-foot space includes a lounge area, conference rooms, an event space, a dining area, a “nap” room decked with futuristic sleep pods, and two outdoor terraces with expansive views of Manhattan. Access to the Zo clubhouse and other services is free for tenants of Rockefeller Center and their employees. Tishman is not the first landlord to launch a tenant engagement app or set up a multipurpose space for its tenants. But the scale and method of its efforts to evolve its offering are unique. Zo was first trialed in Rockefeller Center, and is gradually rolled out to other Tishman properties across the world. That means it has the potential to spread across a commercial and mixed-use portfolio of nearly 80 million square feet. While most landlords rely on third-party software providers for apps and web development, Tishman Speyer chose to develop Zo’s software components in-house, following an acquisition of an app development company. The company aims to develop proprietary digital products and online tools. Back offline, the clubhouse was just the first step in Tishman’s efforts to create new physical products that tenants can access on a more flexible basis. In 2018, the company launched Studio, a coworking space that offers a common work area, meeting rooms, and private offices partitioned by glass walls—taking a page out of WeWork’s book. The first Studio occupies a full floor at 600 Fifth Avenue, on the southeast corner of Rockefeller Center. Tenants that outgrow the coworking space can “graduate” to Studio Private, a service that includes pre-built private offices as well as access to all Studio spaces, Zo clubhouses, and Zo services. The private offices will require tenants to commit to longer periods, probably one to two years on average, but still less than a traditional office lease of five or more years. Tishman company is rolling out Studio in its own buildings in South America and Europe. In addition, it is planning to open locations in buildings owned by other landlords. Put differently, one of the world’s largest landlords is planning to sign leases or enter management deals with other landlords in order to bring its coworking brand to new locations. Tishman’s focus is expanding from its own (and owned) buildings toward providing a branded productivity and wellness solution that can “run” on top of anyone’s real estate assets. Other large landlords have been experimenting with homemade flexible office brands, albeit on a smaller scale. British Land launched Storey in 2017. Swire Properties re-launched Blueprint in 2017, following an earlier iteration in 2014. Land Securities launched Myo in 2019. Many of these efforts are

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modest and tentative. Tishman Speyer is the first traditional landlord, to our knowledge, to launch a brand of coworking spaces across multiple countries. Starting in 2018, Tishman also began making direct investments into start­up companies. Notable investments include Ritual, an app that helps office employees pre-order meals; VTS, a portfolio, leasing, and deal management platform for commercial real estate; and Lyric, an operator of furnished apartments, focused on corporate travelers. These venture investments are currently made using the company’s own balance sheet. Tishman is not the first property giant to invest in office-related start-ups. Over the past four years, Brookfield Properties and RXR invested in Convene; Rudin Properties and the Durst Organization were early investors in WeWork; Ascendas-Singbridge (now part of CapitaLand) and CDPQ (parent of Ivanhoe Cambridge) invested in Breather; and Blackstone acquired a majority stake in The Office Group (TOG). Brookfield, RXR, and CapitaLand have also set up dedicated venture funds to handle investments of this kind.

Flexible Operators Trying to Land While traditional landlords are trying to accommodate smaller tenants, integrate more flexibility, and experiment with venture capital, flexible office companies are trying to appeal to larger tenants, secure longer-term “members”, and make use of traditional private equity, debt, and management deals to expand their portfolios. TOG set out to own many of its buildings from the outset, relying on traditional bank financing and the private capital of its founders and owners. That meant the company grew more slowly than the likes of WeWork or Knotel, but it was also able to enjoy the value appreciation of buildings it operated in addition to regular membership income from tenants. As of Q2 2019, 65% of TOG’s enterprise value consisted of properties it owns.clxxxvii Most flexible space operators are in a more precarious position. As of Q2 2019, nearly all of spaces operated by WeWork were secured by signing master leases with the buildings’ owners. This model means that the WeWork is on the hook for rental payments 5–25 years into the future, but derives most of its income from customers who only commit to much shorter periods. The original WeWork model1 relies on a form of risk or lease arbitrage. These are long-term obligations to “suppliers” versus short-term obligations  Note: We are using “WeWork” in reference to the hundreds of other coworking operators who emerged over the past decade and rely on a similar model. 1

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from customers. However, it is important to note that the premium paid by flexible office and coworking customers reflects much more than the risk. In addition to flexibility and the benefit of avoiding traditional lease obligations, the customers pay for design, community, services, and other benefits mentioned above. As Lisa Picard, the CEO of Blackstone’s North American office business (EQ Office), pointed out, the early business model of flexible operators is reminiscent of value-added resellers, or VARsclxxxviii that are common in the computer and mechanical hardware industries. Such resellers make a profit by bundling together a group of goods and services in order to create a turnkey solution for customers. Picard said that VARs “commonly provide a more hands-on approach to client service, creating value above and beyond the original equipment supplied by the manufacturer”. In the same vein, WeWork and others are providing tenants-members with value well beyond the physical building that was “manufactured” by a traditional real estate developer. But office buildings are different from manufactured goods. Office buildings are immovable. Unlike a computer, an office space cannot be made in one place and resold in another. Office buildings are, by definition, located within their target markets, thus making it possible for their owners to create direct relationships with end users (even though many of them choose not to). Most importantly, the lease arbitrage model means WeWork is not really a value-added reseller; instead, it is a value-added re-renter. This brings up several issues. First, WeWork must maintain an ongoing relationship with its landlord-suppliers and cannot easily switch from one to the other (unlike, say, a computer reseller who can rely on multiple interchangeable suppliers). Second, WeWork has a limited ability to make changes to the building’s overall design and systems. Third, being a tenant means that a big portion of the value created by WeWork is accrued to the owner of the building, and not to WeWork. More importantly, an abundance of relatively cheap capital is available to finance the acquisition of office buildings (assets) in large cities, but such financing is not available to finance long leases (liabilities). As a result, WeWork’s original model requires spending a lot of cash to secure inventory while relying on relatively expensive sources of financing—venture capital and high-interest debt—to continue to expand. WeWork has been trying to transition to a more sustainable model since at least 2017. It will likely do so with more gusto now that investors have soured on its “growth at all cost” strategy and its founder has been replaced. The first step was the introduction of Powered by We, a solution aimed at large enterprise

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clients with thousands of employees. WeWork takes over the design, build-out, and operation of the spaces already owned or leased by these enterprise clients. UBS, for example, relied on Powered by We to transform its 100,000 square feet office in Weehawken, New Jersey, across the Hudson River from Manhattan.clxxxix Powered by We customers get to focus on their core business, optimize their real estate usage (often, reducing the amount of space allocated per employee), and offer their employees the joys of a WeWork membership. WeWork, for its part, receives membership revenue from large, stable clients without the need to sign leases or pay for actual construction. The second step in WeWork’s transformation was the introduction of Custom Buildouts, also in 2017. Unlike Powered by We, this solution entails WeWork scouting a whole new location for clients, negotiating and signing the lease, designing and building out the space, and then handling ongoing operations. While WeWork does sign a lease in this case, it does so with a specific corporate tenant, reducing its overall risk. The third step came in 2018, with the introduction of Headquarters by WeWork (HQ by We), a solution that provides customers with a private office outside of WeWork’s main buildings. Unlike Custom Buildings, HQ by We locations are chosen by WeWork itself, and are offered with four different designs. The solution is aimed at growing companies with 11–250 employees who want to have their own office, with their name on the door, but avoid the costs and commitments involved in signing a traditional lease. In 2018, WeWork also launched Global Access, a “passport” that provides access to all of WeWork’s coworking spaces and corporate lounges around the world. The solution allows employees of WeWork’s enterprise clients to use WeWork spaces as a base during business trips, between meetings on the other side of town, or whenever they need a change of scene. Customers pay a fixed membership fee and get “all you can eat” access. For WeWork, this translates into regular service income that is not tied to any specific location (or lease). The fourth step in the We Company’s transformation is the most interesting of all. In 2019, the company announced ARK, a $2.9 billion real estate investment platform. The platform (We Co insisted on not calling it a fund) relies on capital from third-party investors, including $1 billion from Ivanhoe Cambridge, the real estate management arm of Caisse de dépôt et placement du Québec, a financial giant that manages various pensions and insurance programs. ARK will use its capital to acquire, develop, and manage “properties in gateway cities around the world and high-growth secondary cities that will benefit from WeWork’s tenant base”.cxc The investment platform is the maturation of WeWork’s earlier experiments with property acquisitions, mentioned earlier in this section.

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Table 11.1  The evolution of WeWork’s business model Flagship offering

Demand focus

Supply focus

Freelancers, early-stage Lease arbitrage start-ups, and small businesses WeWork 2.0 (2017–18) Powered by We Enterprise, SMBs, and Management growth-stage start-ups fees Acquisitions WeWork 3.0 (2019–TBC) Network of private Companies of all with sizes + institutional offices and third-party investors coworking capital spaces + ARK investment platform WeWork 1.0 (2010–16) Coworking

ARK is not simply a way for WeWork to own buildings. It is a way for the company to manage capital on behalf of institutional investors that are looking to invest in real estate. Like other fund managers (e.g. Blackstone or Carlyle), our understanding is that WeWork will earn management fees based on the amount of capital committed to the ARK platform, as well as earn carried interest or a sponsor promote based on the income these assets generate during operation or a future sale. The addition of a fund management business, if successful, can benefit WeWork in multiple ways. The company will get more control over buildings it operates and reduce its reliance on third-party landlords. It will acquire such controlling interests with money from third-party investors, without risking significant amounts of its own capital, and get paid to manage other people’s investment in real estate and receive a share of any profits generated by these investments make (Table 11.1).

The Convergence of Landlords and “Start-ups” All in all, WeWork is evolving into a combination of a real estate fund manager and a branded services company. As the company matures (notwithstanding all the risks and hurdles ahead), it will look increasingly similar to a large investment management firm and, even more so, like a hotel brand franchise. We would not be surprised if the company also launches a public real estate investment trust (REIT) over the next few years, allowing smaller investor to participate in the ownership of WeWork-operated buildings. Such a REIT could acquire buildings developed by ARK once they become stable and produce regular income.

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Combining one of more branded service companies with several private and public investment vehicles is increasingly common in the real estate investment world. As mentioned, Blackstone owns TOG and EQ Office, and manages multiple funds that own hundreds of office and other properties. Brookfield is the largest investor in Convene and manages a public REIT as well as several private real estate funds. In Asia, CapitaLand owns office and retail management platforms and manages multiple REITs. We explore hotel operating structured in the Housing and Lodging section and we discuss their relevance to office assets in the final chapter of this book. This is not to say that WeWork’s continued success is guaranteed or even likely. The company needs to prove its ability to scale its management business (Powered by We) and its investment business (ARK). Perhaps the largest challenge will be managing investor expectations during the transition from being a risky “tech” company to being a more traditional real estate fund manager and service company. WeWork’s pre-IPO valuation ($47  billion as of Q2 2019) is based on a projected revenue growth rate that would be difficult to achieve under a more traditional model. The company’s valuation might have to be cut as it relies on more profitable and more stable sources of revenue. Ultimately, such a dip might prove to be a minor setback on the way to a much higher valuation. But that is a topic for a different book. For now, it suffices to note that in five years, WeWork and its ilk might look more like traditional real estate giants and that traditional landlords might look more like WeWork. All of them will have to include a combination of a meaningful brand, proprietary technology and data, and physical assets.

12 Rethinking Office Buildings

Office buildings are the ultimate institutional real estate asset. Historically, investors have been attracted to their steady and predictable income streams, their no-frills value proposition, and the fungibility of their tenants and their operators. Today, technology is changing the way office space is used and redefines how, where, and even why people go about their work. The supply of space for work is no longer constrained by zoning or the pace of new construction. Technology makes it possible to make more intensive use of existing assets through densification and intensification. It enables older and smaller assets to compete for the best tenants using new distribution channels, through emphasis of non-traditional product dimensions, and by redefining accessibility and mobility. It frees up large spaces that were previously used for retail. It allows work to bleed into dedicated spaces in non-­ office buildings such as hotels and multifamily projects. And it allows hospitality spaces to double as office spaces during certain hours of the day, coordinated by software. Future demand for office will become less predictable and more… demanding. It becomes harder to evaluate and pick stable, creditworthy tenants. Public companies are not as stable as they once were: the old ones face the risk of disruption and rapid decline in value (and headcount); the new ones are often not profitable and are prone to “move fast and break things”. The fastest-­ growing companies remain private for longer which, in turn, means their financial data is not publicly available and their credit quality is not rated. Work itself is changing. The impact of automation and machine intelligence is difficult to gauge but it will likely be profound. Meanwhile, human

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work is becoming more conceptual, less structured, and requires a variety of different settings and, at times, geographical locations. The workforce is becoming more diverse in terms of gender, age, and skillset, making it harder for a single, simple office product to meet everyone’s needs. More work is performed remotely, outside traditional organizations or in corporate departments that form and dissolve based on the success of new projects and business units. This uncertainty makes it harder for tenants to predict how much and what type of space they would require. At the same time, the work environment is weaponized in the war for talent. It is expected to help attract, motivate, and retain valuable employees. The business of an office provider is shifting from business-to-business to business-to-consumer (B2C), delivering experiences and meaning to individual end users. In consequence of the above, the income streams of many office buildings are becoming less predictable, their value proposition becomes more elaborate, their operators become more specialized, and their end users expect personalized service. This creates an opportunity to extract more value out of office portfolios. To capitalize on this opportunity, landlords and the office ecosystem as a whole will have to evolve. Forget about space. The new business of office is to empower tenants and individuals to produce their best work. What that means in practice varies widely. The office market will become increasingly segmented with different offerings that focus on the needs, aspirations, and budgets of different customers. Landlords will have to choose what business they are in, based on their comfort level, cost of capital, and investment mandates. Some will specialize in branded operation and distribution and, perhaps, own less actual real estate assets. Others will focus on the ownership side and leave B2C management and distribution to others. Ultimately, large parts of the office market will resemble the hotel industry, where a single asset is often are owned, operated, and branded (and marketed) by three separate entities. Each entity has its own capitalization structure/ source, has a different appetite for risk, and has a very different organizational culture. The transition to hotel-like operating models will be painful and favor companies that are vertically integrated, or companies that are small enough to move quickly and survive in a small and profitable niche. In the next section, we look at the evolution of operating models in lodging industry. These models shed light on the future of offices. We also revisit office buildings in the final chapter of this book.

Section III Housing and Lodging

13 Housing and Lodging in Context

In 1904, William E.D. Stokes completed the construction of the Ansonia, one of the “largest, handsomest, and most complete apartment hotels in the world”.cxci Stokes wanted to build a self-sustaining residential community and “put flexibility in the foreground”.cxcii Residents at the Ansonia could stay for a day or a year. Some stayed for decades. The management company provided furniture, fresh towels, linen, and kitchen utensils.cxciii The Ansonia was designed as a luxury building, but the smaller apartments were relatively affordable, attracting teachers, writers, aspiring actors, and other young professionals. Some of the apartments had separate units that could be rented out to external tenants or guests. These guest units could be accessed from the main apartment or separately through a public corridor. This arrangement also made it easy for apartments to “grow” over time to accommodate new children or other life changes. Many of the residents at the Ansonia spent most of their time outside and only came home to sleep. An observer from France who visited New York at the time was astonished that urban “Americans… ate in restaurants all the time” and “did no cooking at all”.cxciv In line with this lifestyle, some of the larger apartments in the building had four or five bedrooms but no kitchens. This was ideal for single residents who wanted to share a flat or for families that preferred to eat at the building’s shared dining hall (or had their servants work in a central shared kitchen instead of at home). The walls between the Ansonia’s 340 apartments were as soundproof as those of a recording studio, making the building popular with musicians and party animals. The basement had a variety of amenities that residents could share: a large swimming pool,cxcv a billiards table, steam-powered washers and

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dryers, and a large hall for events and dining. A messaging system—based on a network of pneumatic tubes—allowed residents to communicate directly with management and order food, get laundry picked up, or handle maintenance issues. Anything that was not available within the building itself, was available within a short walking distance. The most unique feature of the Ansonia was on the roof, above the 18th floor. An urban farm with about 500 chickens and other animals operated until 1907, when it was shut down by the authorities. While the farm was in operation, residents received a delivery of fresh eggs every morning, courtesy of the landlord. In the spirit of community, any excess produce was sold in the building’s basement to neighboring residents. Stokes, the Ansonia’s owner, even developed a new kind of elevator to make it easy to transport both people and animals (and avoid overpaying for Elijah Otis’s recent invention of the safety elevator).cxcvi The Ansonia was a new building for a new era, located in one of the fastest-­ growing parts of Manhattan, outfitted with the latest technology, attuned to changing lifestyles, and built with elements of community and sustainability in mind. It was also a product of its owner’s obsession with farming and breeding and, of course, a healthy desire for financial returns.

Apartment Buildings Then and Now It is no coincidence that the Ansonia sounds like a mash-up between coliving and Airbnb and brings to mind notions of the sharing economy and space-as-­ a-service. As we have seen in the Retail and Office sections of this book, the second half of the nineteenth century and the early decades of the twentieth had a lot in common with our own day and age. Compared to the 1950s, the twenty-first century’s Millennials and their peers from a century earlier married relatively late. The average marriage age for men in 1890s and the 1990s was 26. In the 1950s it was 23.cxcvii In the late nineteenth century, as now, young people moved into the largest cities in search of better-paying jobs and of each other. As Eric Klinenberg of New York University pointed out in Going Solo, urban environments “created places where young people who wanted to prolong the transition to adulthood could indulge in all kinds of new experiences”.cxcviii Then, as now, technology gave rise to whole new urban industries. By 1890 “stock exchanges and investment bankers had become more important to the [U.S.’] economic development than cotton wharves and landed gentry”.cxcix

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Findings from multiple studies point out that Millennials are having less sex compared to Baby Boomers and Gen Xers at the same age.cc Young people in the late nineteenth century were “accused” of similar behavior. Following a visit to the U.S. in the early 1890s, the French author and critic Paul Bourget remarked that American young men had diminished sexual passions, busy as they were with work and other distractions the city had to offer.cci Urban families in the 1890s also showed commonalities with those of our own era. Many of them opted not to settle down and build a “proper” home. Visitors to America’s largest cities in the late nineteenth century observed that “the expenses and annoyances of housekeeping” are driving “young couples that are not rich [to] escape them by living in hotels”.ccii Many of these couples had only a single child or none at all. As early as 1856, Walt Whitman observed that “it is probable that nearer three-quarters than two-thirds of all the adult inhabitants of New York city, of the middle and wealthy classes, live in boarding-houses”.cciii Whitman, a celebrated poet, essayist, and journalist, was not impressed with this way of living. “A man is not a whole and complete man”, he wrote, “unless he owns a house and the ground it stands on.” The emphasis on owns is in the original. Writing in 1919, the sociologist Arthur Calhoun observed that urbanization was “transforming the United States into a nation of hotels”.cciv Calhoun was not speaking only about what we now call hotels, but about buildings with multiple units in general. As historian A.K.  Sandoval-Strausz pointed out, the word hotel was often used to describe early apartment buildings, blurring the line between what we now call apartments and hotels.ccv Hotel could describe a cheap rooming house, a middle-class cooperative project such as the Chelsea Association Building (better known as Hotel Chelsea), or luxury properties such as the Waldorf-Astoria and the Plaza. A clearer distinction between large apartment buildings and urban hotels emerged only later in the twentieth century, at least in the U.S. The ambiguity of terms stemmed from the fact that apartment buildings were themselves new in nineteenth-century America. It may be hard to believe, but New York did not have proper apartment buildings before the 1860s.ccvi Instead, it had hotels, tenements, and single-family residences. The ambiguity was exacerbated by the fact that many existing hotels offered accommodation for the night as well as for much longer periods. At what point does a hotel become an apartment building and vice versa?ccvii The question is still not settled. As the Ansonia story illustrates, some of the early purpose-built apartment buildings had features that we currently associate with hotels. Apartments in several of New York’s first multifamily buildings, such as the Haight House and the Stevens House, did not include kitchens.ccviii Others, such as The

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Stuyvesant, did. America’s early apartment buildings drew inspiration from local hotels which were, in turn, inspired by European apartment buildings. New York’s early apartment buildings also drew inspiration directly from the “French flats” or “Parisian buildings” that became popular in France’s capital a few decades earlier.ccix The French did not invent apartment buildings. Various forms of housing for multiple dwellers were popular in the ancient and medieval world. Rome, for example, had over 44,000 insula buildings in the fourth century.ccx Insulae—or islands, in English—were “constructed of brick covered with concrete” and could encompass whole blocks. They “were often five or more stories high”, despite Roman laws that restricted building height.ccxi The purpose of the insulae was to provide “economically practical housing” in areas where “land values were high and population dense”.ccxii They housed members of the lower classes in overcrowded and often hazardous conditions. For that purpose, insulae were similar to the tenements that popped up in industrializing cities such as New York in the eighteenth and nineteenth centuries. The French innovation—particularly in the Haussmann era from 1853 and onward—was in designing, constructing, and managing multi-unit buildings that attracted middle- and upper-class households, not just the dregs of society. In America, it took longer to convince affluent (or aspiring) homeowners to move into multifamily buildings. In New York and other large cities, sharing a corridor, staircase, or lobby with strangers was associated with the lifestyle of the poor, who often hobbled together in tenements, basements, and rookeries. Class anxiety also played a role. Some claimed that Europeans, who were often born into a clear social rank, did not mind living above or below poorer or wealthier neighbors. Americans, on the other hand, were more wary of being perceived as low class or lacking wealth.ccxiii But more than anything, America’s well-to-do families seemed to have a more prosaic reason to avoid apartment buildings: lack of adequate supply. Until the last three decades of the nineteenth century, New York simply did not have enough well-designed and well-managed residential buildings— whether they were built as hotels or apartment blocks. But that changed quickly. By the 1880s, both supply and demand dynamics converged to squeeze all but the very wealthy New Yorkers out of single-family houses.ccxiv Land became more expensive due to urbanization. Labor shortages made it more expensive to afford the maintenance of a private residence. Bourgeoning department stores introduced the middle class to an abundance of consumption goods that offered new ways to signal social status. And new construction ­technologies made it possible to build taller buildings, which introduced more valuable uses to lots that previously featured a single private house.

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Ultimately, the flexibility, competitive price, and convenience offered by residential hotels and hotel-like apartment buildings won out. Sharing amenities with their neighbors provided residents with access to things they could not afford on their own. For working-class people, that meant indoor plumbing, a hot shower, and ready-to-eat meals. For wealthier folk, it meant swimming pools, electricity, telephone access, and on-demand laundry services. Socially, residential hotels offered a way of interaction that suited the transactional and (relatively) fast pace of the new age. They enabled “temporary and marginally paid workers”ccxv to live in the city, close to employment opportunities in new industries. And they allowed upwardly mobile industrialists, bankers, or artists to avoid committing to a long leaseccxvi or immovable possessions.

 rban Housing: Past Regression and Future U Evolution Media articles and even scholarly works tend to use the 1950s as a yardstick for normal domestic life, particularly in the U.S. Such works often paint a picture of an era in which couples got married as soon as they could, bought a house, and worked for decades in a job that was aligned with their mortgage. But that ideal stands in stark contrast to the periods preceding and proceeding it. Urban residents in the late nineteenth and early twenty-first centuries both have been criticized (or pitied) for getting married too late, for struggling to maintain to stable job, for spending their savings on urban indulgences, and for living temporarily in shared apartment buildings instead of owning a home. Unfortunately, most of our current housing stock and related infrastructure were built based on assumptions from the 1950s. This is particularly true in the U.S. but is generally true in many developed countries. How did this happen? Residential hotels emerged to help cities absorb a diversity of new people, new lifestyles, and new industries at a time of rapid technological, demographic, and cultural change. They pointed toward a future that was shared, flexible, serviced, and urban. But it was a false start. Resistance from a variety of powerful religious, financial, and other interests converged to prevent the U.S. from becoming, in Calhoun’s words, “a civilization without homes”.ccxvii Residential hotels and early apartment buildings were seen as “cauldrons of social and cultural evil”,ccxviii as enablers of

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immoral or immodest lifestyles, as breeding grounds for sexually transmitted and other diseases, and as exposing those of good breeding to criminal behaviors.ccxix Between 1910 and 1940 the pressure materialized into formal policy that made it difficult to build new residential hotels or operate existing ones. Legislators introduced moral codes for tenant behavior, and safety and health codes that made it difficult to share amenities. They also introduced zoning laws, limited overall residential density, prioritized urban office buildings, and, later, encourage the construction of new roads and parking for automobiles. New legislation also distinguished hotels from apartment buildings, reducing the overlap between the two. Increased regulation made urban apartments and hotels safer, healthier, and more standardized. It also made them more expensive to build and less capable of responding to changes in demand. Following World War II, U.S. government policy provided heavy incentives for returning veterans to build a single-family home and start a family, fueling a mass middle-class migration to the suburbs. In parallel, cities (in the U.S. and beyond) ramped up the construction of high-rise public housing projects. In 2019, economic growth is concentrated in a few large metrosccxx and the labor force is as fluid and unstable as ever. In mature economies such as the U.S. and the U.K., demand for new housing solutions is driven by a mismatch between existing inventory and the needs of contemporary urban dwellers. New York and London are experiencing net negative migration— more people are moving out than are moving in—while the cost of owning or renting an apartment in these cities continues to rise relative to incomes. In developing countries such as China and India, demand for urban housing is driven by mass migration into cities such as Shanghai and Bangalore and the urbanization of previously rural areas. New housing supply is competing with other land uses such as office, light industry, and even retail. And new investment is often misallocated and goes into the development of luxury units instead of catering to middle-class families or young professionals. As a result, there is a surge in demand for shared, flexible, and/or serviced living solutions in large cities across the world. To meet this demand, we see the emergence of new housing forms, new business models, and the re-­ blurring of the boundaries between private homes, rental apartments, and hotels. Unlike a century ago, today’s tech-powered innovators are moving at a speed that makes it harder for policymakers and interest groups to catch up. Urban dwellers are no longer a political minority—most of the global population now lives in cities. And while growth is concentrated in large cities, there

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are signs that some of the best-paying jobs can be performed from anywhere and that some corporations are large and flexible enough to shift economic activity en masse to new cities and regions. In the following pages, we will explore the evolution of urban housing and hotels and look at the following: (1) the historical and future impact of transportation and communication technologies on housing and lodging; (2) other technologies that impact the supply and demand for housing and lodging; (3) how new business models are redefining the notion of buying, selling, and owning a home; (4) how hotel ownership and operation models can inform the evolution of other property types; and (5) what it takes to be a successful housing or lodging provider in the twenty-first century.

Housing and Lodging by the Numbers Housing is larger in terms of overall area and value, more diverse in its architectural forms, and more fragmented in its ownership than any other real estate category. Our focus in this section will be primarily on housing in dense urban areas and on assets that are, or have the potential to be, of interest to large institutional investors. Where relevant, we also explore innovations in non-urban housing and hotels, particularly those that shed light on the future of housing as a whole. Hotels are a much smaller real estate category. We choose to include them in this section since both their past and their future are intertwined with those of residential buildings, particularly in cities. In particular, the evolution of the hotel industry offers insights about the future of all property types and lessons about the role of different players in the real estate “food chain”— including investors, owners, managers, lenders, and regulators. Apartment buildings underpin the portfolios of many of world’s largest real estate investors. On the institutional front, the NCREIF Property Index (NPI) tracks the value and performance of properties owned by or on behalf of tax-exempt institutional investors. In Q1 2019, 25.7% or $161.95 billion of the NPI’s value was derived from apartment properties, second only to office buildings (34.8%).ccxxi Hotel properties, meanwhile, contributed only 0.5% or $2.96 billion of the NPI’s value. Housing also plays an important role in the public real estate universe. In April 2019, the market capitalization of U.S. residential real estate investment trusts (REITs) was $175 billion, second in size only to those that own retail projects ($180.5 billion).ccxxii Residential REITs own portfolios of apartment buildings, manufactured homes, and single-family homes. During the same

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period, the market capitalization of U.S. lodging REITs was $55  billion. Lodging includes hotels, resorts, and serviced apartments. The vast majority of housing properties are not owned by institutional investors or REITs. Instead, they are owned by individual occupiers or small landlords that acquired a few houses or apartments for investment purposes. A 2018 analysis by Zillow, an online listings site, estimates the value of all homes in the U.S. at around $31.8 trillion.ccxxiii To put the scale of housing in perspective, consider that the aggregate value of private homes in the Los Angeles or New York City metros—$2.7 and $2.6 trillion, respectively—is higher than the total gross domestic product (GDP) of France.ccxxiv A 2017 analysis by Savills, a real estate services company, estimates the value of all residential properties across the world at about $220 trillion.ccxxv Beyond their financial value, residential properties are also major contributors to economic activity. Investment in construction and remodeling of new houses and apartments accounts for 3%–5% of U.S. GDP. Housing-related services, rental payments, housing utilities, and owners’ imputed rentccxxvi account for an additional 12%–18% of GDP.ccxxvii In developing economies, particularly China, the contribution of housing construction to GDP can be much higher. Developing countries also have millions of houses (and other assets) with unclear or undefined property rights. Such assets cannot be easily valued, sold, or financed, and are absent from official tallies of global real estate estimates. Unlike retail, office, or any other real estate assets, housing is deeply personal and necessary. For most adults, it the largest component of private spending or net worth, as well as source of psychological comfort—or anxiety. In the U.S., renters spend about $500 billion a year on rent. And owners have a significant amount of their net worth invested in the house they live in. Over 65% of the net wealth of the median U.S. household was tied to single-­ family housing, according to a 2001 survey by the Federal Reserve.ccxxviii In China, Professor Xiang Songzuo from Renmin University in Beijing estimates that about 80% of people’s wealth “is in the form of real estate”—representing about $65 trillion in value.ccxxix Housing is also deeply political, given its importance to the economy as a whole and to private spending and savings. In recent years, protests concerning the cost of renting or owning a home took place anywhere from the U.S., Germany, Ireland, and Israel, to South Africa, Ethiopia, Thailand, and China. These protests represented different agendas and conflicting interests. Some protested the construction of new housing projects; others, the lack of new construction. Some decried the limited affordability of new homes; others

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rallied against policies that may reduce rents and sales values for homes they already own. And so on.

Checking in on Hotels Despite only consisting of a fraction of global real estate in terms of floor area or value, hotels have played an outsized role in spurring the evolution of modern apartment buildings. In the nineteenth and twentieth centuries, hotels inspired residential design, construction, and services. In the twenty-first century, hotels offer lessons for all other real estate categories. Before we explore these lessons, we must get a clear understanding of how the hotel industry is structured, and why. This understanding serves as a critical foundation for our analysis of the future of all real estate assets. Hotel properties are owned, managed, leased, and valued differently from apartment, office, retail, and industrial assets. Most notably, most hotels are branded. One’s office might be at 595 Madison Avenue, her home might be at 135 Boulevard Saint-Germain, and she may shop on Bond Street, the Siam Paragon, or Rodeo Drive. But when she goes to a hotel, she usually stays in a Marriott, a Holiday Inn, or a Hyatt. In that sense, hotel brands are similar to retail brands. But most retailers are tenants within larger projects and they do not exercise control over how whole buildings are named, built, and operated. Some office and residential buildings—such as the Empire State, Burj Khalifa, Gherkin, Taipei 101—are as known as any global brand. But these are the exceptions that prove the rule. Moreover, the “brand” of these famous buildings draws value and meaning from each building’s unique location and features. Hotel brands, on the other hand, confer value and meaning on buildings that are otherwise unremarkable. Hotel brands do not reflect the virtues of a specific building; they reflect the virtues of the chain to which the building belongs. And they do much more besides. About two-thirds of U.S. hotels and half of those in the rest of the world belong to a chain.ccxxx Such hotels are often called branded hotels or flagged hotels as they “fly the flag” of a specific chain. Hotels that operate without brand affiliation are called independent hotels. The owner of a hotel’s building (real estate) and a hotel’s brand are often separate entities. A building owner can sign a franchise agreement with a brand owner, the franchisor. These agreements usually require the landlord to pay a “royalty” based on room revenue as well as fees for the marketing efforts, reservation systems, and loyalty programs provided by the brand.

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Table 13.1  Examples of hotel franchisors, property owners, and managers Brand/franchisor Property owner Manager/TPO

Marriott, Westin, Holiday Inn, Hyatt, Hilton, aLoft, Shangri-La, IBIS, Ritz-Carlton, DoubleTree Host Hotels & Resorts, Blackstone, Chesapeake Lodging, Covivio, OUE Hospitality Trust Aimbridge Hospitality, Highgate, Access Hotels & Resorts, HHM Hotels, Sage Hospitality

In addition to a building and a brand, hotels also require day-to-day management. Some property owners or brands handle management directly. Many of the publicly traded hotel companies, in particular, specialize in both management and brand franchising.ccxxxi In other cases, management is handled by third-party operators (TPOs or, simply, “managers”). Such operators are paid by the property owner but must adhere to guidelines set by the franchisor. Often, the franchisor also has the power to veto the appointment of a specific manager. Third-party operators also serve independent hotels that are not affiliated with a hotel brand/chain. Table 13.1 includes examples of hotel franchisors (brand owners), managers, and property owners. In reality, the division of roles is not as clear cut. Some companies own buildings, brands, and management companies but choose to act in different capacities in different projects. Accor, for example, is the owner of hotel brands such as Sofitel, Fairmont, and IBIS, and is affiliated with 4780 properties across the world. As of December 2018, Accor acted as a franchisor for 2258 properties, and as a manager for 2275 properties. In addition, Accor owned or leased 247 of properties affiliated with its brands.ccxxxii In contrast, Marriott International brands are affiliated with even more properties—a total of 6900—but the company owns or leases a much lower number of properties.ccxxxiii The model of operating a hotel chain without owning any assets or signing master leases is often referred to as asset light. Marriott used to own many more of its properties but spun them off into a separate entity in 1993. That entity, now known as Host Hotels & Resorts, proceeded to acquire additional buildings that were affiliated with other brands and managers. In 1999, Host qualified to become a public REIT.

Parts Bigger Than Their Sum Marriott’s split into separate entities highlights some of the reasons for companies to act as owners, franchisors, or managers in different scenarios. A REIT enjoys unique tax benefits and the cheap capital provided by public

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Property Design & Construction

Interior Design & Build-Out

Check-in

Marketing & Sales

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Service

Traditional Hotel (e.g. Statler Buffalo) Brand Franchisor (e.g. Marriott)

REIT (e.g. Host) Fig. 13.1  Value chain integration of traditional hotels, brands, and lodging REITs

markets. On the other hand, regulations require REITs to invest most of their capital in real assets (or mortgages), limits their ability to draw income from any other sources, and mandates them to distribute 90% of their taxable income as dividend. As a result, REITs have a limited ability to invest in branding and marketing platforms or to rely on franchising and service fees. At the same time, a regular corporation (such as Marriott International, after the split) can make the investments necessary to build a global brand and marketing platform. But such a company might be burdened by all the debt required to acquire real estate assets or the need to acquire a whole building each time it wants to expand its inventory. The two businesses (franchisor and property investor) are also easier for investors to understand as separate entities with clear structures (Fig. 13.1). There are other reasons to keep brand, management, and buildings in separate entities. For one, many institutional investors have mandates that allow them to invest only in actual property, not in complex operating companies.1 Another reason is local taxes and regulations in different countries that ­prohibit or incentivize different structures, particularly when foreign ownership is involved. There are also strategic reasons to integrate or outsource specific activities. Later in this section, we will see how competitive advantage stems from activities in a company’s value chain. But first, let’s consider why hotel brands exist at all.  Such investors might have separate mandates to invest in operating companies, but these, too, are easier to invest in when they have a clear business and not a mix of real estate ownership and a separate revenue center. 1

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 otels Brands: Physical Property and Intellectual H Property The dependence on brands undermines the idea that real estate assets are inherently valuable. If a well-designed building is erected in a central location, why does it need a business-to-consumer (B2C) brand like Marriott or Hilton? In theory, the landlord could operate the building on its own. Likewise, if the owner wants to remain a passive investor, it could appoint a reputable business-­ to-­business (B2B) firm to handle the day-to-day operation of the asset. Why, then, is a consumer brand necessary? Why do hotel brands exist? The simple answer is that hotel brands grew out of restaurant franchises. The history of lodging has been intertwined with dining since time immemorial and the two are collectively referred to as “hospitality”. Many of today’s largest hotel groups, including Marriott, Choice (Howard Johnson), and Wyndham, started as restaurant operators and franchisors. When such companies added lodging to their menu, the franchise model graduated from restaurants to hotels. But why did brand franchises exist in the restaurant world to begin with? And why did operators without restaurant roots (such as Hilton) still choose to build hotel franchises? And while we’re at it, why did franchising not emerge in the office, multifamily, or industrial real estate world? To answer these questions, let’s return to an idea we explored at length in the Retail section. As you may recall, transaction costs reflect the resources required to consummate an exchange between two or more willing parties and can be grouped into three key challenges: 1. Triangulation: The cost of the parties finding one another and agreeing on price and other terms; 2. Transfer: The cost of transferring the goods and the payment; and 3. Trust: The cost of ensuring each party will honor the terms of the deal, including warranty and after service. The transaction costs involved in securing and servicing customers for lodging properties are different from those for office, multifamily, or industrial ones. Hotels need to find hundreds of new customers every single day, and to “convince” these customers that it is safe to shower or fall asleep in a strange place. Offices, on the other hand, do not involve this level of intimacy but face other challenges. For each transaction, office landlords need to ascer-

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Table 13.2  Transaction costs associated with lodging, office, industrial, and multifamily properties Lodging

Office

Low: Need to find a new tenant for High: Need to find a new every unit every few years. customer for each unit every day. Transfer Low: Checking a guest into a High: Moving a tenant into a unit involves complex coordination room (or a table) is a quick and, often, construction work. and simple affair. Trust Low: Guests pay on the spot. High: Ascertaining the creditworthiness of a tenant is (financial) If one guest fails to pay, the critical and involves and complex impact is trivial. legal and financial arrangements. Low: Most office buildings are Trust High: Humans are anxious “good enough” to spend a (experiential) about sleeping, showering, working day in. or eating in a new place. Triangulation

Industrial

Multifamily

Medium: Need to find a new tenant Low: Need to find a new for each unit once a year or so. tenant for every unit every few years. Low: Moving a resident into an Transfer Medium: Moving a tenant apartment is normally a quick and into a unit involves complex simple affair. coordination and, often, construction work. Medium: Ascertaining the Trust High: Ascertaining the (financial) creditworthiness of a tenant creditworthiness of a new resident is important and involves and is critical and involves and legal and financial arrangements. complex legal and financial If one resident defaults, the arrangements. impact is not dramatic. High: Humans are anxious about Trust Low: Most industrial sleeping, showering, or eating in a (experiential) properties have very basic new place. features that are easy to evaluate. Triangulation

tain the creditworthiness of occupiers that take on large financial obligations. Other differences are listed in Table 13.2. As a result of the unique transaction costs associated with their buildings (and businesses), hotel owners will often struggle to reach enough new customers or to engender enough trust. Brand franchisors help reduce these transaction costs by providing centralized marketing and booking, a standardized in-room experience, and a name that customers know and trust. In addition to simply “filling rooms”, a good brand provides access to loyal customers who are less price sensitive and generate positive word of mouth.ccxxxiv

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How Franchises Differ from Tenants Something in the above comparison between hotels and other assets feels lacking, however. Are hotel brands really unique? Retailers and restaurants also rely on brands to attract customers into physical spaces and provide a standardized experience. And many other kinds of companies use physical space to run their business—in offices, in industrial buildings, and even in empty fields. Aren’t hotel brands simply the tenants of hotel buildings? The short answer is “no”. The long answer is “it’s complicated”, particularly since the construction or acquisition of a building usually requires financing. A tenant by any other name would smell as sweet to most people, but it smells very different when you’re a bank. As Cornell School of Hotel Administration Professor Jack Corgel and others point out, “most lenders require hotel [property] owners to have a chain affiliation in order to qualify for a loan.”ccxxxv In other words, hotel acquisitions are harder to finance or refinance unless the property is affiliated with a major brand. As a result, “hotels are heavily represented by chains”.2 In addition, being affiliated with a brand impacts the physical characteristics of the building itself. Hotel brands have detailed specifications regarding room layout, building systems, amenities and common areas, construction materials, lighting and plumbing fixtures, and much more. When an owner of an existing building signs an agreement with a new brand or renews the lease of an existing franchise, he or she is usually required to conduct costly renovations, commonly referred to as a property improvement plans (PIP). Hence, lenders and investors assume that changing the brand of a hotel will entail significant investment and downtime. As a result, the number of years remaining on a franchise agreement affects the valuation of a hotel building. All things being equal, a building that would require a PIP in two years is less valuable than one that would only require significant renovations ten years later. Sophisticated investors would usually negotiate with the existing brand and agree on an extension of the term based on an agreed renovation schedule. A matter of course, hotel franchises are integral to the way buildings are designed, financed, valued, and renovated over time. In contrast most retail, office, industrial, and multifamily assets do not display power dynamics of this kind. Most institutional office and retail projects have multiple tenants  This is despite the fact that empirical research has not found a consistent and systematic relationship between hotel brands and hotel performance. See, for example: 2

• Steven A.  Carvell, Linda Canina, and Michael C.  Sturman, “Comparison of the Performance of Brand-Affiliated and Unaffiliated Hotel Properties”, Cornell Hospitality Quarterly 57, no. 2 (2016). • O’Neill, John W., and Qu Xiao. “The Role of Brand Affiliation in Hotel Market Value.” Cornell Hotel and Restaurant Administration Quarterly 47, no. 3 (August 2006): 210–23.

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that are interchangeable. While there are costs to switching retail and office tenants, they are generally not commensurate with those required when switching, or even renewing, a hotel franchise. Further, office and retail tenants often pay for their own interior build-outs, which is seldom the case for hotel brands. To be sure, lenders to all commercial real estate assets care about each building’s tenants and see some as safer or more reliable than others. But in the hotel industry, franchises are concentrated within a few powerful companies and their importance to the asset is institutionalized in agreements that give these companies powers that are uncommon elsewhere. For decades, hotel franchises maintained a firm grip on both supply and demand. Their unique position enabled them to dictate terms to some of the world’s largest real estate owners and investors. Then the Internet happened. In the following pages, we will see how technology impacts hotel brands and, ultimately, residential and commercial property owners and developers. We will also look at other technologies that affect the way housing and lodging properties are designed, constructed, operated, transacted, and valued. To start with, let’s look more deeply into the shared history and possible futures of housing, lodging, transportation, and communication.

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It was an unprecedented victory. Barack Obama took on two powerful political brands—Clinton and McCain—to win the 2008 U.S. Presidential election. Obama’s victory was unprecedented in more than one way, including its use of technology. For the first time ever, a majority of the adult population relied on online sources for information about candidates and policies.ccxxxvi For the first time, a candidate chose not to participate in the public financing system for presidential campaigns—a system that would have granted Obama over $84 million in guaranteed funding but would have limited his ability to raise private donations.ccxxxvii Instead, Obama relied on the distribution and fundraising power of new digital tools. His campaign even got an early endorsement from Marc Andreessen, perhaps the most influential venture capital investor in the world at the time.ccxxxviii Obama’s victory was a triumph for the Democratic Party, but some saw ominous signs in his unorthodox campaign. As the New York Times’ media columnist pointed out two days after the 2008 election, “political parties supply brand, ground troops, money, and relationships.”ccxxxix Obama used digital channels to build all of these things on his own: a brand that transcended his party, a crowdsourced army of volunteers, and a financial war chest based on small contributions from hundreds of thousands of first-time donors. In only a few years, the junior senator from Illinois managed to build a powerful political machine and become the most powerful person on earth. Obama’s inauguration was the biggest ever, drawing about 1.8 million people, more than the combined attendance for the four Bush and Clinton inaugurations that preceded it. How could a city with barely 30,000 roomsccxl

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accommodate such a surge in visitors? A crowdsourced campaign victory called for a crowdsourced hospitality solution. Sensing the opportunity, Brian Chesky, Joe Gebbia, and Nathan Blecharczyk traveled to D.C. to try to get their new home-sharing website off the ground. The website, called AirBedAndBreakfast.com at the time, did not manage to solve Washington, D.C.’s accommodation shortage. But the founders’ presence in the historical event earned the site a mention in a roundup of unusual accommodations on ABC’s Good Morning America, one of the most popular TV shows in the country. A few weeks later, the company changed its name to Airbnb. As of Q2 2019, Airbnb was valued at $35 billion and preparing for an IPO. Brad Stone’s book The Upstarts details the significance of that 2009 D.C. trip to Airbnb’s meteoric rise.ccxli As Stone pointed out, Airbnb’s founders were not the only entrepreneurs who traveled to Obama’s inauguration in search of a break. Garrett Camp and Travis Kalanick were also in town. The two stayed at a vacation home that Kalanick booked on VRBO, another website. In a city with surging demand, finding a place to stay was only half the battle. The other half was getting from the apartment to the main event at the National Mall. As the two struggled to find a taxi, Camp impressed on Kalanick the value of his new start-up idea: an app that allowed anyone to call a black car with a click of a button.ccxlii A few weeks later, Camp and Kalanick founded Uber.

Democratizing Access to Lodging and Mobility The co-emergence of transformational mobility and lodging companies was not a coincidence. Nor was it unprecedented. A hundred years earlier, a surge in demand inspired two hotel and automotive pioneers to revolutionize their respective industries. In 1901, the World’s Fair—also known as the Pan-American Exposition— was held in Buffalo, New York. The fair aimed to showcase the latest innovations and inventions and “promote commercial and social interests among the States and countries of the Western Hemisphere”.ccxliii With a population of around 800,000, Buffalo was one of the ten largest cities in North America at the time, bigger than Los Angeles, Houston, and Detroit. Its growth was partly thanks to easy access via the most important travel modes of the nineteenth century: the canal system and multiple railway lines. Over a period of six months, the World’s Fair drew around eight million visitors to Buffalo.ccxliv To accommodate the surge in travelers, the city

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c­ ommissioned the restaurateur Ellsworth Milton Statler to build a temporary hotel near the exposition grounds. With 2100 rooms, Statler’s creation was the largest hotel in the world. Three years later, Statler’s reputation earned him a similar appointment at the World’s Fair in St. Louis.ccxlv He built an even bigger, if still temporary, hotel. In 1907, exactly 100 years before the founding of Airbnb, Ellsworth opened the first permanent Statler Hotel back in Buffalo. Statler is considered by many to be the father of the modern hotel industry. His Buffalo hotel was the first in the country to have running water and a private bath in each room. Statler pioneered many practices that are still prevalent in the hotel industry today, including grouping all building systems around a central core, interconnected rooms that can be combined and divided based on demand, separate taps for cold and hot water, illuminated clothing cabinets, and more. Within two decades, Statler Hotels were “the largest in the nation owned by a single individual”.ccxlvi While small chains existed since the middle of the nineteenth century, Statler was the first to systematize hotel design, sourcing, operation processes, and take advantage of economies of scale across multiple properties.ccxlvii Unlike most urban hoteliers at the time, he shunned luxury projects (and prices) and relied on technology and innovation to make his hotels both more affordable and more convenient. In 1954, Conrad Hilton acquired all 17 Statler Hotels and proceeded to build the world’s most well-­ known hospitality brand.ccxlviii

The Automobile and the Chain In 1908, a year after the opening of the first Statler Hotel, Henry Ford introduced the Model T, a car designed to “democratize the automobile” and provide “practical, affordable transportation for the common man”.ccxlix Ford’s innovative assembly line production enabled him to reduce the price of the T’s touring car version from $850 in 1908 to less than $300 in 1925. Like Statler, Ford introduced processes that reshaped the car industry—and all industry—forever. Indeed, Statler and Ford became friends and “kept informed about each other’s companies”.ccl Coincidentally, in 1915, the third Statler Hotel was built on Detroit’s Washington Boulevard, less than three miles from the Model T’s original factory on Piquette Avenue. By 1927, over 15 million Ford Model Ts were made in the U.S., and many more in England and Continental Europe.ccli At times, nearly 40% of all cars sold in the U.S. were Model Ts. Ultimately, Ford had a bigger impact on hotels, housing, and all real estate assets than Statler. It took several decades,

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but by the middle of the twentieth century, cars became the dominant mode of transportation in the U.S. In 1955, the country had over 52 million registered cars, up from only 8000 in 1900.cclii On a per capita basis, the number of vehicles rose nearly 6000-fold during that time.ccliii The emergence of the world’s largest hotel chains is tied closely to the growing popularity of automobiles. Between 1830 and 1930, trains and canals spurred the development of large hotels in the center of larger cities. From 1930 or so, cars facilitated the unbundling of this paradigm into smaller hotels dispersed along highways, between and outside urban cores. Cars empowered customers to travel whenever and wherever they liked, in small groups, and spend the night anywhere along the way. As Sandoval-Krausz pointed out in Hotel: An American History, the impact on hotels “harkened back to the eighteenth century’s geography of roadside inns and taverns, with numerous establishments lining the roads between settlements”.ccliv The first Holiday Inn, Howard Johnson, and Marriott hotels emerged in the 1950s to address a new challenge: Convince customers to pull off of the highway and stop their car. This required a brand that was easy to remember and easy to spot from a distance, an experience that was standardized across different locations, and lots of free parking. The motor hotel, or motel, was born. By the early 1940s, the number of motel locations (but not rooms) surpassed that of hotels.cclv Cars did not eliminate urban hotels, but they diminished their relative importance. The automobile also gave a new freedom of movement to those who were otherwise still restricted. In 1955, African-Americans had to rely on guides such as the “Negro Traveler’s Green Book” to find “listings of Colored and White Motel owners” who “desired their patronage”.cclvi During the same time, more than 50% of many hotels in many U.S. states did not admit Jewish patrons.cclvii In the middle of the twentieth century, transportation and communication technologies unlocked new travel destinations, both for pleasure and for business. In 1944, the Chicago Convention on International Civil Aviation gave rise to the aviation industry as we now know it.cclviii Relative global stability, cheap oil, and a booming global economy fueled an explosion of tourism after World War II.  In 1947, Westin hotels (then called Western International) introduced “Hoteltype”, a system that used Teletype machines to provide instant booking confirmations.cclix In 1955, Hilton launched a central reservation system that allowed customers to book rooms in 27 different hotels by telephone, telegram, or Teletype.cclx

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In that era of abundant destinations and information, branded hotel chains truly came into their own. They helped travelers and property owners find— and trust—one another. In the twenty-first century, technology is unlocking an even greater abundance, empowering gatekeepers of a different kind, first in the lodging industry, and ultimately in housing as well.

OTAs: The Hotel Goes Online “I believe in tough negotiations. But what they came up with was over the top,” said Steve Joyce, CEO of Choice Hotels International. “They were asking for outrageous things,”cclxi he continued. Joyce was referring to Expedia Inc., owner of several websites that allow travelers to search, book, and review hotels and other services. At the time, Choice was one of the largest hotel franchisors in the world, with nearly 500,000 rooms in over 5000 hotels.cclxii It was October 2009, and Choice and Expedia were trying to re-negotiate an agreement that defined their relationship. Expedia wanted Choice not to offer its rooms at lower or higher prices on any other website. Further, Expedia demanded the power to sell Choice rooms at a discount, even when availability was low and Choice’s own systems recommended to raise prices or pull rooms off Expedia and sell them directly.cclxiii In other words, Expedia demanded explicit powers over Choice’s inventory and price management. As the two parties failed to reach agreement, Expedia dropped all of Choice’s properties from its platform. Choice assumed that other hotel companies would join its fight with Expedia. They didn’t. A month later, Choice reached an agreement with Expedia and its hotels were back online. How does a “website” gain the power to dictate terms to a hotel giant with 50 years of history? A hotel giant, mind you, that itself used to dictate terms to some of the world’s largest real estate owners. To answer this question, let’s look at how the Internet affects transaction costs and marginal costs in the hotel industry. Companies such as Expedia are known as OTAs, or online travel agents. OTAs reduce the cost of triangulation and trust in the hotel industry, but they do so differently from traditional brands. OTAs provide online listings that make it easy to discover hotel properties in different locations. They also provide reviews, recommendations, and comparison tools that engender a certain degree of trust. In parallel, social media and information sites such as Instagram and TripAdvisor provide travelers with even more information about specific hotels, including recent pictures, videos, and personal stories.

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Despite bearing the same name, OTAs are very different from traditional travel agents (TTAs). Traditional agents are numerous and mostly small. OTAs are few and large. In 2018, Expedia and its main rival, Booking Holdings, generated 73% of the total revenue for the 10 largest travel sites. In the U.S., OTAs control about 35%–40% of the online booking market, with the remainder handled directly by brand websites such as Marriott.com or Hilton.com. Their concentrated power gives OTAs leverage when negotiating with hotel chains. OTAs eroded hotel brands’ position as drivers of demand and arbiters of quality. As Expedia CEO, Dara Khosrowshahi, pointed out in 2016 that the company “attract[s] brand-agnostic travelers”, and only 0.5% of the customers on its main hotel site, Hotels.com, are “searching for specific large brands”. Instead, customers search for a specific location and filter by average reviews or other features. OTAs also empower independent hotels to reach more customers than ever and compete with brand hotels. As HVS, a hotel advisory firm, pointed out, OTAs also charge independent hotels much higher commissions due to the latter’s weaker market position.cclxiv

Asset Light and the Economics of Tech To obtain their position in the market, OTAs made significant upfront investment in developing proprietary hardware, software, and products (as well as acquiring smaller competitors). As discussed in the Retail section, such upfront investments are characteristic of tech companies. When they bear fruit, these investments enable companies to reduce the marginal cost of serving new customers. In other words, these companies become dramatically more profitable as they scale. Ironically, this type of strategy is reminiscent of the original hotel franchise model. Marriott, Hilton, and Choice invested heavily in brand marketing, booking systems, and inventory management systems that enabled them to act as asset-light gatekeepers for thousands of properties they did not own. As a result, their customer base and revenue could grow much faster than their costs. The Internet enabled OTAs to take this idea and put it on steroids. Why spread technology and marketing costs over thousands of hotels when you can spread them over hundreds of thousands of hotels? Expedia lists over 200,000 hotels on its various websites, about 20 times more than Choice’s portfolio. By investing in technology and marketing, OTAs became powerful enough to force higher commissions and new terms of service on hotel brands. OTAs

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Home-sharing Sites 4,000,000+ Locations

OTAs

200,000+ Locations

Brands

5,000+ Locations

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Owners

100+ Locations

Fig. 14.1  Supply availability for hotel owners, hotel brands, OTAs, and home-sharing companies

also introduced loyalty programs that further undermined the value of being loyal to a specific hotel brand (Fig. 14.1). Two decades ago, it was easy to assume that online agents were only a threat to traditional agents. They offered an easier way for hotel brands to distribute their inventory and often even purchased inventory in bulk and resold it at their own risk. In addition, the high upfront costs required to build a successful OTA may have seemed downright crazy to a hotel brand. These costs only make sense if you spread them over a large enough pie and can accept bookings for hundreds of thousands of locations. Under the economics of tech, a business can become profitable only once it is operating at massive scale. And when it comes to scale, no real estate category is larger than housing. Soon enough, the online booking model found its way there.

Airbnb: The Hotel Goes Home It was a hot day and Abraham was sitting at the edge of his tent. He raised his eyes and, behold, three men were standing beside him. Abraham immediately offered the three strangers a meal to sustain their hearts, water to bathe their feet, and a place to recline. According to the story, recounted in Genesis 18 in the Bible, Abraham’s generous hospitality earned him the miracle of becoming a father at a very old age.

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In the Middle East around 4200 years ago, there were no travel agents, no credit card deposits, and no online reviews. To paraphrase Thomas Hobbes, people lived in continual fear, in danger of imminent violent death, and life was “solitary, poor, nasty, brutish, and short”.cclxv In other words, transaction costs were high. For Abraham to welcome three strangers into his home was a significant leap of faith. Fast forward to the twenty-first century, the world is a much more complicated place. Global population has grown from less than 30  millioncclxvi in Biblical times to over 7.5 billion today.cclxvii There are over 1.5 billion housing units on earth, including a 130 million in the U.S. alone.cclxviii On a given day, a significant number of these units or rooms within them are vacant. Hosting strangers still requires a high degree of coordination and trust, but it no longer requires a miracle. Like the OTAs before it, Airbnb used an online platform to solve the triangulation and trust issues involved in home-sharing transactions. It managed to do so by featuring reviews from verified past guests, sending its own staff to take professional photographs of early listings, providing hosts with up to $1 million in liability and damage insurance, and by promoting the listings of verified hosts who had a strong track record. Airbnb’s original focus was the bottom of the lodging market, matching travelers with literal air beds in other people’s living rooms. It gradually shifted its focus to more demanding customers that could have easily afforded a room in a budget or even mid-range hotel. The company managed to attract hosts with better homes and apartments. Hosts also began to adjust their units to be more comfortable and attractive to Airbnb guests.

The Limits of Aggregated Experience But even the nicest apartments and houses lack basic services and amenities that travelers expect to find in a hotel, such as food, advice, taxi bookings, laundry, a gym, and services ranging from a backrub to childcare. Airbnb’s emergence as an alternative to hotels was aided by dozens of location-based apps that helped fill in the gap by providing guests with information about local activities and dining options, and providing on-demand food delivery, laundry, storage, transportation, meeting rooms, and other services. Airbnb’s rise also spawned an ecosystem of start-ups that help make life easier for hosts. Guest enables hosts to keep track of maintenance tasks, manage listings on multiple websites, and share information with building and apartment owners. Keycafe installs digital lockers in local business where hosts

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and guests can leave apartment keys for check-ins and check-outs without needing a person present. Beyond Pricing helps hosts optimize their pricing strategy based on real-time market data. Fülhaus’s interior design service is specialized in converting residential units to hospitality uses. Properly provides cleaning services for short-term rental units. And the list goes on. But dealing with multiple apps and providers to construct one’s hospitality experience is, itself, an inconvenience—for guests and for hosts alike. And even the best Airbnb units are, by definition, unstandardized. They offer an inconsistent check-in experience, an inconsistent level of service, and an inconsistent array of in-room amenities, from mattresses and pillows to towels and shampoos. This problem is compounded by the sheer number of Airbnb listings—over six million as of June 2019. Home-sharing also involves headaches and risks for hosts and/or their landlords. Hosts in many cities had to operate in a legal gray area or in explicit violation of local regulations. Building owners faced fines and legal action for exceeding the permitted use for residential assets. Neighbors of shared units did not appreciate the flow of strangers with suitcases at all hours of the night. In short, the Airbnb model lowered the friction involved in allocating vacant residential units and trusting local hosts, but it introduced other forms of friction and uncertainty. It reduced some transaction costs but increased others. These costs inspired some home-sharing hosts to evolve into more specialized businesses, not unlike traditional hotel brands. These businesses integrated different aspects of the home-sharing experience. Before we explore their operating models, let’s take a moment to understand the role of integration and modularity within a company’s value chain.

 nderstanding Value Chains, Modularity, U and Integration The next few pages are heavy on theory, but their ideas are critical for understanding the future of all real estate assets, as well related businesses including brokerage, architecture, and finance. In Competitive Advantage, Harvard University Professor Michael E. Porter describes a business unit1 as a “collection of activities that are performed to design, produce, market, deliver, and support” a given product.cclxix Taken  We use the term business unit since a company can often operate multiple business units with different products and different value chains. For example, Apple’s iPhone and Music business units sell very different products (hardware vs. digital media subscription) and rely on a different set of activities to do so successfully. 1

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Sourcing and handling inputs that go into the product

Operations Transforming input into the final product

Outbound Logistics Distributing the product to buyers.

Marketing & Sales

Service

Inducing and enabling customers to buy the product.

Enhancing and maintaining the value of the product.

Fig. 14.2  Michael E. Porter’s five generic categories of value chain activitiescclxx

together, these activities constitute a value chain that reflects the business unit’s history, strategy, and its approach to implementing its strategy. The activities also reflect the economic conditions in and around that firm’s industry, such as the strength of its competitors or suppliers. Value chains are different from supply chains in their focus on how interrelated activities create a unique competitive advantage (as opposed to simply describing the flow of information, materials, goods, and funds during production and delivery). Porter divided these activities into five generic categories, shown in Fig. 14.2. Companies that sell somewhat similar, competing products might do so using very different value chains. Samsung, for example, makes many of the hardware components for its flagship Galaxy S phone, but uses an operating system made by Google (Android). In recent years, Samsung began opening retail stores, but it relies heavily on third-party resellers and mobile carriers. Apple, on the other hand, developed its own operating systems (iOS) but makes less of its own hardware and even buys the screens for its iPhone X phones from Samsung. Apple is also more reliant on its own physical and online stores. Apple’s choice to invest heavily in its own software and physical stores is not simply a matter of optimizing how an iPhone is made and distributed; instead, it reflects the company’s efforts to differentiate itself from competitors and deliver superior value to customers. It might be cheaper or faster for Apple to rely on Google’s free Android operating system or to sell all its phones through Amazon, but Apple builds competitive advantage by creating dependencies between different activities within its value chain. Porter calls such linked activities value activities. Aside from competitive advantage considerations, a business unit is often forced to create dependencies between its activities. IBM, for example, had to create software for its early computers since no one was making software that could work with its processors. It also had to design and manufacture many of the parts within these computers in order to ensure they all fit together. In other words, IBM had a highly integrated approach to making and selling computers.

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As the computer industry matured, standards emerged, and suppliers started designing and manufacturing components that computer companies could mix and match with ease. Standardized components enabled IBM’s competitors to adopt a modular structure and produce cheaper machines that were compatible with IBM software. These machines were initially not as good as IBM’s, but they were good enough for most users. Standardization also enabled software companies to develop products that work on computers from multiple companies, not just IBM.

 he Law of Conservation of Integration (and T Profits) As Harvard Business School Professor Clayton M. Christensen pointed out, new products in new industries tend to be more integrated. As a product or service becomes more reliable (and more popular), some of its components become standardized. Standards make it possible for many suppliers to provide different parts, and to do so faster and at a lower cost.cclxxi This, in turn, enables new competitors to adopt a more modular product architecture and spend more resources on other activities within their value chain. Let’s unpack that last sentence, using Dell Computers as an example. By the mid-1990s, personal computers (PCs) became relatively standardized and a variety of cheap suppliers provided different components and assembly. This enabled Dell and others to produce and sell “IBM compatible” PCs while relying heavily on outsourced parts and labor. These new companies pushed the price of PCs down. But the modular approach did not just enable Dell to compete with IBM on price. It also enabled Dell to “deliver customized products rapidly”,cclxxii by drawing on a network of different suppliers. Based on this ability, Dell launched Dell.com in July 1996, allowing consumers to buy and customize a PC online—and changing the way people bought computers. Within a few months, Dell.com was generating about $1 million per day in sales.cclxxiii Modularity enabled Dell to focus on new and different value activities such as customization and online commerce. While Dell’s production and logistics became more modular, its marketing and sales became more integrated. It built a proprietary sales channel (Dell.com) that was interlinked with the way its computers were produced. In other words, IBM could not easily build a website and offer customization, because its production was integrated. This

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Operations

Outbound Logistics

Marketing & Sales

Service

Dell’s integrated activities

Fig. 14.3  Value chain integration: IBM versus Dell (simplified)

meant IBM’s production quality was perhaps higher, but also less flexible (see Fig. 14.3). At an industry level, the computers themselves became commodities. Most of them were good enough for most users. As Christensen pointed out, “when a product starts to become a commodity, a decommoditization process is often triggered somewhere else in the value chain.”cclxxiv In the mid-1990s, the way computers were made became modular and commoditized. At the same time, the way computers were sold and serviced became integrated, and was a source of differentiation and competitive advantage. The shifting of integration and modularity from one part of the value chain to another is an ongoing process. Christensen calls this dynamic “The Law of Conservation of Integration” or “The Law of Conservation of Attractive Profits”. As he pointed out, “when attractive profits disappear at one stage in the value chain because a product becomes modular and commoditized, the opportunity to earn attractive profits with proprietary products will usually emerge at an adjacent stage.”cclxxv Porter’s and Christensen’s theories have many more layers and are usually applied to complex industrial and technology businesses. In the following pages, we will use a simplified version of their ideas to look at hotel and home-­ sharing companies.

Sonder: A Hybrid Home-Sharing Hotel The value chains of Marriott and Airbnb are markedly different. To use a simple analogy, Marriott is to hotels what IBM was to personal computers: an integrated giant that offers standardized products that satisfy the most demanding customers. Does this mean Airbnb is Dell? No. Booking a room on Airbnb.com is not similar to buying a computer on Dell.com, but more similar to buying a computer on eBay. Airbnb and eBay are platforms that make it easy and safe for

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customers to find and purchase products they like. But both companies don’t have any products of their own and offer an experience of variable quality that is good enough for some customers. Generally speaking, both companies cater more to bargain hunters or to people with needs that are not served by mainstream retailers or hoteliers. If Airbnb isn’t Dell, who is? In recent years, a few companies have emerged to combine the standardized, reliable, and legal experience of a hotel with the authentic, more spacious, and relatively affordable experience of home-sharing. One company that is showing the way is Sonder. It offers furnished apartments can be booked for a day, a month, or a year. Like hotel rooms, Sonder units are cleaned daily and fitted with standardized furniture, fixtures, equipment, pillows, towels, and shampoos (FF&E and OS&E, in hotel parlance). Sonder secures inventory by signing leases with residential landlords for whole floors or entire buildings. The lease term can be anywhere from one to five years long. In some cases, Sonder signs a management agreement with the owner of the property. The company relies on different channels to generate demand. A fair share of its bookings is direct, completed on Sonder.com. The remainder is booked through OTAs such as Expedia and Booking.com, as well as through home-­ sharing websites such as Airbnb and HomeAway. As of Q2 2019, the company operates over a thousand of units in over ten cities. It has raised $360  million in venture capital from investors such as Greylock Partners, Greenoaks Capital, Tao Capital Partners, and Spark Capital. Unlike Marriott, Sonder did not begin by owning a physical asset and building a reputation and a distribution network that it later leveraged to secure franchise deals. Instead, it started by building a brand and an online distribution channel and leveraged these to secure more physical inventory. In that sense, Sonder is similar to DTC (direct to consumer) brands that emerged in the retail world, which we covered in the Retail section. Other companies, including Lyric, WhyHotel, and Zeus Living use a similar model to compete with traditional hotels and short-term rentals. Traditional hospitality, real estate, and home-sharing companies have a growing interest in this model, as exemplified by their investment in the space. Lyric’s investors, for example, include real estate giants Tishman Speyer and RXR Realty; Barry Sternlicht, the co-founder of Starwood Capital Group; Fifth Wall Ventures, whose LPs include Host Hotels & Resorts; and Airbnb. Sonder creates value in a different way from both Marriott and Airbnb (Fig. 14.4). It is less integrated and more flexible with its inventory than Marriott, and it is far more integrated than Airbnb. But like Airbnb, Sonder’s value activities are more focused on the right side of the value

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Property Design & Construction

Interior Design & Build-Out

Check-in

Marketing & Sales

Service

Provide detailed requirements for layouts, FF&E, OS&E

Employ 24/7 staff on premises to issue keys and open doors

Invest in brand; operate booking site and loyalty program; rely on GDS, TTAs, tour operators, OTAs

Provide 24/7 room service, 24/7 concierge, on-premise dining, daily housekeeping

—

—

—

Invest in brand; operate booking site;

Provide 24/7 customer support

—

Provide detailed requirements for layouts, FF&E, OS&E

Provide online check-in with app and digital locks

Invest in brand; operate booking site; rely on OTAs, Airbnb

Provide 24/7 customer support and daily housekeeping

Marriott Provide detailed requirements for program, amenities, systems, and materials

Airbnb

Sonder

Fig. 14.4  Key value creation activities for Marriott, Airbnb, and Sondercclxxvi

chain, farther from the physical asset and closer to the customer. Meanwhile, Marriott’s value creation activities around the way buildings are designed and constructed are still significant, even when it does not own these buildings. The variability in the supply of home-sharing units limited Airbnb’s original business and created an opportunity for Sonder and others to transform apartment buildings into makeshift hotels in key global cities. Meanwhile, in developing countries, even the supply of hotels is not yet standardized, reliable, or up to code, particularly at the bottom of the market. This created an opportunity for the emergence of yet another business model.

OYO: The Pure-Play HoTA In 2011, Ritesh Agrawal decided to build India’s Airbnb. He founded Oravel. com, a website that aggregated listings of bed and breakfasts, serviced apartments, and private rooms.cclxxvii Two years later, at the age of 19, Agrawal was selected for a Thiel Fellowship, a program that provides funding and mentorship to entrepreneurs, scientists, and activists who decided to drop out of college and pursue their calling.cclxxviii Mentors on the program include Elon Musk and Sean Parker. It was founded by Peter Thiel, co-founder of PayPal and Palantir, and an early investor in Facebook.

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But the Oravel model wasn’t working. The portal made it easy for customers to find and book properties, but that wasn’t enough. As Agrawal told the India Times, “the big problem was that these portals are not standardized,”cclxxix people can’t really know what experience awaits them once they get off the website and into the actual property. In 2014, Agrawal decided to shut down Oravel.com and launch OYO Rooms, a network of budget hotels. More accurately, OYO often had only a few rooms in a hotel, which it helped manage in a standardized fashion. OYO leased these rooms from the hotel owner or operated them based on a revenue-­ sharing agreement. At the time of its launch OYORooms.com had listings from about a dozen hotels. The company used funds it had previously raised for Oravel.com from investors such as Silicon Valley’s Lightspeed Venture Partners and Singapore’s DSG Consumer Partners. Within a year, OYO had partnerships with 200 hotels across ten Indian cities. In early 2015, it raised $25 million from investors such as Lightspeed, Sequoia Capital, and others to expand its network and build its proprietary technology.cclxxx Before the end of the year, the company was already active in 70 cities and raised an additional $100 million in a round led by Softbank.cclxxxi OYO operates an Uber-like network of distributed staff servicing its various hotels and a central customer care center. The company developed proprietary apps to allocate tasks and monitor its staff. The apps also provide staff with instant rewards based on customer feedback. The company also built a consumer-facing app, enabling guests to check in and out, make service requests, and pay for their rooms. Each OYO room comes with standardized free Wi-Fi, free breakfast, and air-conditioning—features that are far from guaranteed in India’s budget hotel market. As of Q2 2019, OYO “operates” about 700,000 rooms in 20,000 properties in multiple countries, including about 50 hotels in the U.S. We put quotation marks around “operates” since OYO is more involved in some listings that it is in others. The company now operates several business lines, including mid-market hotels that it designs and manages, Airbnb-style vacation homes, serviced apartments, studios for medium-term stays, as well as budget hotels under its original light-touch model. By April 2019, OYO had raised $1.7  billion in venture capital, mostly from Softbank Investment Advisers. The most recent investor in OYO is none other than Airbnb. Is OYO a hotel franchise, a home-sharing company, or an OTA? It seems to be a bit of everything, or a new kind of animal: a HoTA. But OYO is not the only lodging company that’s becoming difficult to define. The same is true for other companies in the space, including ones that have been around for much longer.

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 he Convergence of Franchisors, Home-Sharing T Sites, and OTAs The investment in OYO was not Airbnb’s first foray into the world of hotels. In February 2018, Airbnb announced a technology partnership with SiteMinder, a software company, to streamline listings from small boutique hotels and B&Bs. SiteMinder provides tools that help over 28,000 properties set up a website, accept direct online bookings, distribute their inventory to travel agents, and optimize their pricing. The partnership makes it easy for SiteMinder customers to list their inventory on Airbnb.cclxxxii Independent hotels have been using Airbnb to market their rooms for years, but this was the company’s first formal effort to bring hotels to its platform. In March 2019, Airbnb went a step further and acquired HotelTonight, a hotel booking app and website. HotelTonight originally launched in 2010 as an app to find same-day deals for nearby hotels. Unlike traditional OTAs, the app only displayed a handful of select properties with transparent pricing and simple booking process, making it a favorite among mobile users. Over time, HotelTonight expanded its booking window and launched a desktop version, but it remained highly curated, listing about 25,000cclxxxiii hotels compared to Expedia’s 500,000. In June 2019, Airbnb introduced a new commission structure that made it easier for hotels to list properties on its platform. Doing so brought it one step closer to the OTA industry standard.cclxxxiv Expedia and Booking, meanwhile, have been moving into Airbnb’s turf for several years. In 2015, Expedia acquired HomeAway, Airbnb’s main competitor, adding over 1.3  million “alternative accommodation” listings to its platform. Booking Group has been aggressively building its home-sharing inventory, and in 2018 it drew 20% of its revenue, or $2.8 billion, from such listings.cclxxxv It is not surprising that the model of “Internet companies” like Airbnb, Expedia, and Booking are gradually converging. These companies’ ability to control a big chunk of demand for accommodation is a strategic challenge for traditional hotel companies. And hotel companies are rising to the challenge or, at least, trying to. In 2016, Accor acquired OneFineStay.com, a London-­ based company that provides vacation listings for high-end homes combined with hotel-like services for hosts and travelers.cclxxxvi Two years later, Accor wrote off most of its investment in OneFineStay;cclxxxvii however, it is keeping the site alive and continuing to experiment. Accor also previously bought 30% of Oasis Collections, a vacation rental website with a more hands-on operations model, employing professional staff

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in each city to welcome guests and service its units. Hyatt Hotels was also previously a shareholder of Oasis. And in May 2019, Accor was reported to be in talks to invest $50 million in Treebo, an India-based HoTA and OYO’s main competitor.cclxxxviii Marriott, the largest hotel company in the world, has taken a more cautious approach. In 2018, the company embarked on a six-month-long experiment in listing 200 luxury homes in London, in partnership with HostMaker, a property management company. Marriott later expanded the experiment to additional homes in Paris, Lisbon, and Rome. Following the experiment, Marriott decided to officially jump into the home-sharing fray in April 2019, with the launches of Homes & Villas by Marriott International in 100 destinations. The new business line initially lists around 2000 homes. Unlike Airbnb, Marriott does not allow “hosts” to simply list properties on its site. Instead, it is partnering with local property management companies who can offer guests a more hands-on and a more standardized level of service. Marriott’s entry into home-sharing is not just a stab at Airbnb. Perhaps more so, it is an effort to expand the benefits of its loyalty program in order to drive more direct bookings to its hotels and counter the power of OTAs such as Expedia and Booking. The hotel industry’s response to the emergence of home-sharing is reminiscent of Elisabeth Kübler-Ross’s model of the five stages of grief, starting with denial, going through anger, bargaining, and depression, and finally accepting change (see Table 14.1). The industry is still far from reaching a new equilibrium. More change is on the horizon, extending the impact of new brands and online channels deeper into the residential market. Table 14.1  The five stages of real estate grief (hotel edition) Denial

Incumbents assume Airbnb will not have a significant impact on the hotel industry. Anger Incumbents petition local authorities and hire lobbyists to crack down on Airbnb or impose regulation that would limit its growth. Bargaining Incumbents concede that home-sharing is a legitimate hospitality category and try to figure out how to respond. Depression Analysts and investors question the long-term viability of hotel franchises in light of new business models. Incumbents make half-­ hearted efforts to change by making passive investments in listing sites. Acceptance Incumbents integrate home-sharing into their core offering and loyalty programs.

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Airbnb: Going Offline As traditional hotels take the battle to the digital world, digital companies are developing an appetite for the physical world. First, in hotels and hospitality assets, but ultimately in apartments and even single-family houses. Traditional hotels are not the only ones who had to come to terms with Airbnb’s meteoric rise. Residential landlords were also at odds at how to deal with the fact that some of their buildings have become makeshift hotels. Most tried to prevent such behavior, leading to crackdown on tenants. Other landlords tried to capitalize the trend by furnishing some of their own empty units and listing them on short-term rental sites.2 This, in turn, led to complaints from long-term tenants and neighbors. One of the largest property owners in the world decided to try something else. In December 2017, Brookfield Property Partners announced plans to invest $200 million in Niido, forming a joint venture to develop and acquire over a dozen multifamily properties in which units will be seasonally rented out through a special partnership with Airbnb. Niido tenants would be allowed to rent their apartments on the home-sharing site for less than six months each year. In return, Brookfield and its partner will collect 25% of the short-term rental income generated through Airbnb. By explicitly positioning properties as Airbnb-friendly, Brookfield avoids tenants who would be uncomfortable with that type of use. And by partnering directly with Airbnb, it can formalize how units are shared to ensure overall safety and compliance with local zoning laws and other regulations. Most importantly, the model seems to generate superior returns. As Jonathan Moore, Managing Director at Brookfield, pointed out, the “25% scrape” of home-sharing revenue translates into a 2%–3% increase in Brookfield’s investment returns, measured by unlevered internal rate of return (IRR).cclxxxix In May 2019, Airbnb announced a partnership with RXR Realty, a New York-based property developer, to “create a new category of urban lodging” in New York and possibly other urban centers.ccxc As a first step, the two companies will convert ten floors of RXR’s 75 Rockefeller Plaza office tower into 200 luxury accommodation units that will be available exclusively through Airbnb. The units will enjoy service from on-site staff and guests will have access to other amenities in the building, including a ground-floor ­restaurant, meeting and coworking facilities, and a member’s lounge located  See, for example, Equity Residential’s 2016 ordeal with 400 West 37th Street, New York: E. B. Solomont, “Equity Residential Flouting Law by Running Airbnb-Style Hotel in Midtown: Lawsuit”, The Real Deal, last modified August 8, 2016, https://therealdeal.com/2016/08/08/equity-residential-flouting-lawby-running-airbnb-style-hotel-in-midtown-lawsuit/. 2

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on the top floor (and operated by Convene, another real estate “start-up”).ccxci The partnership with RXR followed an earlier announcement from Airbnb that it might start building and selling single-family houses or prefabricated housing units of some sort.ccxcii By Q2 2019, no formal announcements were made on that topic, but it is clear that the company is interested in creating more of its own inventory. The company’s Samara unit has been experimenting with urban planning and construction since at least 2016 and will likely make additional announcements in 2019 and beyond. Airbnb’s initiatives, and the emergence of companies such as Sonder, Lyric, and WhyHotel, highlight the fact that “home-sharing” is a misnomer. These companies are not facilitating the sharing of homes; they’re converting residential and commercial units into uses that were previously exclusive to hotels. More accurately, they are creating a new spectrum of options that renders the traditional definitions of housing and lodging irrelevant. When someone books a Sonder for a whole year, is she a “guest” or is she a local? When someone books an Airbnb for three months, is he “residing” or is he “lodging”? And most importantly: Why should it take 30 seconds to find, pay, and move into an apartment on Sonder or Airbnb while it takes 30 days to find, pay, and move into the same apartment through the traditional residential leasing process? It doesn’t make sense and it won’t last. Technological and demographic forces are once again pushing the housing and lodging industries toward one another. The outcome of this process will transform how hundreds of millions of people live and how trillions of dollars in assets are operated and transacted.

Airbnb: Disrupting Hotels or Disrupting Housing? Airbnb’s early years were a textbook disruption story. The company initially offered a sub-standard experience to people who would otherwise stay at a low-end hotel or avoid travel altogether. But the company’s growth and evolution did not progress according to Christensen’s classic model. For one, Airbnb’s impact on the industry it supposedly set to disrupt was unclear. Unlike Netflix’s decimation of Blockbuster or Google’s eclipse of Yahoo, Airbnb did not end up replacing traditional hotels or driving the hotel industry to its knees. In fact, U.S. hotels had a record year in 2018ccxciii—measured in occupancy, revenue per available room, and average dwelling rate— and 2019 is expected to cap ten consecutive years of continuous growth.ccxciv

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The sector’s growth was probably more a result of macro conditions than of any specific action by hotel companies. Perhaps hotels would have done even better if Airbnb did not exist, but Airbnb did have an impact on how some hotels are designed and played an important role in pushing hotel companies and OTAs to evolve and, in some cases, consolidate. And one day, Airbnb might have a more damaging impact on hotels, but so far, hotel brands have mostly done well in the era of home-sharing. The second reason Airbnb does not fit into the classic disruption model is that its evolution did not continue upwards in a straight line. Home-sharing started in the low end of the market (see Fig. 14.5), but it did not grow to become the preferred option of mainstream travelers. It did not replace hotels. Instead, Airbnb parlayed its initial success in home-sharing to integrate more hotels to its platform and become more of an OTA—a giant among other giants such as Booking, Expedia, and Marriott. This trend is set to continue with the expected addition of flight bookings to Airbnb’s offering and its continued experimentation with development partnership.ccxcv A 2015 study by Morgan Stanley—an Airbnb investor—concluded that Airbnb is “primarily focused on non-hotel, leisure, longer-duration stays”.ccxcvi This was corroborated by data published by Airbnb itself showing that average bookings in cities such as New York, Paris, and Amsterdam are often two

Improvement trajectory of Airbnb’s offering

TIME Note: Based on Clayton M. Christensen, Michael E. Raynor, and Rory McDonald, “What Is Disruptive Innovation?”, Harvard Business Review, last modified December 2015, https://hbr.org/2015/12/what-is-disruptive-innovation

Fig. 14.5  The trajectory of disruptive innovation in the lodging sector

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times longer than hotel bookings in the same city, reflecting a different type of use.ccxcvii In late 2017, a separate study by Morgan Stanley pointed out that Airbnb and shared lodging in general “could be more niche than previously expected”.ccxcviii To be clear, this does not mean that Airbnb’s business has no room to grow. But it does mean that the total size of the company’s original home-sharing business has a lower ceiling and that Airbnb should expand to other business lines in order to keep growing—as it is indeed doing. Airbnb used apartments to disrupt hotels, but its ultimate impact will be much more disruptive to those who manage apartments than to those who manage hotels. Seen in the context of hotels, Airbnb provided listings that other companies could quickly and easily offer as well. But seen in the context of housing, Airbnb has done something that was never before done at scale: enabled people to book and move into residential buildings at the click of a button. By doing so, Airbnb provided validation and inspiration to a new generation of companies that are disrupting the residential market. Let’s see how.

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Ollie: The Hotelization of Multifamily Real Estate In 2006, the living room of Chris Bledsoe became a makeshift bedroom. The guest, in this case, did not arrive through Airbnb. Andrew, Chris’s younger brother, just moved to the city and needed a place to stay. After a few weeks, the couch became uncomfortable and Chris encouraged Andrew to get an apartment of his own. A few additional weeks later, Chris provided the necessary guarantees for a lease on a one-bedroom apartment and Andrew moved out. But the brothers had a plan. To help pay the rent, Andrew decided to bring in sub-tenants. He used a pressurized wall system to split the living room into two tiny but private rooms and posted a short ad on Craigslist. Within 48 hours, nearly 90 people responded to the ad. Most of the respondents were not travelers. They were living in New York but were either unable to or uninterested in signing a proper lease. The “uninterested” were entrepreneurs or corporate employees working on uncertain projects, international students who did not have the local credit score required to sign a lease, recent divorcees who had to figure out their next steps, and even empty nesters who sold their home and planned to spend several months a year elsewhere. The “unable” applicants had stable jobs and relationships but could not afford to live alone and did not manage to find a roommate who aligned with their move-in date, budget, and living habits. All the applicants were happy to pay a premium for a very humble room. They valued the fact that everything was ready for them—furniture, kitchen utensils, Wi-Fi. They also valued the absence of a formal application process,

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a broker to pay to, or an inscrutable lease from an often-inscrutable landlord. Facing such overwhelming demand, Andrew and Chris realized they were onto something. In 2015, they launched Ollie (a play on “all inclusive”) to try to provide a more intentional and code-compliant solution at a much larger scale. Ollie’s first step was to join forces with the developers of Carmel Place, an experimental building in Manhattan’s Kips Bay neighborhood. As part of Mayor Bloomberg’s plan to experiment with new solutions for the city’s growing number of small households, Carmel Place was granted several planning exceptions that allowed for smaller units and higher density, featuring 55 micro-studios that ranged from 260 to 360 square feet in total size (compared to the 400 minimum usually required). Carmel Place was built modularly, developed by Monadnock Development, designed by nARCHITECTS and outfitted with unique space-saving furniture from Resource Furniture. Ollie joined late in the development process but managed to make an impact on how units were fit out and how the building was positioned, leased, and operated. It was at Ollie’s second New York project that a new real estate model started to emerge. The company partnered with Simon Baron, a real estate development company, to affect the design of Alta, a new 43-story residential tower in Queens. Fourteen floors in the building were dedicated to coliving, with two- and three-bedroom units designed, furnished, and serviced in a way that made them easier to share with unrelated individuals. With 422 rooms in 169 shared apartments, Alta was the largest ground-up coliving project ever built in the U.S. (Table 15.1). Ollie’s role at Alta is similar to that played by hotel brands. The floors operated by the company have been laid out according to unique specifications made by Ollie’s in-house design and architecture teams. Ollie handled the way units were furnished and stocked, down to the paper towel holders and kitchenware. Ollie provides weekly housekeeping with linen and tower service to all the coliving units and replenishes the supply of toilet paper, dish soap, body wash, conditioner, and shampoo. All Ollie residents have access to Alta’s amenity network including two rooftop lounges, a coworking space, gym, pool, yoga room, and golf ­simulator. Table 15.1  Alta unit mix Conventional (floors 17–42) Coliving (floors 2–16) Building total

Apartments

Bedrooms

297 169 466

367 422 789

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Ollie conducts regular community events, both in and out of the building. Ollie also provides a digital layer, including an app that allows residents to submit maintenance requests, schedule cleanings, book building amenities, receive package notifications, and keep track of the building’s busy schedule of community activities. On the distribution side, Ollie’s website generates about 80% of the leads to the building’s coliving units, according to CEO Chris Bledsoe.ccxcix Ollie also operates a website that helps residents identify an ideal roommate. The app, called Bedvetter, provides each member with a questionnaire and connects people based on their move-in date, budget, lifestyle, and personal habits. As of June 2019, Bedvetter helped “create” over 200 shared households. Once matched, roommates sign a standardized lease agreement. Other roommate matching solutions such as Nooklyn and Roomi have also grown in popularity in recent years, but Ollie is the first to integrate the process into a comprehensive residential offering. Ollie’s involvement helped Alta improved the project’s overall financial results. Based on 90% of the coliving units leased by June 2019, the areas of the building operated by Ollie achieved rental premium of about 45% compared to the building’s traditional units. This translates into a 30% increase in net operating income (NOI) per square foot, net of Ollie’s incremental expenses and management fees. Ollie’s typical arrangement with property owners is also reminiscent of hotel franchisors. The company’s management fees are based on a percentage of rent, with bonuses based on pre-agreed benchmarks, and additional fees for Ollie’s tech services and lead generation. In 2019, Alta’s developer managed to replace the building’s construction loan with permanent financing from Société Générale and Deutsche Pfandbriefbank, reflecting the confidence of traditional lenders in this new coliving operating model for residential buildings.ccc Dozens of coliving projects by operators such as Ollie, Common Living, Medici Living, and Starcity have proved that the model can deliver superior financial results. But many in the industry still question the overall potential of the coliving market and see it as a niche product. We believe that demand for coliving is driven by demographic and technological changes that impact a significant share of the population. More importantly, it would be a mistake to assume that coliving’s operating model applies only to the customers it currently serves. The model’s evolution points to a bigger shift in the way all residential assets are operated. Let’s see how.

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 ommon: Digital Distribution as a Source C of Value At the same time that Ollie was working on ground-up development micro-­ apartment layouts, others have been trying to bring the coliving model to existing buildings. In 2010, Brad Hargreaves co-founded General Assembly, a start-up that helps individual and corporate teams learn “digital” skills, including software development, user experience design, data analysis, and online marketing. As the business grew, Hargreaves found himself increasingly occupied with finding a place for his students to live. Several trends have been coalescing to make it difficult for young professionals to find an affordable and convenient place to live. People are getting married later or not at all, reducing the average household size. More young people are moving into large cities in search of good jobs (even though migration, on net, was negative in many cities). On average, young urban professionals are also staying in the city for longer, delaying or avoiding buying a home and moving to the suburbs. This means that a growing swath of the population is renting. The growing preference to rent rather than own is itself driven by a combination of record levels of student debt, as well as a robust but unstable employment market (as detailed in the Office section). Renting is also aligned with a broader change in consumer preferences toward push-button solutions that has emerged to fill every human need. Apps provide everything, from on-­ demand transportation and food delivery, through housekeeping and professional services, to dating and social interaction. On the supply side, cities such as New York, San Francisco, and Washington, D.C., have zoning and policies that make it difficult to build units for single residents. Some policies encourage developers to build luxury units that are less regulated or to build units for various government programs in exchange for tax breaks or other concessions. Meanwhile, not enough units are being built for urban residents who can’t afford luxury but did not qualify for various government welfare programs. Other global cities such as London, Amsterdam, Berlin, Shanghai, and Tel Aviv also suffer from a similar shortage of rental apartments that are suitable for single residents. In 2015, Hargreaves decided to develop a solution of his own through a new venture, Common Living. As a first step, Common took over an 84-year-­ old building in Crown Heights, Brooklyn. The four-story brick building was originally built to serve as the home of a single, wealthy family. Over the years, it was divided into several separate apartments for working-families who

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probably moved to the area after World War II. Common converted it into a single building with 16 bedrooms to house a group of unrelated individuals. Hargreaves figured that using existing buildings would allow him to bring a product to market faster, iterate faster, and gather insights and validation that would enable him to later move on to larger, ground-up development projects. Common furnished all the bedrooms and shared areas, provided basic supplies and cleaning services, helped match roommates, and developed a legal process less painful than a typical lease. True to Hargreaves’s digital roots, the company launched as a digital brand, with a website that allows potential residents to see Instagram-style photos of their future home and learn about life in the neighborhood. It is also planning to provide virtual 3D tours. It offers new residents the flexibility to commit to less than a year and to move freely between other projects in Common’s portfolio. Common’s online distribution channel enabled it to attract residents to parts of Brooklyn that they did not originally intend to live in. At the time, Crown Heights was affordable to young professionals, but its reputation was that of a less safe and less cool destination, particularly when compared to neighborhoods such as East Village or Williamsburg which were top destinations for young professionals at the time. But most of all, most newcomers and many New York residents were not aware that Crown Heights existed. Common’s digital narrative, service package, and flexibility gave residents the confidence to give it a go. Unlike Ollie’s, Common’s first buildings were not particularly dense. But the ability to draw residents to new areas enabled the company to make margin. Common did not price its rooms based on the neighborhood they were in. Instead, it priced them based on the budgets of its target customers. A resident who planned to spend $1800 a month on an empty bedroom in a traditional shared apartment in East Village could, instead, spend the same on a fully furnished and serviced room in a fully renovated Common property in a less desirable neighborhood. For the customer, that meant a better experience and a lower overall cost when factoring in utilities, furniture, and various moving costs. For Common, that meant a rent per square foot that was about double compared to similar properties, and an NOI lift of 30%–40%. In a sense, incumbent landlords in popular neighborhoods provided Common’s early projects with a price umbrella, setting tenants’ expectations of how much should be spent on housing. Common proceeded to open dozens of additional properties in seven other cities and expanded its model to include management deals and ground-up development projects. As of Q2 2019, Common’s website generates more

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than 15,000 direct leads from prospective tenants—much more than the company can accommodate in its existing projects. This is a remarkable fact in an industry where landlords normally rely on brokers to “move their inventory”. The most interesting aspect of Common’s evolution is not the growth of its coliving brand—it is its ability to parlay its unique capabilities into other residential products and a different position in the real estate capital stack.

Coliving’s Disruptive Trajectory In March 2019, Common announced a joint venture with Tishman Speyer, one of the world’s largest real estate owners and developers. The new venture, dubbed Kin, will be America’s “first residential brand tailor-made for families living in and near cities”.ccci Kin will develop and operate multifamily projects that are purpose-built for families. The idea is to couple Tishman’s development and financing capabilities with Common’s technology, operations, branding, and community management expertise. Kin projects will include larger units and amenities that focus on children, education, and the needs of parents, and will be located to ensure easy access to school and employment areas. Unlike Common’s coliving projects, Kin apartments will not be shared and buildings will be programmed with events and activities that are suitable to the target demographic, including swimming lessons, enrichment classes, and kid-friendly holiday parties. Kin’s mobile app enables residents to access shared resources such as toys, playrooms, and even last-minute babysitters or longer-term nannies. Kin currently operates a section of Jackson Park, a larger project developed by Tishman Speyer in Queens, New York—about 300 feet from Ollie’s Alta project. Jackson Park includes 1871 apartments and 120,000 square feet of amenity spaces. New and existing residents can pay a monthly fee in order to access all Kin services or opt out and receive only basic property management services. Kin was launched while we were writing the final pages of this book, so we did not have an opportunity to gauge its performance over time. However, the mere existence of this venture is a milestone in the evolution of coliving operators and of Common in particular. The company originally focused on small-­ scale fixer-upper projects in less desirable neighborhoods that catered to under-served, low-value customers.

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Fig. 15.1  The trajectory of disruptive innovation in the multifamily sectorcccii

The company invested time and (venture) capital to develop tools and methodologies that are essential to the operation of residential projects in the twenty-first century. Common is using its brand, technology, and operational capabilities to gradually move upmarket and take on larger, ground-up development projects in more desirable neighborhoods (Fig. 15.1). Other coliving operators have relied on diverse sources of capital from property investors to develop new projects. Starcity raised the $1.8 million in equity required for an adaptive reuse project in San Francisco’s Lower Haight on EquityMultiple.com, a crowdfunding platform.ccciii Medici Living, owner of the Quarters coliving brand, secured a $1.1  billion commitment from CORESTATE Capital Group to acquire and develop as many as 30 coliving projects in Europe.ccciv We already mentioned Ollie’s collaboration with developer Simon Barron above. But Common’s Kin partnership is the first to cross the chasm from coliving toward the mainstream of the multifamily market— catering to middle-class families who are comfortable committing to a 12-month lease and are more motivated by experience and convenience than price. If Kin will prove to be a success, it would position Common as a legitimate competitor in the multifamily market, prompting more incumbents to launch brands of their own or to partner with emerging operators such as Common, Starcity, Ollie, and others.

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 enn: Neighborhoods as Amenities and the New V Capital Stack Bundling multiple services and amenities into a single building is not a new idea, but it can benefit from a technology-powered revival and optimization. But ground-up development sites are relatively rare in dense urban areas, and those that are available are usually too small to fit a large building. Small buildings, in turn, cannot justify the costs of large amenity areas or any investment in proprietary technologies or services. Venn, a Tel Aviv-based housing start-up, came up with a novel approach to provide small apartment buildings with rich amenities, services, and a sense of community. Instead of helping residents share an apartment or a building, Venn enables them to share a whole neighborhood. In Brooklyn, Berlin, and Tel Aviv, the company operates clusters of buildings that are located within walking distance from one another. The buildings include new or renovated furnished apartments. Aside from residential buildings, the company’s network includes communal areas and businesses that are spread across the neighborhood, from cultural centers to gyms, childcare facilities, restaurants, household tool “libraries”, dry cleaners, and more. Venn ensures that each of its “hoods”, as it calls them, include a critical mass of services and communal spaces by providing seed capital to local business owners or by operating some spaces and services on its own. Venn members receive access to all the amenities in the hood, as well as to community events and activities and housekeeping services. Membership is open to any neighbor, including those who live in buildings that are not operated by Venn. Venn’s operating philosophy, captured in a book written by its founders, sees neighborhoods as central to people’s identity, convenience, and personal growth. Unlike many coliving and coworking start-ups, Venn did not begin by spending venture capital on signing leases or acquiring buildings. Instead, the company relies on a capital stack that includes real estate private equity, real estate debt, corporate debt, and venture capital (Table  15.2). The private equity comes from investors who acquire (or sign long-term master leases for) properties that Venn can operate. The debt finances more typical business expenses such as capital expenditures for renovation and furniture. And the venture capital finances the development of Venn’s branded technology and services platform that powers its projects across the world. This model enables Venn, its investors, and its lenders to transform less desirable neighborhoods and capture more of the increase in property value

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Table 15.2  Venn’s capital stack Type of capital

Uses

Venture capital

→

Corporate debt

→

Real estate debt Real estate equity

→ →

Technology R&D, brand, teams to select and service properties in the company’s management portfolio. Capital expenditures necessary to renovate and furnish properties in the company’s portfolio. Augment the equity when acquiring properties. Acquisition of properties for Venn to operate.

created by its activities—not just the value of a single residential building, but the value of multiple residential and commercial buildings and multiple local businesses. It also enables Venn to act as a sponsor of sorts in real estate acquisitions made by its affiliates, allowing the Venn platform to benefit from its contribution to the value of assets owned by third-party investors. Regardless of Venn’s specific product and target demographics, its capital stack is an example that many real estate companies may follow in the future. As residential (and commercial) assets become more reliant on branding, technology, and thicker operating layers, it makes sense for the real estate capital stack to evolve and enable separate investors to finance separate aspects of the business in a way that is commensurate with their risk appetites and mandates. Venn is already in the process of “upgrading” parts of the Shapira neighborhood in Tel Aviv, Bushwick in Brooklyn, and Friedrichshain in Berlin. To existing residents, the company’s model may seem like a “gentrification machine”, a systematic way to increase property prices and make a neighborhood unaffordable to its original residents who are usually renters. To address this concern, Venn is exploring business models that would allow for more inclusive growth and benefit its neighbors, not just its customers and investors. One way to do so would be to enable small investors to become fractional owners of the buildings or neighborhoods they live in. A similar challenge is being addressed by a collaboration between EFFEKT, an architecture firm, and Space10, a research and design lab backed by IKEA. The two companies developed a concept for an “urban village” that would provide reasonably priced housing units and access to a variety of shared services and amenities. The companies plan to allow residents to buy (financial) “shares” in the project as part of their monthly rental payment.cccv This way, locals will gradually build an ownership stake in the properties they use every day. The concept was presented in June 2019 at IKEA’s annual design

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c­ onference. No details were published on when, where, and whether it would be actually built. So far, we only discussed emerging models in the market for urban apartments. Before we conclude this section, it is worthwhile to look at how technology is reshaping the market for private residential houses in and around cities.

Invitation Homes: Consolidating Single-Family Homes In February 2008, the New Yorker magazine interviewed Stephen Schwarzman, founder and then-CEO of the Blackstone Group. When asked about the five different residential properties he owns and uses, Schwartzman mused: “I love houses. I’m not sure why.”cccvi The year 2008 was not great for houses. By the end of the year, the Case-­ Shiller Index tracked an 18% drop in the price of U.S. homes, the largest ever recorded.cccvii The delinquency rate for single-family residential mortgages jumped from less than 2% in 2006 to 6.59% in 2008 and shot to over 11.5% by the first quarter of 2010.cccviii Millions of homebuyers defaulted on their mortgages and lost their properties. Lenders, in turn, found themselves sitting on millions of distressed assets that they had to find new buyers for. This created an opportunity for Schwarzman’s Blackstone Group to own more houses than anyone on earth. In 2012, Blackstone seeded a new company called Invitation Homes in order to “purchase distressed single-family homes and then refurbish, lease, and maintain them in neighborhoods across the country”.cccix Over the next five years, the company used proprietary software to identify and streamline the acquisition and renovation of about 48,000 homes.cccx Many of these properties were acquired in bulk, at the bottom of the market from lenders who had to liquidate foreclosed assets. By 2017, Invitation Homes invested about $10 billion on acquiring and renovating houses. Most of the capital was provided by institutional investors that invested in Blackstone-managed funds. Such investors regularly allocate billions to investment in large office, retail, industrial, and multifamily properties but steer clear of smaller assets. Why? The answer lies in transaction costs. Historically, it was too costly to identify and manage thousands of individual properties. It is much more efficient to deploy $500 billion on a single office building acquisition than to find,

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evaluate, and acquire 3000 separate houses for the same amount. Not to mention the coordination required to get all these houses renovated and resold. But Blackstone was astute enough to realize that transaction costs have changed. Software and the various online tools made it possible to sift through millions of deals, manage thousands of concurrent bids and acquisitions, and to coordinate with local contractors and managers in dozens of cities. In other words, technology made it possible to turn single-family housing into an institutional asset class in which billions of dollars can be deployed each year. The housing crisis provided Blackstone with an opportunity to turn this insight into an actual business. As the economy recovered, Invitation Homes was in a position to “flip” those houses back into the market and cash out. But that wasn’t the plan. Technology also made it possible to lease and manage a distributed portfolio with tens of thousands of houses. Instead of selling them, Invitation Homes rented them out. Its offering to tenants was more compelling than that of millions of smaller residential landlords. All the houses were professionally renovated and maintained and, as an option, leases were bundled with smart home systems such as digital locks, temperature controls, and energy management software. An online portal enabled residents to pay the rent and report maintenance issues. Technology also played an indirect role in driving demand for rental housing. In particular, it contributed to a robust but volatile job market that makes it difficult for middle-class families to commit to a long-term mortgage. And it drove a shift in consumer preferences toward on-demand, turnkey offerings as well as a growing “preference” of access over “ownership”. These effects of technology are covered in more detail in the Retail and Office sections. Other economic factors also contributed to this shift. Overall, the number of renter-­ occupied housing units in the U.S. has grown by more than 20% or 7.5 million units from 2008 to 2018cccxi while the population has only grown by 7% or so. In 2017, Invitation Homes’ portfolio was rolled into a real estate investment trust (REIT) and listed on the New York Stock Exchange. As of May 2019, it owned and operated over 80,000 homes. For comparison, each of the largest multifamily REITs, such as AvalonBay Communities and Equity Residential, owns and operates about 80,000 apartments across less than 300 individual buildings. This means that multifamily REITs only need to evaluate dozens or hundreds of potential acquisitions each year, compared to hundreds of thousands or million in the case of Invitation Homes. The amount of data that is aggregated and created during this process presents an opportunity for an even more radical business model.

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Opendoor: Automating Real Estate Acquisitions Houses are typically owned by their occupiers or other small investors. But the mortgages of these houses are concentrated on the balance sheets of lenders. The scale of the residential debt market is breathtaking. In the U.S. alone, about 600,000 residential mortgages are issued each month, representing a total over $1.5 trillion in new debt each year.cccxii The Federal Home Loan Mortgage Corporation, commonly referred to as Freddie Mac, buys a big chunk of all new mortgages from smaller lenders and packages into mortgage-backed securities and other financial products that institutional investors can purchase. The reasons for this are complex and mired in controversy. For the purpose of our discussion, the salient point is that Freddie Mac needs to determine the value of the collateral for millions of mortgages—that is, houses—each year. Freddie Mac needs to do so without visiting the actual assets and without interacting directly with the borrowers. Starting in the late 1990s, Freddie Mac developed a set of automated valuation models (AVMs) that generate an estimate of a property’s value within seconds. These models take into account data on comparable sales as well as so-called hedonic characteristics such as the number of bedrooms, number of bathrooms, and other features. According to information published on its website, Freddie Mac uses AVMs to verify the underwriting quality of mortgages it acquires, to evaluate overall credit risk in its existing portfolio and for other functions.cccxiii Lenders in other countries also use AVMs for similar purposes.cccxiv Invitation Homes also relies on AVMs to determine the value of properties it acquires or already owns, but does so in tandem with more traditional appraisal methods, including physical inspections. Over the past two decades, AVMs made life easier (but not necessarily safer) for large lenders and large investors. For individual homebuyers and sellers, the acquisition process remained complex, time-consuming, and fraught with uncertainty and anxiety. Buying a home is often the most important financial decision in a person’s life. And unlike Blackstone or Freddie Mac, individual buyers put their own life savings at risk. In 2014, a group of entrepreneurs set itself a mission to turn individual house purchases into a matter of “a few clicks online”.cccxv They founded a company called Opendoor, with the backing of some of Silicon Valley’s most prominent investors, including Khosla Ventures, PayPal co-founder Max Levchin, Yelp CEO Jeremy Stoppelman, Quora CEO Adam D’Angelo, and Y Combinator’s Sam Altman.

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True to its vision, Opendoor introduced a new way to sell and buy houses. Sellers can visit Opendoor.com, enter their home address, and fill in a detailed questionnaire. Within 24 hours, the seller receives a cash offer from Opendoor. The price is determined by an AVM that takes into account “thousands of features” and data points, according to the firm.cccxvi The valuation process is not always entirely automated. When the model indicates low confidence in its own estimate, an Opendoor employee can review and tweak the valuation before an offer is sent. If the seller accepts the offer, Opendoor sends a representative to inspect the property and verify the information provided. The seller has the option to close a deal and move out with a few days. In addition to speed, sellers avoid the need to hold open houses for potential buyers, avoid dealing with contractors and handling repairs, and avoid the risk of a buyer failing to secure a mortgage after weeks of negotiations and discussions. Opendoor allows sellers to choose a preferred moving date—to align with their availability of their next home—and even offers a “late checkout” option for sellers who wish to get paid prior to moving out. For this pleasure, Opendoor charges sellers about 5%–8% of the sales price, which is comparable or slightly higher than the cost of a traditional transaction when taking into account typical broker fees, staging, last-minute concessions to buyers, and temporary accommodation due to uncertain moving dates. Once a house has been acquired, Opendoor handles any renovations required in order to put it back on the market. For buyers, Opendoor offers the benefit of dealing with a professional seller and moving into a newly renovated home. As opposed to the coordination required with individual sellers, prospective buyers can visit Opendoor properties at all hours of the day, every day. And once a deal is done, Opendoor offers a 30-day satisfaction guarantee with the promise to buy the house back in case the buyer is unhappy. Over the past few years, multiple other companies started adopting the Opendoor model. This includes home listings giants such as Zillow and Redfin, which have added instant offers to their sites. In the tech community, Opendoor and other companies that buy houses online have been dubbed “iBuyers”. The iBuyer model introduced unprecedented liquidity to the housing market, enabling people to buy and sell houses the same way they would sell a car or an appliance. Opendoor even offers a “trade in” program. In 2018, it partnered with Lennar, America’s largest homebuilder, to offer existing homeowners the opportunity to upgrade their current home to a new one.cccxvii The iBuyer model blurs the boundaries between owners, agents, listings, and buyers. Its implications for brokers and listings sites are beyond the scope of this book. The iBuyer model also introduces new risks that are yet to be

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fully understood. The average holding period for a home on Opendoor’s balance sheet is around three months.cccxviii The company has raised over $1.5 billion in venture capital from investors such as Softbank, General Atlantic, and Lennar, and relies on a combination of equity and debt to finance its acquisitions. As of March 2019, Opendoor is active in 23 U.S. cities and claims to handle close to 3000 transactions a month.cccxix The company and its model have yet to face a significant housing slowdown. We note that in 2008, AVMs did not save Freddie Mac from reaching the brink of financial collapse and requiring a $100  billion government bailout. On the other hand, higher liquidity has shown to decrease the volatility of other assets such as stocks and currencies—but its impact on real estate merits further research. The Opendoor experiment is worth the risk. It is justified by the size of the opportunity. And unlike other speculative housing ventures, the company and its competitors make life better for individual buyers and sellers. As analyst Ben Thompson pointed out, technology is reshaping the job market and creating opportunities in different areas than where job seekers are located. By increasing the liquidity of the housing market, Opendoor and other iBuyers have the potential to make the overall job market more dynamic and make it easier for people to move toward better opportunities.cccxx For now, iBuyers only impact a tiny share of the housing market. The University of Colorado’s Mike DelPrete estimates that in 2018, Opendoor and its competitors were involved in only 0.2% U.S. housing transactions.cccxxi But they are growing fast and attracting significant amounts of capital. Can the iBuyer model apply to commercial assets such as offices, retail projects, and multifamily buildings? Not just yet. iBuyers have access to plenty of relevant data. It’s easy to compare single-family homes and with millions of annual transactions. In contrast, there are only a few thousand commercial property transactions a year, and even these are spread across different countries and asset types. The world has millions of near-identical houses, but most office or retail projects are unique in their size, design, and features, not to mention additional factors such as mechanical systems or air rights. The comparison method is generally less relevant in commercial valuations since commercial assets are valued primarily based on their expected cash flow. That cash flow, in turn, is a factor of dozens or hundreds of office, retail, and residential leases or operating agreements with hospitality operators. Commercial projects also have more complex debt and cash flow distribution structures that require deeper analysis and modeling. All these leases and financial arrangements reside across multiple documents, often only on paper.

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That said, automated valuations can help commercial investors sift through hundreds of opportunities and decide which ones are worth further attention. Technologies such as machine vision and natural language processing make it easier to consolidate and analyze data from different documents and sources. This means that processes that previously required hundreds of man-hours can now be expedited. Also, technology makes it easier to aggregate data from additional sources. A start-up called Skyline AI analyzes traditional and non-traditional data to identify attractive investment opportunities in real estate assets. Non-­ traditional data can include anything from social media posts to energy usage and traffic patterns. Skyline bills itself an “artificial intelligence asset manager for commercial real estate”. The company has raised over $25 million in venture capital from investors such as Sequoia Capital and JLL Spark. In 2018, it started working with large real estate investors such as DWS Group and Silverstein Properties to identify multifamily investment opportunities. It is too early to determine whether Skyline’s approach will yield superior results.

16 Rethinking Housing and Lodging

The technological and demographic changes of our age correspond with those of the late nineteenth century, fueling demand for housing solutions that are shared, flexible, serviced, and urban. Today’s plain apartment buildings were once considered radical, opposed by social critics, and avoided by most “proper” people. The notion of sharing a hallway, a laundry room, an elevator, or a roof with other families was seen as a recipe for moral decline. Perhaps it was then, but we now consider it normal. In turn, many of today’s radical design, ownership, and operating models will seem mundane to our children (if we have any). Technology facilitated the emergence of new urban industries that attracted young people to the cities. These people found ways to live in buildings that were formally designed for other uses. At the low end, that meant using single-­ family buildings as tenements for dozens of unrelated individuals, sleeping in bunk beds. At the middle and upper end, it meant using hotels as homes. Gradually, the market caught up and consumer behavior was formalized in new apartment buildings. But technological and demographic trends seldom continue indefinitely. They are embedded in a political and social context. And technology itself continues to evolve to different effects. Urban housing solutions that emerged organically were regulated out of existence or deserted by middle- and upper-­ class residents. The trains and industrial facilities that pushed cities inwards and upwards gave way to cars and trucks that enabled and encouraged sprawl. Cars combined the flexibility of the horse carriage with the speed of the train, unlocking new areas where urban professionals could live and where travelers could stay. For hotels in particular, the abundance of potential

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l­ocations translated into a growing reliance on recognizable brands and efficient distribution channels. Hotel “landlords” evolved into three distinct businesses: property ownership, property management, and brand franchising. Technology demanded this evolution. Cars gave customers choice, mass media made it possible to build brands, and telephones and teletypes made it possible to centralize all booking and sales activity. Hotel brands were able to consolidate thousands of properties under a single flag and a single distribution channel—holding leverage over property owners and travel agents. But online travel agents (OTAs) proved to be different than their predecessors. They were not simply another channel; they aggregated hundreds of thousands of properties and offered customers unprecedented number of options, as well as new tools to help them choose. OTAs put independent hotels on equal footing with branded ones. And their concentrated power gave them leverage over brands, forcing them to cede some pricing and inventory management. But digital distribution channels did not simply change how hotels were sold. They changed what hotels are. Airbnb unlocked millions of rooms in new inventory by lowering the cost of finding, booking, and trusting them. Others used Airbnb as a channel to offer a more standardized lodging product, with a business model that flipped the real estate on its head: Sonder built an online brand first and then proceeded to standardize its actual physical product. Airbnb, meanwhile, used its own distribution power to affect how some projects are designed and developed. Soon, it might start developing (or manufacturing) housing or lodging units on its own. The old definitions are losing their meaning. Hotel listing sites like OYO are becoming hotel franchises. Travel booking sites like Expedia are going into home-sharing. Home-sharing sites are adding independent hotels. Hotel franchises are acquiring or launching home-sharing businesses. Everyone is trying to spread the upfront costs of building unique technology products and brands across a larger number of properties and customers. These dynamics from the lodging industry are making their way into the residential world. New operators are introducing a new level of service and flexibility, and designing products that cater to the needs of specific customers (and not everyone). Companies like Common Living and Ollie are building their own digital distribution channels and are building branded residential franchises. Their initial focus was on under-served, low-end customers, but they are gradually making their way upmarket. They do so with the backing of large venture capital and real estate investors. Just like in the nineteenth century, it is becoming difficult to draw a line between housing and lodging. The same physical asset is used differently

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depending on the channel through which it is marketed: leased for a year through a traditional leasing agent, booked for a night on Airbnb, or offered for several months through a serviced operator like Sonder or Lyric. Many customers who can afford to own prefer the convenience and flexibility of renting and expect better service and more specialized solutions. Technology also facilitates the aggregation of whole new asset types into rental platforms. Single-family houses are being consolidated into large portfolios, managed under a single brand, and financed by investors that previously acquired only larger commercial assets. Even the boundaries between renting and owning are being blurred by technology. iBuyers use data and venture capital to bring unprecedented liquidity to the housing market, enabling people to sell or buy a house within days. Meanwhile, companies such as Space10 and Venn are exploring models that would enable long-term renters to build an equity stake in the houses and community facilities they use every day. Technology is changing residential and lodging units in many other ways that were not covered in this section. Connected devices make it possible to create new experiences and offer new services. They also raise new privacy concerns and liability risks which will be addressed in the final chapter of this book. Robotic furniture from companies such as Ori Systems and Bumblebee Spaces makes it possible to use the same spaces in completely different ways throughout the day. On-demand apps handle daily necessities from laundry, to food delivery, to storage. By doing so, these apps “transfer” activities that used to require space inside the home into other locations. On the other hand, the constant stream of packages and deliveries requires residential buildings to add new facilities and systems and, in some cases, whole service corridors and back-of-house facilities—just like hotels. Meanwhile, new construction materials and techniques promise to make houses and apartments more affordable, more sustainable, and more pleasant to live in. Finally, as we consider how people live, technology’s bigger impact might be on where they live. Technology enables goods and people to move around faster, for much lower costs, and along new paths. It also disrupts employment patterns and work styles, concentrating certain jobs in a few areas while dispersing (or eliminating) others. In the next few decades, these developments are likely to cause a displacement of value on par with those caused by the train and the automobile. We looked at technology’s impact on employment in the Office section. In the next section about Logistics and Industrial properties, we explore the impact of new transportation systems.

Section IV Logistics and Industrial

17 Logistics and Industrial in Context

It was a rainy November afternoon in the city of Everett, in Washington state. A white Subaru sedan stopped in front of the Buxton residence. A man in a plaid shirt stepped out of the car. He opened the trunk, took out a brown cardboard box, and walked toward the front door. No one was home. He dropped the box on the mat and looked around. The street was empty. He took out his phone, clicked on an app, and looked around again. Seeing no one, he bent down and picked up a different, smaller box. Then, he turned around, walked back to his car, and drove away.cccxxii The Buxtons were notified about two deliveries that day: one from UPS, and the other from Amazon. But when they arrived home, they found only one package. Upon checking their security camera, they were even more surprised: the same man who delivered the package from Amazon also took away the package that arrived from UPS. He was driving an unmarked car, wearing plain clothes, and would have been an alarming presence on one’s front porch even without thieving. The Buxtons called the police. In supply chains governed by algorithms and complex technological systems, humans are often the weakest link. Amazon’s reliance on temporary workers who receive nominal training and drive their own cars intensifies the challenge. To work around the human issue, Postmates, an urban logistics company, in December 2018 unveiled Serve, an autonomous delivery rover that is essentially a little box with wheels, a screen, and a pair of robot eyes that makes it appear more friendly. The autonomous delivery-bot can reportedly carry up to 50 pounds and travel 30 miles on one charge. It is expected to hit the streets of Los Angeles and other cities in 2019.cccxxiii As of July, it has not.

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Humans have not been happy about the encroachment of robots—and they have been making their displeasure known. There have been reports of people blocking, vandalizing, and even threatening to shoot the few self-­ driving cars that have been deployed to test new delivery technology.cccxxiv It is unclear whether humans will feel comfortable opening their doors to, or sharing the street with, non-human logistical devices. As consumers are figuring out whether customer-centric innovations in the way goods are stored and delivered are a hazard or a boon, it is even more perplexing for owners of industrial real estate. In a world where everything is expected on demand and the arms race is to get products to the end customer ever faster, the least glamorous sibling of office and retail suddenly finds itself in the limelight. In this section, we explore: (1) the historical context of urban logistics; (2) technological forces affecting industrial real estate properties; (3) the innovation efforts of the world’s largest industrial tenants and logistics start-ups; and (4) the innovation efforts of the world’s largest industrial landlords. But first, let’s understand industrial’s place within the real estate industry and the economy.

Industrial Real Estate by the Numbers Industrial real estate is typically comprised of three main groups: storage, manufacturing, and flex. Flex buildings are different from other industrial spaces because they have a more flexible configuration, often accommodating technology and service tenants. They have a more upscale appearance, often serving as a showroom or office facing the tenant’s own customers. From the outside, industrial space may seem dull: a bunch of lightweight structures full of cardboard boxes or machines located next to major transport hubs such as airports and railway intersections, or in infill locations within or close in proximity to large population centers. But industrial assets can be more dynamic than many office or residential buildings. Most industrial facilities are used to keep goods in motion, for traditional and e-commerce distribution, or for manufacturing within complex, just-in-time supply chains. Very little of the inventory ends up simply sitting in place. And as we will see below, the leading industrial landlords are often ahead of their office, retail, and residential peers in the adoption of new technologies and business models. The scale of industrial real estate is significant. The total value of industrial assets in the U.S. is estimated at over $1 trillion.cccxxv Total inventory stands at over 14.5 billion square feet,cccxxvi with over 50 million square feet of net new

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supply being absorbed every quarter for the past few years. Historically, industrial assets traded at higher capitalization rates than retail, office, and residential,cccxxvii meaning they were perceived by investors to have less predictable returns, and less defensible differentiation. Industrial assets are a key component of the world’s largest real estate portfolios. The NCREIF Property Index (NPI) tracks the value and performance of office, apartment, hotel, industrial, and retail properties owned by or, on behalf of, tax-exempt institutional investors. In Q1 2019, 17% or $105 billion of the NPI’s value came from industrial properties, fourth in importance to office, apartment, and retail properties.cccxxviii Industrial plays an even more important role in the public real estate universe, where smaller, non-institutional investors can buy shares in real estate investment trusts (REITs). As of Q2 2019, the market capitalization of U.S. industrial REITs was $106.2 billion, higher than offices ($99.1 billion) and not far behind multifamily buildings ($134.1 billion).cccxxix Note that while investment in REITs is open to the general public, it is also popular among large institutional investors who manage retirement savings, pension, and insurance money of individual people. Industrial real estate is also an important contributor to employment, particularly in suburban areas. According to the U.S. Bureau of Labor Statistics (BLS), nearly 1.2 million people work in the warehousing and storage sector. The number reflects an increase of nearly 80% since 2009.cccxxx Amazon alone has 125,000 full-time employees in more than 75 fulfillment centers across the U.S., and many more who are employed as contractors on a seasonal basis.cccxxxi In total, the company employed approximately 647,500 full-time and part-time employees as of December 2018.cccxxxii In addition to employment within industrial properties, an additional 1.5 million people work in the adjacent sector, truck transportation.cccxxxiii An analysis of BLS data by National Public Radio found that “truck driver” is the most common job in many U.S. states, ahead of farmworkers, retail sales clerks, primary school teachers, and machine operators.cccxxxiv Industrial properties have been in high demand in recent years. Capitalization rates have been trending down, reflecting strong growth expectations from investors.cccxxxv According to CBRE, 2018 was the first time industrial was the favorite asset type of global institutional real estate investors—ahead of old-time favorites such as office, multifamily, and retail.cccxxxvi In June 2019, Blackstone announced the acquisition of an $18.7 billion portfolio of industrial properties from GLP. The acquisition was the largest real estate transaction ever recorded. Kenneth Caplan, Co-head of Blackstone Real Estate described logistics as the firm’s “highest conviction global

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­investment theme”,cccxxxvii reflecting their faith in continued demand from e-­commerce companies. At least part of the growing interest in industrial real estate can be explained by the desire to allocate capital away from traditional institutional favorites. First and foremost, that meant retail, but the point applies to office and multifamily properties as well. As we have seen in the previous chapters, all customer-­facing assets are starting to require more intensive management, sophisticated marketing, and higher upfront investment in fit out and amenities. At the same time, retail, office, and multifamily tenants are showing a growing appetite for flexibility—which means income is becoming less predictable, even if it goes up. Compared to other commercial assets, industrial properties have so far retained the classical characteristics that institutional investors know and love: simple and fast construction cycles, low upfront investment, low re-tenanting costs, and healthy demand from occupiers that sign long leases and pay on time.cccxxxviii These days, industrial assets also enjoy higher liquidity, making them easier to acquire and exit. In a world of online commerce, remote work, and shared housing, industrial assets seem like a safe haven. After all, even goods sold online must be made and stored somewhere, and local supply chains remain necessary regardless of whether people work from home or are subletting their apartment to strangers. But the nondescript façade of industrial buildings masks an increasingly complex world of complex networks, automation, cutting-edge mobility, and some of the largest and most sophisticated landlords and tenants on earth.

18 Forces Affecting Supply and Demand for Industrial Real Estate

In the Summer of 1919, a young Lieutenant Colonel named Dwight D. Eisenhower joined 23 other officers and 258 enlisted men on a journey to “test the mobility of the [U.S.] military during wartime conditions”.cccxxxix The test consisted of driving a convoy of military trucks from Washington, D.C., to San Francisco, a total distance of 3250 miles, in order to see how difficult it would be and how long it would take. The journey took 62 days. It involved dozens of accidents, malfunctions, and multiple injuries for the soldiers involved. Just from driving. By the end of the trip, Eisenhower and the other officers involved “were thoroughly convinced that all transcontinental highways should be construed and maintained by the Federal Government”.cccxl Thirty-four years later, following his exceptional service in World War II, Eisenhower was elected U.S. president. In 1956, he signed into law the construction plan of the Interstate Highway System, encompassing 41,000 miles of new roads. The new system was designed, among other things, to connect to nearly all U.S.  Air Force bases.cccxli The new highways did not just benefit military causes, they also benefitted retired military personnel. Following World War II, government policy helped and encouraged the 16 million returning veterans to buy a home.cccxlii These homes were mostly in new, low-density suburbs, disconnected from public transport and reliant on personal cars. Suburbs of this kind were already growing before World War II, and particularly so after World War I, but they exploded between 1950 and 1970. During those two decades, 83% of America’s total population growth was in the suburbs and the number of suburbanites doubled from 36 million to 74 million.cccxliii

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Eisenhower’s literal and figurative journey highlights the fact that logistics is first and foremost a military matter. The word logistics first appeared in English in the 1860s to refer to the “art of moving and quartering troops”.cccxliv It also highlights the early and important role played by delivery convoys in impacting policy and reshaping cities. Finally, it is another reminder that technological progress is embedded in a social, political, and even geopolitical context. The evolution of systems that move people and things in American cities offers a case in point.

Moving America, from the Streetcar to the Truck Streetcars are mostly associated with Europe these days, but at the end of the nineteenth century, the vast majority of them were in the U.S.  In 1890, American street railways (including cable cars and elevated systems) served over two billion passengers—more than double the number for the rest of the world combined.cccxlv And by the end of 1903, 98% of street railways were powered by electricity.cccxlvi Before 1880, most residents of American cities walked to work.cccxlvii Streetcars expanded the boundaries of cities like New York, Boston, Philadelphia, and Los Angeles to new areas, reducing commute times by running four times faster than the horse-drawn carriages they replaced. Tracks were often laid out into unbuilt areas, spurring the emergence of new residential neighborhoods. Unlike what we currently call “suburbs”, these new neighborhoods were closer to the city, connected to public transport, and relatively dense. Land use in streetcar suburbs was relatively homogenous, despite the absence of zoning laws at the time. Developers followed the rails to expand the city along clear and predictable paths. Streetcars could carry people, but they could not carry heavy loads, and other forms of ground transportations were expensive (in part due to the monopolistic power of trains). In other words, transporting people was cheaper and easier than transporting goods and machines. And so, residential suburbs were growing, but manufacturing and heavy logistics remained closer to the original urban core, next to wharves or railheads. As a result, streetcar suburbs were different in their land use than the cities they extended. Factories were mostly absent, as were the tenements to house factory workers. Developers built tracts of similar-looking detached homes along streetcar paths, with small stores and low-rise apartment buildings on the main streets closest to the rails. The relatively organized nature of land use was a result of coordination between developers and the logistical constraints

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on non-residential uses. As William A. Fischel pointed out in Zoning Rules: The Economics of Land Use Regulation, control over the location of streetcar lines was a substitute for zoning.cccxlviii All that changed when Henry Ford began mass manufacturing automobiles. Passenger cars are commonly credited with undermining the old pattern of homogenous development—and creating a need for zoning laws that made development even more homogenous. But as Fischel argued, it was the Ford Model T’s larger and less elegant cousins—the motor truck and the bus—that truly undermined the old order.cccxlix The motor truck came into use shortly after the automobile and “allowed manufacturers to take advantage of lower-cost land in residential districts” by liberating heavy industry from “close proximity to downtown railroad stations and docks”.cccl Trucks lowered the cost of moving goods inland and promoted the decentralization of industry. As Fischel pointed out, the number of registered trucks in the U.S. doubled every two years or so between 1905 and 1920.cccli The motorized passenger bus liberated apartment buildings from close proximity to streetcar tracks. Previously, that freedom was reserved for middle- and upper-class residents who were wealthy enough to own a car or a horse (and live in a detached house). Now, buses enabled apartment dwellers to live in the suburbs. Buses began to replace streetcars in the 1920s and overtook them in popularity in the 1930s. Between 1938 and 1950, General Motors (GM), Firestone tires, Standard Oil, and others funded a company that acquired electric streetcar lines and converted over 100 of them to bus lines that required car engines, tires, and gasoline. GM and its partners were ultimately found guilty of “conspiracy to monopolize the sale of supplies used by the local transportation companies” they acquired.ccclii But by then, the gas-guzzling genie was out of the bottle.

Zoning: Mixed Uses and Mixed Races Unlike streetcars and trains, trucks and buses could reach more places, make more stops, and change routes frequently and easily. As a result, it was harder for developers and existing residents to predict and restrict the way land was used and who it was used by. This created demand for zoning laws that allowed local interest groups—including wealthier residents, social reformers, real estate agents, and developers—to limit the spread of denser housing and noxious industrial uses.

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Resistance to denser apartment buildings was often a way to restrict African-­ Americans and new immigrants from moving into new areas.cccliii Zoning laws were controversial and made it all the way to the U.S. Supreme Court in a landmark 1926 case involving Amber Realty, an industrial developer, and the village (now city) government of Euclid, Ohio. The court upheld the local government’s right to issue zoning ordinances. Despite the fact that the case was about the encroachment of industrial uses on affluent residential communities, the majority opinion found it necessary to express distaste for the development of apartment buildings as well. The majority opinion, written by Justice George Sutherland, stated that “very often the apartment house is a mere parasite, constructed in order to take advantage of the open spaces and attractive surroundings created by the residential character of the district.”cccliv Justice Sutherland also wrote the majority opinion for two other controversial court cases in the 1920s,ccclv decreeing that Asian people of Indian or Japanese origins could not become citizens of the U.S. since they did not conform to America’s Founding Fathers’ definition of “white persons”.ccclvi The struggle for more equitable zoning laws continues to this day and is a subject of numerous books. For our purpose, it is important to note that industrial properties and the people who work within them were liberated by new transportation technology and spread out of city centers into suburban and rural areas, along highways teeming with trucks, buses, and cars. Today, new mobility and distribution systems are once again undermining the existing order. This, in turn, impacts where industrial properties are located and how they are designed, operated, and valued. Over time, it will also affect how and where most people live and work. Our exploration of the possible consequences begins with a company that is both a large occupier of industrial space, a mover of a vast number of goods, and an employer of a large number of people.

Amazon: The 300-Million-Square-Foot Gorilla The deliveryman for hire who allegedly stole the Buxton’s UPS package worked for Amazon. But he wasn’t an Amazon employee. The company operates a program called Flex that allows gig-economy workers to pick up packages from Amazon delivery stations and deliver them directly to customers. This Uber-like, crowdsourced delivery army enables Amazon to respond to surges in demand without increasing its overhead. And just like Uber, the Flex operation is held together by proprietary software that guides and supervises

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the minimally trained contract workers at every turn. Relying on a fragmented delivery network with private cars also makes it easier to deliver smaller goods directly to urban locations where there may be restrictions on trucks and commercial traffic. Software also turns undeveloped sites into valuable nodes in Amazon’s distribution chain. It does so by integrating these sites into a network of multiple locations and on-demand drivers. During the 2018 peak holiday shopping season, the company pitched large tents on vacant land to help it meet demand.ccclvii The ability to marshal physical and human resources quickly and at relatively low marginal cost allows the company to perform tasks that other companies do with expensive real estate assets and huge fleets. However, the company uses a lot of traditional real estate. As of December 2018, Amazon’s footprint dedicated to “fulfillment, data centers, and other” was over 277 million square feet, according to company filings.ccclviii Amazon is the largest U.S. tenant of Prologis, the world’s largest owner-operator of industrial space, occupying 16 million square feet as of the end of 2017, and probably even more in 2018.ccclix In turn, Prologis is Amazon’s largest landlord, providing 13% of the warehouse space the e-commerce giant operates. Amazon is the largest global tenant of Prologis’ main global competitor, GLP, filling 4.5%, or over 7.7 million square feet, of the company’s U.S. portfolio.ccclx As mentioned above, GLP’s U.S. portfolio was sold to Blackstone in 2019, adding to the investment giant’s already significant industrial portfolio and Amazon leases.ccclxi But Amazon is not just a tenant; it is also a landlord in its own right. The company owned over 11 million square feet at the end of 2018,ccclxii over half of which was industrial properties. This represents only 4% of Amazon’s total footprint, but the figure has doubled since 2016 and is likely to continue to grow. Interestingly, Amazon is not only buying traditional industrial sites. It is also acquiring failed shopping malls and converting them into logistics centers. Mall sites have many characteristics that make them ideal for industrial facilities: They are large and flat, connected to industrial-grade power and water systems, and located alongside highways and next to existing bus stops. This means they are easy to build on, easy to access by truck, and easy for employees to commute to. As it happens, one of the malls converted by Amazon is located in Euclid, Ohio—the city whose effort to control land use was the basis for the Supreme Court ruling that made zoning laws ubiquitous. The site of the Euclid Square Mall is now an 855,000-square-foot Amazon fulfillment center. Amazon is also reportedly building a network of multistory fulfillment centers in urban areas.ccclxiii Historically, warehouses and fulfillment centers were

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spread over a single level to accommodate trucks and human employees. Providing convenient truck and human access across multiple levels requires a heavier, costlier structure. Another option is to build warehouses underground, an effort currently attempted near London’s Heathrow Airport.ccclxiv But digging is much more expensive than putting up a light structure on existing land and subterranean structures pose their own accessibility challenges for both delivery trucks and humans. As the world becomes increasingly urbanized, the economics of last-mile logistics will remain in flux. But Amazon is not relying on the simple power of supply and demand to make the economics work; it is using innovation across its distribution chain to question basic assumptions about industrial real estate. Through its Flex program, the company marshals private cars for tasks that were previously performed by trucks. Founder Jeff Bezos originally wanted to name Amazon “Cadabra”—as in “abracadabra”—a reference to the magical experience it provides to shoppers.ccclxv Magic requires more than mobilizing untrained humans in Subarus—it requires intelligent machines. In 2012, Amazon acquired Kiva, a maker of robots that service warehouses, for $775 million in cash.ccclxvi According to data provider Pitchbook, within two years of the acquisition, the army of fulfillment robots allowed the company to cut the click-to-ship cycle to 15  minutes, down from 60–75  minutes required by humans.ccclxvii The company saved 20% on operating costs. Kiva has since been rebranded Amazon Robotics and remains a wholly owned subsidiary, focused on using automation to create better customer experience. Amazon’s past hiring activity provides an indication of how intensively it is investing in automation: Between 2014 and 2016, the company added 50,000 warehouse workers across the U.S., and more than 30,000 robots.ccclxviii The amount of warehouse employees more than doubled between 2016 and 2019 and we assume the number of robots has grown even faster. While Amazon is still struggling with labor shortages in the short and medium term, it is already preparing for a future in which robots will take on more (or most) of the work in fulfillment centers. In July 2019, the company announced a new initiative to retrain 100,000 of its workers by 2025. The initiative would cost a total of $700 million and enable employees to take on more advanced jobs within Amazon or find new ones elsewhere. Hourly workers in fulfillment centers, for example, could retrain for IT support roles to manage the machines that operate in the company’s various facilities.ccclxix Amazon also indicated an interest in autonomous drones,ccclxx to make use of taller, multistory distribution centers. Using physical space more intensively, and expanding its centers upwards, can help the company reduce its reliance on land. This does not mean that Amazon will not continue to grow

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its real estate footprint, but it will do so under different assumptions and challenge landlords’ traditional methods of predicting demand. And it doesn’t stop there. Amazon is providing some of the largest third-party sellers on its platform with access to its own shipping and logistics software. This means orders are shipped directly from the sellers to consumers, eliminating the need for physical Amazon facilities and labor. Software is also helping to reduce logistical footprint in other ways. Amazon is using artificial intelligence to determine the items, sizes, and colors customers will buy and where these items should be shipped. All this is done before a customer makes an actual purchase.ccclxxi The company’s anticipatory shipping patent, for example, allows it to ship a package “to the destination geographical area without completely specifying the delivery address” and adding the specifics later, only after the package is in transit.ccclxxii Advanced data analysis helps Amazon figure out, for example, that the release of a new version of some product categories (such as tax software) creates demand exclusively for the latest model, while in other product categories (such as DSLR cameras), a new release also increases demand for older models. In another example, the company realized that a shortage of bananas causes people to abandon their whole shopping cart, while a shortage of other products does not. And that bananas are most in demand on Mondays.ccclxxiii The company’s ambitions do not stop at the customer’s doorstep. Amazon wants to make sure that packages make it into the house, reducing the occurrence for repeat deliveries, damage, and theft. In February 2018, the company acquired Ring, a maker of home security cameras and access control systems. Amazon also operates a network of automated lockers to service residents of multifamily buildings in denser areas. And, if you are a Prime member, Amazon can even deliver to the trunk of your car, through a special integration with carmakers. The ability to ensure delivery at all times of the day allows for more efficient use of storage space.

The Rise of the Rest Other retailers are following in Amazon’s footsteps. Fast Retailing, owner of Uniqlo and one of the world’s largest clothing retailers, in October 2018 announced plans to invest $885  million in warehouse automation, in ­partnership with Daifuku, a Japanese maker of manufacturing and material handling systems. The partnership is already bearing fruit: In just two months, one of Fast Retailing’s Tokyo warehouses employs only 2 people, compared to an original staff base of 20. In addition to lower labor costs, the company can

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now operate the warehouse 24 hours a day.ccclxxiv Another consequence is that goods are delivered faster and spend less time in the warehouse. Kroger, one of the world’s largest retailers, announced a partnership with Nuro.ai, maker of autonomous delivery vehicles, in December 2018. The two companies launched an unmanned grocery delivery program in Scottsdale, Arizona. This is still an early effort, with each unmanned vehicle followed by a human supervisor in a separate car. In February 2019, Nuro raised $940 million from Softbank. Softbank has also poured additional billions into other mobility and automation ventures, including DoorDash, Uber, Didi Chuxing, and General Motor’s Cruise Automation initiative. Softbank is even an investor in Zume, a start-up developing robots that specialize in making pizzas. Walmart, another retail giant, has been experimenting with fleets of crowdsourced human drivers, not unlike Amazon Flex. According to the company, the experiment allowed it to reduce delivery costs by more than 50% and increase the percentage of orders delivered on time.ccclxxv In a different experiment, Walmart used software to enable employees to deliver packages on their way home from work.ccclxxvi In 2011, Walmart founded Walmart Labs, staffed through an acquisition of Kosmix, a social media technology company in Mountain View, California.ccclxxvii Labs operates as a wholly owned private entity focused on developing solutions to streamline the in-store and online shopping experience. In June 2019, Walmart announced plans to launch a new service that would deliver groceries directly into customers’ homes. The service, called InHome Delivery, will rely on smart locks to open doors and an array of cameras worn by delivery associates to allow the customer to watch the delivery in real time. Walmart’s logistics investments have been heavily focused in China, backing companies such as NewDada, a crowdsourced delivery service, and JD. com, one of China’s largest online retailers and an innovator in its own right. Founder Richard Liu envisions a future where JD.com would be fully automated. This is more realistic than most would assume. One of the company’s fulfillment centers in Shanghai handles the packing and shipping of 200,000 orders a day with only four human employees.ccclxxviii Another investor in JD. com is Google, to the tune of $550  million. The two companies have announced a plan to draw on their respective strengths to create new retail infrastructure solutions.ccclxxix Alibaba, China’s largest online retail platform, has its own logistics technology arm, Cainiao. The company announced plans to spend over $15 billion on a domestic and global smart logistics networkccclxxx that would enable it to achieve 24-hour delivery to anywhere in China, and 72-hour delivery to anywhere on earth.ccclxxxi Cainiao also operates China’s largest robot-powered

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warehouse, where packages are shuffled around by 700 automated vehicles. Over the past decade, Alibaba has acquired or invested in over 100 companies, including delivery, robotics, and analytics start-ups.ccclxxxii Even smaller companies are starting to use complex distribution networks. Flexe, a Seattle, Washington-based start-up, offers on-demand warehouse capacity and fulfillment services. TOMS, a popular shoemaker, relied on Flexe to support a network of pop-up stores in markets it does not normally service. Such stores can be launched in as little as two to three weeks.ccclxxxiii Flexe’s network of partners across the U.S. was able to accommodate TOMS at a speed and cost that made the effort worthwhile. As this example shows, while it is becoming cheaper to distribute goods at scale, there is also growing demand for smaller, short-term solutions. It also underscores the inextricable link between consumer trends and the industrial space. As of Q2 2019, Flexe has raised $64 million in venture capital from investors such as Tiger Global Management and Redpoint Ventures.

Fragments of Demand In 2006, Time magazine made an unusual choice for its person of the year. The person was… “You”. Yes, you. As the magazine explained at the time, the “World Wide Web became a tool for bringing together the small contributions of millions of people and making them matter”.ccclxxxiv The mid-2000s saw an explosion of online platforms that facilitated, empowered, and monetized user-generated content. First came Blogger (acquired by Google in 2003), then Flickr and Facebook, followed by YouTube, Twitter, Tumblr, and finally Instagram. The traditional distinction between those who produce content and those who consumed it disappeared. “You”, all of us—were suddenly both. That paradigm shift created new media empires, toppled a few old ones, and forced a wave of consolidation and experimentation with new formats and business models. It was driven by a sharp reduction in the cost of producing and distributing mediaccclxxxv: everyone could publish an article, post a photo, or share a video, instantly and for free. In the aftermath of the dot-com crash, it was suddenly cheap to set up an Internet company. All the ­infrastructure that was financed during the bubble was in place, a variety of open source technologies were battle-tested, and scores of engineers were available for relatively cheap. On the demand side, the glut of content unlocked the power of the long tail, the notion that it can be more profitable to cater to millions of niche

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markets instead of selling one hit product to the largest group of mainstream customers.ccclxxxvi New search and recommendation technology made it easy to sift through unlimited selection on new distribution platforms such as Spotify, iTunes, and Netflix (which started shifting from physical DVDs to online streaming in 2007). Consumers were no longer restricted to listening to the most popular songs on the radio or watching scheduled programs on TV; everyone could get what they wanted, when they wanted it. Text, music, video: any product that could be digitized was swept up by the wave.

From Buyers to Makers The same dynamics can now be observed in the production of physical goods. It is now easier than ever before to set up small-scale manufacturing businesses. Do-it-yourself enthusiasts are fueling the growth of a global Maker Movement, using new technologies such as 3D printing and open source knowledge from YouTube and specialized sites such as MakerShare.com to turn their hobbies into commercial endeavors. This is dissolving the line between product makers and product sellers.ccclxxxvii Hundreds of Makerspaces across the world allow individuals to share specialized tools that would be too expensive for each of them to acquire individually or learn how to use on their own. Larger, hardware-focused coworking spaces such as Brooklyn’s New Lab provide on-demand access to heavier machines, including lab ovens, blasting cabinets, vacuum formers, and advanced 3D printers. Such spaces also provide their members with advice on intellectual property and fundraising, access to specialized software, and opportunities to meet investors and pilot customers. As of Q4 2018, New Lab said it has helped its member companies raise over $450 million in capital from 270 investment partners, with over $350 million of successful exits and a valuation of $1.7 billion. 3D printing refers to a group additive manufacturing technology such as selective laser sintering, fused deposition modeling, and stereolithography. In theory, these technologies enable individuals to print many goods at home and avoid shopping or delivery altogether. Although there are concerns that 3D printing would kill off retail, a World Economic Forum report noted that it might not kill global trade after all.ccclxxxviii At present, and for the foreseeable future, the economics can’t compete with mass manufacturing, and the technology works best for small batches of goods. It can complement mass manufacturing through minor customizations and postponement but does not replace it.

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On the distribution front, online marketplaces such as eBay and Amazon allow anyone to reach hundreds of millions of potential customers. Social platforms such as Instagram and Pinterest empower niche marketers to entice new customers and nurture armies of existing customer-marketers.ccclxxxix Makers and smaller retailers that wish to set up their own e-commerce website can rely on software-as-a-service providers such as Shopify or WooCommerce. And companies such as Shippo and ShipBob allow sellers of all sizes to manage their inventory and tap into complex logistical networks at the click of a button. As more goods from both large and small retailers come online, a growing number of consumers are expecting products to be authentic and customized to their needs. Etsy, a marketplace for handmade and small-batch goods, turned over $3.9 billion in 2018, up 20% from 2017.cccxc It shows that, in aggregate, goods that are not made in factories can become a significant portion of the overall supply. However, it can be argued that a lot of the goods on Etsy are a form of postponement rather than manufacturing, relying on mass-­ produced goods (such as blank t-shirts or paper products) as a foundation for customized end products. Either way, the journey from the original manufacturer to the end user is changing. The search for authenticity extends beyond the product’s physical features as consumers are becoming more sensitive to environmental and social issues.cccxci Everlane, a venture capital-backed apparel brand, sells itself on its “radical transparency” and shares a breakdown of costs for materials, labor, transport, duties, hardware, and markups on its website.cccxcii H&M launched a sister brand, Arket, that provides shoppers with the information on the factory where every piece of clothing was made.cccxciii Conglomerates such as Unilever and PepsiCo actively promote their efforts to reduce environmental impact,cccxciv and the world’s largest automotive companies recently launched a new initiative to improve their social, ethical, and environmental performance.cccxcv As a result, supply chains and industrial spaces are at the center of unprecedented attention.

The Other Makers One way to address such social and ethical issues is to reduce the overall reliance on human employees. A host of new technologies is transforming mass manufacturing in a movement that is collectively referred to as the Fourth Industrial Revolution, or Industry 4.0. These technologies include autonomous robots, computer simulations, connected Internet of things (IoT)

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devices, augmented reality, big data and analytics, cloud-based software, advanced cybersecurity systems, and additive manufacturing.cccxcvi Sales of manufacturing robots have more than doubled between 2013 and 2018 and are nearly ten times their level in 2009. These robots are currently concentrated in heavy industries such as automotive, electronics, metal, and chemicals. South Korea has the highest concentration of industrial robots per manufacturing employee, followed by Singapore, Germany, and Japan. The U.S. is seventh on the list, ahead of the majority of other OECD countries.cccxcvii According to PwC, a consulting firm, venture capital investment in U.S. robotics tech start-­ups has quadrupled between 2013 and 2017, reaching over $1.4 billion.cccxcviii The deployment of fifth-generation (5G) mobile networks is expected to expedite the adoption of automated systems that can communicate directly and make decisions without consulting human operators. Some analysts even expect 5G deployment to be as consequential as the advent of railways in the nineteenth century.cccxcix According to Kevin Slavin, a research affiliate at MIT’s Media Lab, we are living in a unique moment in history where humans and machines are writing algorithms that humans cannot read. This means humans are now “subject to ideas and actions and efforts by a set of physics that have human origins without human comprehension”.cd Robots are not only diligent workers, but they can also do things humans cannot, such as fly. In addition to their impact on distribution and warehousing of consumer goods, unmanned aerial vehicles (UAVs, or drones) are also becoming more prevalent within factories. Drone use on private property is not regulated by the U.S. Federal Aviation Authority. This leaves companies free to experiment with uses that are not allowed when transporting goods.cdi Shipments of drones for enterprise use are expected to reach 805,000 by 2021, an eightfold increase from 2016,cdii which can portend a new avenue of shipments of small goods. As useful as they as inside storage facilities, drones will have a much bigger impact once they are allowed to fly across private and public lands. Whether and how drones would be allowed to do so is still a matter of great u ­ ncertainty. We will return to this question later in this section. But first, let’s look at the innovation efforts of some of the world’s largest industrial landlords.

19 Industrial Landlords in the Twenty-First Century

The growth of online commerce makes the demand for industrial spaces higher than ever. At the same time, the value of each space is contingent on its ability to accommodate unique hardware systems and integrate with retailers’ unique distribution channels. And some of the largest tenants are not waiting for landlords to accommodate them—they are buying their own land and putting up their own custom structures. In other cases, landlords can cater to smaller clients through new on-demand marketplaces, but these mean that the physical spaces are becoming somewhat commoditized and the customer relationship belongs to the owner of the marketplace. The financing, development, and maintenance capabilities of traditional landlords are no longer sufficient to remain competitive. Value creation is no longer just about the bones or location of each asset, but also about the operator’s ability to provide a comprehensive solution to tenants. The solution includes access to new technology, access to a network of different locations, help with attracting and retaining employers, and more.

 LP’s Venture Investment and Property G Dispositions Some landlords are moving in that direction. Logistics company GLP CEO Ming Mei aims to prevent his warehouse space from becoming a commodity. Instead, he wants to build a future-proof ecosystem of spaces, services, and technology. Between 2017 and mid-2019, GLP invested in more than a dozen technology and service platforms. These include Livible, a self-storage © The Author(s) 2020 D. Poleg, Rethinking Real Estate, https://doi.org/10.1007/978-3-030-13446-4_19

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c­ompany; TrunkTech, a developer of autonomous driving solutions; YimiDida, a crowdsourced delivery platform; G7, an AI-powered fleet-management platform; and NEXT Trucking, a technology platform that connects shippers with truckers and truck companies. GLP is also using technology to tap into new revenue channels. In 2018, it launched a joint venture with Brookfield to install solar panels on the roofs of the GLP’s China warehouses and create an electric grid to service energy-­ starved industrial areas.cdiii The venture is expected to cover over 300 million square feet of space,cdiv and ultimately aims to provide a capacity of 1 gigawatt, which it says is equivalent to the annual power consumption of approximately 750,000 households.cdv GLP is not just one of the world’s largest landlords, with about 700 million square feet under management, but it is also one of the largest real estate fund managers, with $60 billion in assets under management.cdvi As such, it is one of a handful of groups which currently integrates massive investment in real estate, technology, and operating businesses. In China, GLP is also a landlord of Alibaba and JD.com. GLP’s sale of over $18.7 billion worth of industrial property to Blackstone in 2019 caught many industry analysts by surprise, particularly as GLP had earlier sought an initial public offering. In light of GLP’s significant investment in technology and technology companies, the company may be moving toward a model that involves less ownership and more operation of properties owned by others. Under such a model, the company could integrate its technology, customer relationship, and network of managed properties into an offering that smaller owner-operators would struggle to compete with. This brings to mind our discussion of hotel franchises from the Housing and Lodging section. We will explore the relevance of hotel operating models to industrial properties at this book’s closing chapter.

 rologis Experiments with Technology P and Nurtures Talent Prologis, whose global footprint exceeds that of GLP, is also opening up to technology. In 2017, the company announced a strategic partnership with Plug and Play, a venture fund and start-up accelerator, to pilot new technologies and provide mentorship to innovators in the supply chain and logistics vertical.cdvii A year later, Prologis became an investor in Fifth Wall, the world’s largest real estate-focused venture capital fund.cdviii Fifth Wall is an investor in several logistics-related start-ups,cdix including Clutter, a self-storage provider;

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Loggi, a courier service; ShipWell, a freight management platform; and Blueprint Power, a company that transforms buildings into power plants and connects them to energy markets and customers. In 2018, Prologis opened two of what it calls “Labs”, to experiment with new technologies and operating models. The first lab is located in a 13,000-square-foot building in the San Francisco Bay Area. It serves as a sandbox for new Internet of Things systems, loading and sorting equipment, warehouse optimization tools, and more. The company is inviting its tenants from other locations to use the space for their own tools and systems. In addition to the physical space in the U.S., Prologis also operates a “virtual lab” in Amsterdam, where it tests innovations that do not require a large physical space, such as distributed (blockchain) ledgers to track the movement of goods and building information models to create digital twins of existing facilities.cdx The company’s website mentions 63 experiments in the pipeline for its labs as of the end of 2018.cdxi Perhaps the most radical aspect of Prologis innovation efforts is its focus on people. A growing number of the company’s projects now meet the strict requirements of the WELL building standard requirements. WELL is focused on the health and well-being of people within buildings and defines dozens of parameters that address air quality, noise levels, temperature, presence of plants and other natural materials, accessibility by foot and bicycle, and more. The standard is usually associated with office buildings, where it is used to attract tenants with highly paid “knowledge workers”. The adaption (and adoption) of WELL in industrial properties highlight the difficulty in attracting and retaining employees even at the lower end of the market. But making spaces more appealing for tenants’ employees is not enough. Prologis also has several initiatives to ensure tenants have access to enough talent in the vicinity of its properties. In January 2019, the company announced a partnership with Florida’s Miami-Dade County Public Schools to launch a mentorship, training, and internship program for high school students. The program will cover skills required in the field of logistics, distribution, and transportation and will reach nearly 300 students.cdxii Prologis also partnered with a local nonprofit to run a similar program in Los Angeles’ South Bay Area.cdxiii Training tenant employees is not normally part of a landlord’s job description. But the rapid growth in demand for industrial space means landlords are expected to take on new roles and make significant investment in new programs and amenities. Many new industrial properties are now built with features that were heretofore reserved only for urban office buildings, including saunas, bowling lanes, BBQ areas, and outdoor gyms. In one of its projects in France, Prologis is even experimenting with providing childcare services.cdxiv

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Lineage Logistics Reinventing Cold Storage In the late 1990s, as the dot-com bubble was getting filled with hot air, real estate companies were betting on cold storage. Giant real estate investment trusts (REITs) such as Vornado and Prologis (then called SCI Trust) poured hundreds of millions of dollars into the category, betting that specialized industrial would outperform other assets. But specialized facilities require costly equipment and somewhat specialized labor. For traditional property investors, they proved to be more trouble than they’re worth. As Walt Rakowich, Senior Vice President at Prologis SCI, summarized the company’s foray into cold storage, “[i]t was never more than 10% of our business but it caused 90% of our headaches.”cdxv Within a few years, both Prologis and Vornado sold their cold storage business and never looked back. Cold storage is hot again in 2019. The category is still extremely niche, amounting to only 3% of public warehouses, but Bloomberg reports that it has become Wall Street’s “latest darling”.cdxvi But traditional real estate companies are not rushing back into the cold. This time, the leading player in the space is barely seven years old. Lineage Logistics was founded in 2012 as a consolidated platform for several warehousing companies acquired by Bay Grove Capital. According to a 2019 report by CBRE, the platform controls 31.8% of the cold storage market in the U.S. and Canada.cdxvii Its closest competitor, Americold Realty Trust, traces its roots to 1903 and is now a public REIT. But Lineage is not a typical landlord. The company’s “applied sciences team” includes physicists, mathematicians, biologists, and engineers to come up with ways to optimize the way its assets are operated and to differentiate its offering to tenants. In February 2019, Lineage was selected to tech publication Fast Company’s prestigious list of the world’s 50 most innovative companies, alongside better-known up-and-comers such as Shopify, Peloton, and Square, as well as more established creative giants such as Apple, Alibaba Group, Walt Disney, and the NBA. Lineage is a private company, so information on its activities is sparse. The following three paragraphs rely on examples cited by Fast Companycdxviii and Lineage’s media releases. In 2018, Lineage was awarded a patent for an algorithm that uses data to optimizes the way store pallets are arranged. The ­algorithm uses data from a lidar scanner, a scanning technology also used by autonomous vehicles. This, in turn, helped the company pack an extra 800,000 square feet of product into existing buildings.

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Lineage also installed thousands of connected temperature sensors in its warehouses and used machine learning to regulate energy usage throughout the day. As a result, the company managed to reduce its overall energy consumption by 34% in over three years. In July 2019, Lineage was commended by the U.S. Department of Energy’s Better Plants Program for its innovations in energy conservation.cdxix In 2018, the company started piloting Lineage Link, a software it developed to coordinate packing, truck routes, and deliveries. According to Fast Company, the new software helped Lineage reduce the loading and unloading process from several hours to around 45  minutes. These new efficiencies helped the company attract new tenants, including Amazon, PepsiCo, and Sonic. In July 2019, Lineage announced a new service truckload transportation service that guarantees 24/7 freight coverage for its customers. Time will tell whether Lineage can continue to grow and justify its investments in research and development and auxiliary services. In July 2018, a Bloomberg report floated the possibility that the company would seek an initial public offering or convert to a public REIT. As of July 2019, the company is still private. But the possibility of spinning its real estate assets into a REIT and/or listing its operations and technology activities brings to mind the evolution of hotel companies. As described in the Housing and Lodging section, many hotel companies split their property and operations business into separate entities, each with its own tax structure and investors.

Related Merging Retail and Logistics In March 2019, Related Group, a large retail, office, and multifamily developer and operators, acquired Quiet Logistics, a provider of fulfillment services to digitally native brands such as Bonobos, Mack Weldon, and Away Luggage. As mentioned in the Retail section, Related and its partner plan to use the new platform to offer tenants a more comprehensive solution—including physical retail stores, physical fulfillment centers, and the service layer required to sell across multiple channels. As retail analyst Richie Siegel pointed out, many independent brands “reject Amazon fulfillment services, mainly to avoid sharing their data”cdxx with a potential competitor (Amazon is notorious for launching private label alternatives for some of the best-selling products on its site). In consequence, Siegel believes that “independent logistics companies like Quiet have a lot of running room ahead of them.” Unlike Amazon (or even Walmart), landlords are in a better position to align their interests with branded retailers.

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Digital and experiential commerce redefine the relationship between the warehouse and the store. Contrary to their historical name, many retail stores are no longer places where goods are stored. Instead, they are often a place for customers to engage with a brand ahead or during a sale that technically occurs online and is fulfilled remotely. Likewise, many customers use deliveries as a way to try on items, and only then decide whether they wish to keep them. This convergence or rearrangement of the roles played by the “front” and “back” of the supply chain creates new opportunities for landlords. We will revisit this point later in this section and in the closing chapter of this book.

20 The Liberation of Things, People, and Cities

“Whoever’s is the soil, it is theirs all the way to Heaven and all the way to Hell.” The ancient legal principle of ad coelum et ad  inferos states that the rights of a landowner extend indefinitely above and below the ground.cdxxi The idea dates back to the Roman Empire and appears in English law since at least 1587. It survived in various forms well into the twentieth century, even in the U.S., until 1946. That year, the Supreme Court finally decided that the “doctrine has no place in the modern world”. As Justice William O.  Douglas wrote, “common sense revolts at the idea” whose application in modern times would mean that every commercial flight would lead to “countless trespass suits”.cdxxii The court case involved Thomas Lee Causby, a chicken farmer who lived 2200 feet away from an airport used by the military. As planes glided toward the landing strip, they passed through his property “67 feet above the house, 63 feet above the barn and 18 feet above the highest tree”.cdxxiii The planes troubled the Causby family’s sleep. But more so, they troubled the chickens; nearly 150 of the fowl were literally scared to death, “flying into the walls from fright”. Causby sought compensation from the government, claiming that that the army has essentially “taken” his property by rendering it uninhabitable. The court used the occasion to nullify the old notion that land ownership rights extend to the “periphery of the universe”. But it also acknowledged that the flights caused “a direct and immediate interference with the enjoyment and use of the land”. The U.S. Government was ordered to pay the farmer $2000 in compensation (about $30,000 when adjusted for 2019). In its decision, the Supreme Court demolished the principle that property rights don’t

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extend all the way up to heaven or down to hell, but it did not offer a clear new principle in its stead. Over 70  years later, the matter is still in limbo. On July 2015, William Merideth’s daughter was sunbathing in the back yard when she heard a strange buzzing sound. It was a drone, hovering above the property. Next door, the VanMeter family was also at their backyard. Meredith’s daughter went inside to tell her dad about the unusual flying guest. William stepped outside and saw the drone “down by the neighbor’s house, about 10 feet off the ground, looking under their canopy”. As he later told a local news station, “I went and got my shotgun and I said, ‘I’m not going to do anything unless it’s directly over my property.’”cdxxiv Soon enough, the drone did just that. Merideth shot it down. David Boggs, the drone’s owner and pilot, sued Merideth in federal court, seeking damages of $1500 to repair or replace the drone.cdxxv Boggs claimed that he was not trespassing, since the drone was flying in “navigable airspace” where “aircraft” are permitted to fly based on federal law. The court dismissed the case, stating that even if the drone was flying in federally regulated airspace, it is clear that the Federal Aviation Authority did not seek to enforce its regulation in such cases. The ruling, once again, left the matter of aerial trespassing unresolved. As it stands, federal law defines “navigable airspace” as “heights of 500 feet or 1,000 feet” that are “safe altitudes of flight” above land and buildings.cdxxvi Most drones fly under that height. But in recent years, some of the largest companies on earth have been pushing governments to clarify how and where drones and other new mobility devices can be used.

Clearing the Air In 2013, Jeff Bezos announced that Amazon was experimenting with package delivery using drones, or “octocopters” as he called them at the time. Speaking to Charlie Rose on 60 Minutes, a popular TV show, Bezos said the drones could deliver packages weighing up to five pounds within a radius of ten miles from a fulfillment center. The weight, said Bezos, was high enough to cover 86% of the items ordered on Amazon, and the radius is wide enough to cover significant portions of large urban areas. The incredulous Rose asked Bezos how long—if ever—before this vision could become a reality. “My guess”, the Amazon founder replied, “It could be … four, five years? I think so.”cdxxvii The announcement brought to light—and fueled—a race to develop the world’s first drone delivery service. According to data from the World

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Intellectual Property Organization, the number of drone patents filed went up 1700% between 2014 and 2018.cdxxviii Amazon alone filed close to 200 drone-related patents. Walmart filed even more, including 97 patents in the 12  months leading to June 2019.cdxxix In the same month, five years after Bezos’s original prediction, Amazon announced that it was months away from offering drone deliveries, citing 30-minute shipping times within a 15-mile radius. It did not provide any details on where the service will be launched or how much it would cost. Amazon and Walmart are not the only large players in the space. In April 2019, Wing, a delivery venture owned by Google parent Alphabet, has become the first drone company to receive “air carrier” certification from the Federal Aviation Administration. The approval would allow it to begin making deliveries in parts of the state of Virginia. Other mobility and logistics giants such as UPS and Uber are also seeking similar approvals. As mentioned in the Retail section, Uber has a growing food delivery business. But Uber’s main business is still focused on moving people, not packages. And that business, too, might one day take to the air. Uber partnered with several companies to test and develop vertical takeoff and landing vehicles (VTOLs) that could be used to transport passengers. In January 2019, Bell, a producer of commercial and military helicopters introduced a six-rotor VTOL at the Consumer Electronics Show in Las Vegas. The VTOL, dubbed Nexus, is designed as an electric-­powered, four-passenger air taxi. It looks like a giant version of the drones used for photography and play. Bell is one of Uber’s development partners. Flying cars and aerial taxi fleets still sound like science fiction. So did delivery drones when Jeff Bezos first mentioned them in 2014. We do not mean to underestimate the technological and regulatory challenges, but our bet is that autonomous VTOLs will transform urban transportation and logistics much sooner than self-driving cars on the ground. Autonomous flight paths are easier to manage, do not involve pedestrians, and are not dependent on changes to existing municipal and national infrastructure. Could flying cars hit out skies sooner than most people think? A 2019 study by Deloitte, a consulting firm, expects passenger drones to be in use by 2020, “if safety and regulatory hurdles are cleared”.cdxxx A separate 2019 report by Morgan Stanley said the company “believes autonomous aircraft could be common by 2040” due to the maturation of battery technology, processing and computing power, and advanced composite systems.cdxxxi Some real estate investors are already looking to capitalize on this shift. In the U.K., Skyport is buying the usage rights for roofs around London in order to build the landing infrastructure of the future.cdxxxii In the U.S., real estate giant Colony Capital invested over $20 million in Blade, a flying taxi ­company

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that currently relies on helicopters but hopes to convert to other types of VTOLs as they become available. Meanwhile, a parallel mobility revolution is taking place on the ground.

New Mobility on Land The most talked-about innovation poised to transform cities is the self-driving car. Large automobile manufacturers such as GM, Ford, Nissan, Hyundai, and BMW are trying to build their own. Technology giants such as Apple, Intel, Cisco, and Samsung are experimenting with various car systems or, in Google’s case, with developing whole cars. The Softbank Group has a whole department dedicated to developing autonomous public transport solutions and its Vision Fund has poured billions into ventures that are focused on various aspects of autonomous mobility. Softbank’s investments include Uber, Nuro, Flexport, Didi Chuxing, DoorDash, Nauto, and GM’s Cruise Automation. As of July 2019, it looks like it would be a while before city streets are filled with autonomous vehicles (AVs). According to a survey by Fast Company, technology executives are “increasingly pessimistic about the future of AVs … because the raft of rosy projections in recent years have not even remotely come true”.cdxxxiii One reason cited by Fast Company is the fact that companies are pouring hundreds of millions of dollars reinventing the car, “slapping fresh ideas on old chassis”. Meanwhile, the future of autonomous mobility might be “unlike anything that we envision today”. To paraphrase the old adage: to a man with a car factory, everything looks like a car. To imagine the true future of urban mobility and logistics, we must “think outside the car” and get off the beaten (asphalt) path. As mentioned above, one way to do so is to look up to the skies and consider the potential of large and small drones and other VTOLs. A second way is to look at the unbundling of the car itself into smaller devices. As technology analyst Horace Dediu pointed out, a car is, essentially, “a bundle of trips ranging from a few hundred meters and a few hundred kilometers”.cdxxxiv A large percentage of car trips is short and would be easier (faster, cheaper) to accomplish with scooters, bicycles, or other small vehicles. Ideally, humans should have on-demand access to the best device for each purpose whenever they need to move around. But historically, the transaction costs involved in finding, trusting, and paying for a new device each time you wish to move around were too high.

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As we have seen numerous times throughout this book, once technology lowers the cost of triangulation, transfer, and trust, the impractical becomes practical. Today, computing and navigation devices are cheap enough to be integrated into billions of phones and billions more of other devices, including all types of vehicles. As a result, it is now easy to track, book, and pay for … almost anything. And so, instead of prepaying for a single, full-sized car and then using it for trips of varying distances, humans are able to use smaller vehicles for different purposes. Dediu calls this the “micromobility revolution”. The revolution is not just a figment of Dediu’s imagination. In 2018, 84 million trips were taken on shared scooter and electric bikes in the U.S., according to data from the National Association of City Transportation Officials.cdxxxv Shared, in this context, does not mean that users rode a scooter together, but that they accessed it on demand instead of owning it. A 2019 analysis by consulting firm McKinsey estimates the market for shared micromobility across China, the European Union, and the U.S. to be as large as $500 billion by 2030, equal to a quarter of the overall shared autonomous driving market.cdxxxvi Investors and incumbents are taking notice. Between 2015 and 2018, more than $5.7 billion has been deployed into micromobility start-ups such as Bird, Lime, and Ofo. In parallel, carmakers such as GM, Audi, and Volkswagen have started experimenting with scooters and electric bicycles, including models designed specifically for last-mile logistics. As mentioned above, investors are also pouring money into autonomous micromobility devices that can deliver goods and meals across cities. The economics of shared micromobility are still shaky, but demand for it is clear. Replacing traditional car travel with micromobility or AVs has the potential to dramatically reduce the amount of parking required within and outside cities. As former GM executive Lawrence D. Burns pointed out in Autonomy, cars in the U.S. sit unused about 95% of the time.cdxxxvii Whether they are still owned by individuals or by companies like Uber, driverless cars could use their “spare time” to pick up and deliver goods and passengers, including people who cannot currently drive on their own, such as children, the elderly, and people with disabilities. This, in turn, would mean that cars would spend less time parking, particularly in dense urban areas where demand for mobility services is strong. New York City alone has over 1.8 million parking spots, with an estimated value or “replacement cost” of over $20 billion according to a 2018 study by the Research Institute for Housing America (RIHA).cdxxxviii In less dense metro areas, parking takes up even more spaces. The combined area of all surface-­ level parking lots in Los Angeles County is 27 square miles.cdxxxix For

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c­ omparison, that’s about 18% more than the total land area of Manhattan, and that’s without taking into account underground parking. If and when autonomous or alternative mobility reduces demand for parking, all those spaces could be converted for other uses. Fulfillment centers are ideal candidates to pick up some of the slack since they are cheap to build and there is strong demand for them in infill locations. Some logistics start-ups are already experimenting with parking conversion. In July 2019, CommonSense Robotics broke ground on what it calls “the world’s first underground automated warehouse”, located underneath an old office and residential tower in the center of Tel Aviv. The 18,000-square-foot space was originally built as a parking garage and will now serve as a delivery base for one of Israel’s largest grocery chain.cdxl

Trucking Along A third way of thinking about the future of urban mobility involves trucks. A hundred years after they emerged as an alternative to trains and horse-drawn carriages, trucks have the potential to become autonomous at scale long before passenger cars. Trucks operate along set routes that are easier to map out in advance. They mostly drive on highways where there are far fewer unexpected events compared to city streets. And they mostly travel to and from facilities that are purpose-built for truck access. Trucks also seem to have an advantage over passenger cars when it comes to demand. The business case for autonomous trucking is clear and compelling. An analysis by Prologis and Sequoia Partnership, a consulting firm, found that labor currently accounts for more than 30% of the costs in retail supply chain. This includes the cost of warehouse employees as well as truck drivers.cdxli Trucks serve corporate customers and move goods, not people. As such, the adoption of autonomy is not contingent on passengers becoming comfortable with the idea of riding in a car with no driver. In June 2019, Starsky Robotics started testing unmanned trucks on public highways in Florida. On the first day of the test, Starsky’s truck traveled along a ten-mile strip and “successfully navigated a rest area, merged onto the highway, changed lanes and maintained a speed of 55 mph”.cdxlii Starsky’s trucks are unmanned but they are not yet fully autonomous. The trucks are partly controlled by “pilots” who are sitting in front of a computer screen at the company’s office, 200  miles away. Other companies, including Renault, Daimler, Hyundai, and Alphabet-owned Waymo are also experimenting with electric and autonomous trucks.

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As Anthony M. Townsend, author of Smart Cities, pointed out,cdxliii new types of trucks will not only help reduce trucks, but also increase overall shipping capacity. Electric and autonomous trucks could operate at night, since they will be significantly quieter and not require humans who are impaired (or cost more) once the sun goes down. This, in turn, also means more efficient use of roads and electricity during off-peak hours.

21 Rethinking Logistics and Industrial Properties

Industrial real estate is a key component of many of the world’s largest institutional portfolios. Historically, the category was the smaller and somewhat less glamorous sibling of office, retail, and multifamily properties. The growth of online commerce and consumer demand for increasingly fast delivery windows has brought industrial properties to the fore. In recent years, investors have been acquiring fulfillment centers and sites at a rapid clip, pushing valuation multiples (cap rates) into territories that were heretofore reserved only for other commercial assets. Demand for storage and fulfillment space is expected to grow in line with e-commerce, which still constitutes only a sixth of all retail sales in the U.S. and a little over a third in China. New product categories, most notably groceries, are also starting to shift online. Beyond the pull of industrial, capital is also being pushed away from other assets. First and foremost, the turbulence in physical retail is driving many investors away from that category. But even in the office and multifamily categories, owners and operators increasingly face tenants that are both more volatile and more demanding. In this context, the bland façades of industrial properties shine brighter than ever: the demand is strong, the leases are long, the structures are light, and the supply is tight. But industrial real estate is more dynamic than it seems. It is home to some of the world’s largest and most sophisticated tenants. Fast growth resulted in a more competitive labor market which, in turn, requires more attractive (and more expensive) buildings. And strong demand is fueling innovations in logistics and mobility that are set to transform supply chains. Over time, this

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transformation could invalidate many of the current assumptions about supply, demand, and operating costs. On the supply side, the biggest unknown is the impact of new ways to move goods and people. Highways and trucks liberated storage and manufacturing facilities from railheads and docks. Flying devices of various kinds have the potential to liberate them from highways, unlocking many new locations. In theory, and in some cases, drones could also enable goods to skip fulfillment centers altogether. Instead, they could fly directly from sellers and producers to buyers or to small logistics centers in the heart of cities. Inside industrial properties, drones and other technologies already make it possible to operate multistory facilities. While this is good news for existing owners, it also means that old assumptions about the amount of land required to meet industrial demand are changing. Closer to the ground, fleets of personal cars and “freelance” delivery drivers increase delivery capacity and delivery windows. New software and hardware optimize the flow of deliveries and ensure they arrive into people’s homes. These improvements in efficiency have the potential to reduce the space required for storage. To be clear, this does not mean that overall demand for storage will decline, but that it will not grow as fast as e-commerce sales. In other words, the nature of demand changes along with growth. The increase in delivery capacity will accelerate if and when autonomous and unmanned trucks become ubiquitous. New transportation devices—trucks, cars, micro-devices, drones—have the potential to reduce transportation costs dramatically. This means that a higher percentage of supply chain costs could be allocated to rent. But tenants’ ability to pay higher rent will also unlock new types of assets and locations for logistical use—particularly in and next to dense urban centers. This is good news for real estate in general but it could actually lower demand for many exiting industrial assets. If office buildings are any indication, tenants prefer to pay higher rents in the city rather than save in the suburbs. Autonomous cars have the potential to free up vast amounts of parking space. Many of these spaces are ideal for storage (and less ideal for other uses). Even before the advent of autonomous mobility, micromobility can make urban residents less reliant on cars and car ownership, leading to a similar effect on parking. The evolution of both autonomous and micromobility is difficult to predict. That, in itself, implies that the business of storing goods is far less static than many investors assume. On the demand side, the biggest tenants are getting bigger and more sophisticated. They also show an ability to acquire and develop properties on their own. On the other hand, a long tail of small sellers and manufacturers

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are unable to commit to very long leases or to invest in sophisticated storage and fulfillment systems. Some production and distribution is moving out of traditional industrial spaces into smaller urban locations or even into sellers’ homes. The impact of this is not yet meaningful, but this trend is worth keeping an eye on. The emergence of new office, lodging, and housing operators teaches us that dynamics in the low end of the market can make their way to the mainstream. The competition for labor is also driving industrial centers closer to more populated areas and existing public transport lines. It also pushes developers to make higher investments in new amenities and systems that make life better for employees. While this will continue in the near term, there are already signs that the impact of automation on the fulfillment sector will be significant. Current labor shortages are fueling innovations that might—gradually, then suddenly—make warehouses far less dependent on human employees. This, too, will require a readjustment of assumptions about ideal locations, access, and facility design. Demand for flexibility, built-in systems, and better amenities for employees presents new opportunities for landlords. It also presents a new operational complexity and, in some cases, the need to develop solutions that cater to some tenants and not to others. One way to do so is to focus on specific niches (such as cold storage) and integrate transportation and shelving solutions. The other way is to rely on value-added resellers (VARs) who can take up space and then sublease it to smaller tenants and offer additional service. We discuss VARs at length in the Office section. Some of the largest industrial landlords are becoming more sophisticated, investing in technology firms and in-house research, and offering tenants a comprehensive solution across a network of locations. Smaller owners will struggle to compete on their own. In the foreseeable future, this will lead to more consolidation in the space. In the longer term, we will probably see the evolution of specialized operators who barely own any assets but manage large portfolios. Such operators will be reminiscent of hotel franchises and rely on proprietary technology and a deeper integration with physical distribution networks. Looking five years ahead, the way industrial properties are designed, operated, and valued might change more dramatically than urban office, multifamily, and even retail assets. Demand for the latter in their current locations is not going away, even if the operating models will change and some uses overlap. Meanwhile, it is not hard to imagine demand for industrial uses shifting into completely different locations and even different types of assets. That means that even if overall demand remains strong, many investors might be

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underestimating the risks involved in industrial real estate, and the level of expertise required to win. On the other hand, those who are investing in unique capabilities are in a position to capture more value than ever. In the conclusion of this book, we dive more deeply into technology’s impact on real estate as an asset class and summarize the insights gleaned from retail, office, residential, lodging, and industrial properties. Specifically, we spend more time considering the consequences of all the changes described in this book and what real estate professionals can do to make the most of them.

22 Conclusion: Property’s Unreal Future

It was the best of times, it was the worst of times…

This is a book about the present and the future. But while writing it, we found ourselves constantly drawn to the past, particularly to the second half of the nineteenth century. The opening line of Charles Dickens’s A Tale of Two Cities, first published in 1859, encapsulates the spirit of our own time better than anything written since. Dickens wrote during the Industrial Revolution and about the French Revolution. He described a time of rapid change when both risk and opportunity were heightened to an unusual degree. It was a time very much like ours. Retail spaces were becoming social and experiential. People were working out of coffee shops and lobbies. It was often difficult to distinguish between apartment buildings and hotels. Streets were bustling with new transportation devices. Consumers were more educated, better informed and, at the same time, more frivolous and seemingly irrational. New companies were emerging in new industries that reached unprecedented scale. Are we headed for a “spring of hope” or a “winter of despair”? Just like in Dickens’s time, the answer is both. There is change, which creates opportunities, and there are practical steps that can be taken to capitalize on these opportunities. The French Revolution relieved one king of his throne (and of his head), but it ultimately led to the coronation of an emperor. That emperor, Napoleon, was more powerful than any of the kings that came before him, at least for a while. In other words, the question during a time of rapid change is not whether value will be created, but rather how will value be created, and who will capture the bulk of it. Before we answer these two questions, let’s summarize the change.

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Real Estate’s Ten Plagues Technology undermines the inherent value of real estate assets. It makes assets more dependent on their operators. It also makes these operators more dependent on specific customers and activities. As a result of this process, many of the assumptions that make real estate attractive to institutional investors are being challenged. A building’s location is becoming less important and insufficient to define and defend its value. Humans can work remotely and many choose to do so, at least some of the time. A significant portion of commerce is shifting online, providing more people with convenient access to goods and services that previously required physical proximity. Meanwhile, technology drives a yearning toward other physical and communal experiences that have their own impact on where people to choose to live and work. A building’s visibility is no longer restricted to the offline world. The way an asset looks online has a growing impact on its value. This is particularly true for assets that offer instant booking such as hotels, shared apartments, and short-term meeting rooms. It also applies to longer-term multifamily, office, and industrial leases. Even when end users are already inside a physical space, they often value it based on how it would look when shared with their friends and followers on social media. Likewise, the meaning of accessibility is expanding. New ways of moving people and goods are diminishing the relative value of property along old transport routes while increasing the value of new and peripheral locations.1 For a growing number of retail, office, lodging, and industrial customers, access is no longer about a single location but about being able to move freely within a network of spaces. The ease with which physical spaces can be booked and accessed is becoming a key differentiator for many uses. Soon enough, many of the procedures we currently use to sign a lease, move into a space, or even acquire an asset will seem outdated and inadequate. Even buildings in the best locations are expected to offer a comprehensive solution in order to draw tenants. These solutions include not only functional benefits, but also experiential and symbolic ones. This is leading to the emergence of branded operators that focus only on the needs of some customers and adapt their assets accordingly. This is already the case in most hotels, but it is becoming more common in office, multifamily, and even industrial build Peripheral, in this context, does not refer only to places outside of the urban core. It also applies to urban locations that are located off main avenues, a little farther from the subway and other public transport. In some cases, the difference can be a matter of a few hundred feet. 1

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ings. As a result, assets, tenants, and operators are losing their fungibility and are becoming less interchangeable. In many cases, it is becoming costlier for an asset to take on a different operator, and for an operator to change its focus to a different group of tenants. Customers are becoming more demanding and less willing or able to make long-term commitments. Offering differentiated services and flexibility will make it possible to extract more value from real estate assets. But service revenue and less traditional leases will make income less predictable and less bond-like. In a sense, many properties will no longer be assets in themselves, but will serve as inputs and components of other operating businesses. This might make buildings more valuable than ever, but it will also affect their ability to fill their current role within institutional portfolios. As their operational intensity increases, the financial performance of office, multifamily, and industrial assets might become more correlated with other businesses in the overall economy. The performance of hotel properties, for example, is already more correlated with the overall stock market. A growing correlation with other asset classes will affect real estate’s position as an alternative asset class. Institutional allocations will have to be adjusted to reflect this change. Operators that can deliver consistent and stable results will be in high demand. This, in turn, means that owners and investors will have to share more of their buildings’ income with branded operating platforms. Many of these operators will be new. Old habits and old relationships will fall by the wayside, unless they can deliver a return on investment that meets or beats the market. Institutional real estate capital will back or partner with companies that have the brand(s), technology, and know-how to attract and retain tenants and maximize the value of underlying real estate assets. Venture capital will continue to fund the launch of new operators that can one day attract real estate capital. Traditional lenders will initially be wary of assets with management-intensive operating models such as coliving, home-sharing, flexible office, flexible warehousing, and others. As these models become ubiquitous, lenders will look at their operators more favorably and even require their presence. Information that was previously proprietary is now easily accessible online. Tools and capabilities that used to be exclusive to large investors are becoming commodities, available to anyone at a reasonable cost. New data sources that are controlled or aggregated by new companies are growing in importance. Old data sources are becoming more valuable in the hands of those who can utilize and analyze them to produce valuable insights. Often, that means that new competitors and service providers can use landlords’ data better than the landlords themselves.

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Zoning is losing its power. New ventures are able to reach meaningful scale before regulators (and competitors) react. The boundaries between different uses are blurring, with people lodging in apartment buildings, living in hotels, working in restaurants and retail malls, and sleeping or socializing at the office. Disruption of demand for some uses (e.g. retail) creates a glut of inventory that can be repurposed for other uses. Further ahead, new mobility on land and air will likely reshape formal zoning ordinances and reshuffle the value of land. A multitude of powers are converging to question the very idea of scarcity. In many cases, end users face an abundance of choices for where and how to work, live, shop, or store their wares. This includes new spaces as well old ones that are suddenly easier to find, easier to access, or offer more compelling services and solutions. Technology also makes it possible to use existing buildings more efficiently, making it possible for the same assets to serve a larger number of people. We do not mean to imply that scarcity as a whole no longer matters. The supply of land and buildings is still constrained, and many markets have a shortage of different products. But technology is changing many of the assumptions about the amount of space required for a certain number of people (and goods) or for a certain level of economic activity. This, in turn, invalidates many of the most common models used to estimate future demand for real estate based on demographic and economic indicators. As the old defenses are eroding, real estate is becoming a more competitive business. The good news is that assets can be operated to generate more value than ever before. The bad news is that they must be operated this way. Assets that aren’t will sooner or later change hands. This has always been true, but it will happen faster and leave fewer corners of the market unaffected. The new economy’s low-hanging fruits have been picked. Scores of venture capital-­ backed companies are now looking to transform the more physical, more challenging parts of the economy—with real estate as a primary focus. These companies are looking to optimize every process and exploit every arbitrage opportunity. Some of these venture capital-backed companies will work with existing property companies; others will take them on directly. The competitive landscape is becoming broader and more complex for real estate investors, owners, developers, operators, and other professionals. This is true at the level of individual assets as well as for whole companies and investment portfolios. As a result, real estate is shifting from an industry governed by operational effectiveness to an industry governed by strategy. It is evolving from an industry that thrives on well-run assets to an industry that thrives on well-run businesses. Let’s see what this means in practice.

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 perational Effectiveness: Necessary O and Destructive Harvard Business School’s Michael E. Porter defines operational effectiveness as “performing similar activities better than rivals”. Generally, competition in the real estate industry is still fought along operational lines. For real estate investors, improving operational effectiveness can mean improving the accuracy and speed of acquisitions, balancing diversification across different markets and assets, or refinancing and restructuring to reduce taxes and increase return on equity. For developers, it means reducing construction costs and time. For operators, it means reducing maintenance costs, negotiating better leases with tenants, and staggering these leases in a way that keeps overall income stable. Every investor, developer, and operator endeavors to do the above better than any of its competitors. This is not bad in itself. In fact, a high level of operational effectiveness is critical. In recent years, hundreds of PropTech start-ups have launched tools that help real estate professionals identify investment opportunities, reduce design errors and construction accidents, optimize energy management, streamline marketing and leasing, improve customer service, and more. These tools are good, but they are good for everyone. They enable new entrants to meet or exceed the level of operational effectiveness that was previously achieved only by large and sophisticated players. And they enable existing players to become better—but better at doing the same things. In the mid-2000s, for example, some multifamily operators started using revenue management software to optimize their pricing, lease terms, and vacancy levels. Initially, this enabled a handful of owner-operators to outperform competitors that manage similar assets (achieve “alpha”, in financial parlance). But over time, other landlords started adopting similar tools. Today, nearly all large multifamily landlords use revenue management systems, often relying on the same service providers. Revenue management is also increasingly popular among smaller landlords and is gradually becoming par for the course. As a result, multifamily operators are better in operational terms, but they are not necessarily more profitable. Porter observed the same dynamic play out in multiple industries. Operational effectiveness usually depends on practices that are easy for competitors to emulate or acquire from third parties. Focusing only on improving operations leads companies to gradually become more similar. Such companies end up using the same tools to compete based on the same benchmarks.

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As a result, “competition becomes a series of races down identical paths that no one can win”.cdxliv The only winners are the suppliers who sell the operational tools and the end users who get access to better services at a better price. Historically, the scarce and static nature of real estate assets shielded their owners and operators from intense competition. As a result, operational effectiveness was usually enough to ensure ample and sustainable profits.2 But the new abundance and dynamism introduced by technology makes real estate more similar to other industries: Operational effectiveness is table stakes, but it is no longer sufficient in order to win. That’s where strategy comes in.

The Five Attributes of Good Strategy In contrast to operational effectiveness, Porter defines strategy as “performing different activities” or “performing similar activities in different ways”.cdxlv Note that Porter is not talking about simple product differentiation based on features or practices that can be easily copied. Nor is he talking about marketing positioning, which is focused on how consumers perceive a product. Instead, Porter describes five attributes that constitute a good strategy (Table 22.1). Let’s examine each of them, relying on examples from earlier chapters. First, a good strategy delivers a unique value proposition and addresses a specific group of customers or customer needs. Common Living launched in Crown Heights, Brooklyn and offered a solution for young professionals who are unable to commit to a traditional residential lease on their own. Common provides customers a furnished room in a shared apartment, cleaning and replenishing services, a schedule of community activities, and various other support services. It does all this for a price that is on par with an unfurnished bedroom in a more desirable neighborhood. This is a unique value proposition. Second, a good strategy is based on a unique value chain. As mentioned in the Housing and Lodging section, a value chain is a set of activities that a company performs to “design, produce, sell, deliver, and support its Table 22.1  Michael E. Porter’s attributes of good strategy 1 2 3 4 5

Delivers a unique value proposition Based on a unique value chain Involving clear trade-offs Relies on interdependent value activities that fit together in a unique way Implemented continuously over a meaningful period

 This is true even for hotels, where most large companies have multiple brands that compete with one another directly using mostly similar methods, offerings, and prices. 2

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products”.cdxlvi Sonder relies on a unique set of activities to compete directly with traditional hotels and serviced apartment operators. It relies mostly on existing properties that were designed for residential use, its guests check-in and access services and support via a mobile app, and its distribution was built from day one around its own branded digital platform. In comparison, a traditional hotel value chain consists of very different activities, starting with the design (and sometimes ownership) of the building, through the sales and booking process, to staffing and on-site service. Third, a good strategy involves clear trade-offs. A trade-off means that a business must forfeit some potential customers or revenue in order to implement its strategy. WeWork spaces tend to be more open, denser, and more vibrant than those operated by traditional landlords, facility managers, or other flexible office providers such as Breather or Knotel. Among other things, WeWork customers pay to belong to the company’s community, participate in its events, and access the common areas of its locations across the world. In addition, WeWork takes a stand on social and environmental issues that resonate with its target customers—most notably, its decision to stop serving or reimbursing non-vegetarian meals. The WeWork brand and experience are loved and admired by some customers, and are shunned, ridiculed, and even despised by others. Regardless of the company’s other challenges, this is a good sign! A clear strategy entails providing value to some customers, not trying to please everyone. As Porter famously wrote, “[t]he essence of strategy is choosing what not to do.” cdxlvii The Office Group (TOG) offers a more moderate example of the same dynamic. The company built a lifestyle brand and hospitality experience that resonates with London’s creative class. TOG’s shared and private office formats, community events, and publications are not meant to appeal to everyone, but they are incredibly appealing for a specific group of very valuable customers. One could argue that every office building is “not for everyone”. That is true, but most buildings differ based on price or based on functional benefits such as the size and shape of their units or the physical characteristics of their common areas. WeWork provides clear and different functional, experiential, and symbolic benefits that result from its own specific activities, regardless of what building it is in. WeWork’s trade-offs fit well with the other activities of the company. Which brings us to the fourth attribute of a good strategy: fit. The activities within a company’s value chain need to depend on one another in a way that makes the strategy difficult for competitors to copy. Common and Ollie don’t just offer tenants the option to rent bedrooms on flexible terms. Their physi-

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cal product is designed to be shared by strangers. They develop unique tools to help match roommates and streamline the signing and approval of shared leases. They provide services that make it easy for roommates to get along and avoid quarrels over bills and chores. And both Common and Ollie built brands that attract customers that have specific needs that are not served well by traditional competitors. The brand and marketing channels of these two companies allow them to acquire and replace tenants at a lower cost than a traditional landlord. This, in turn, makes it easier for them to offer tenants a certain degree of flexibility. On the surface, Common and Ollie’s strategies seem easy to copy: Any landlord can lease out apartments to roommates. But to do so profitably and at scale requires a set of interdependent activities. A traditional landlord could not adopt the same strategy without eroding its own existing advantages. Without a clear brand, it would be more costly to attract the right customers. Matching potential tenants and coordinating the signing of a single lease between several unrelated individuals would waste precious time. Brokerage, application, and other fees would make it too costly for tenants to leave before a full lease is up. In addition, the landlords’ existing tenants might not appreciate the increased activity and the real or imagined “vibe” that coliving tenants bring to a building. Lineage Logistics offers another example of how activities fit together in a way that makes a strategy difficult to copy. The company acquires and operates industrial properties that cater to very specific uses. It conducts research and development activities that help it to reduce refrigeration costs and to optimize the organization of cold storage pallets. It develops systems that coordinate the loading and unloading process of refrigerated goods. It has partnerships with cold freight carriers that provide its tenants with flexibility that isn’t available elsewhere. The activities in Lineage’s value chain depend on one another. In less than a decade, Lineage’s strategy enabled it to become one of the world’s largest owners and operators of cold storage properties. Time will tell whether the company can continue to grow profitably. The fifth and final attribute highlighted by Porter is continuity. As we have seen above, a good strategy requires not being everything to everyone, but foregoing certain customers and specializing in unique and interdependent activities. This means taking a risk and developing processes and products that would be costly and difficult to reverse or repurpose. For this reason, a good strategy is always a bet. It requires commitment and a long-term view. Many of the companies we used in the examples above are relatively young and have a lot left to prove. But they are trying to build differentiated businesses, and they offer solutions that fit the needs of contemporary real estate end users.

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A strategy should be forged slowly and thoughtfully. Once it is selected, it should be implemented with discipline and tenacity. There will always be short-term reasons to change course. The process of selecting a strategy can involve input from many stakeholders, but the final plan should not be a compromise that keeps everyone within the organization happy. By definition, a good strategy is wholistic and consists of interdependent parts. Adding unnecessary or conflicting activities into the value chain can change the whole cost structure and muddle the value proposition to customers. The quintessential example of strategic commitment is Amazon. For over a decade, the company has invested the proceeds from its operations in building a set of integrated capabilities that make it incredibly difficult for other companies to compete with it on price, on service, or on experience. Amazon was committed to its strategy and was willing to sustain significant and recurring losses and face criticism from investors and the media. Commitment to a strategy should not prevent a business from continuing to evolve. In fact, it requires it to. A business must constantly seek better ways to implement its existing strategy. A business must also continue to improve its operational effectiveness because without it, strategy doesn’t matter. For example, if Common or Lineage would be subpar at performing basic maintenance or administrative tasks, the profits from their unique activities would likely be eroded by other costs. To recap, a good strategy delivers a unique value proposition, to a specific set of customers, based on a combination of interdependent activities. Its essence is saying no to activities and opportunities that might be temporarily easy or profitable but ultimately lead to low profits or irrelevance. Every strategy is a bet that requires clarity and commitment.

The Real Estate Strategy Challenge All the examples above involve companies that operate real estate assets. This is in line with our broader point that assets are becoming more dependent on their operators. But it does not mean that all the “animals” within the real estate “food chain”—investors, developers, facility managers, brokers, service providers—must set up their own branded operating platforms. Nor does it mean that they should acquire or get acquired by an operating platform. Instead, each entity needs to consider how the changes described in this book affect its position within the food chain, and what property-related activities it should focus on in order to optimize its risk-adjusted return. The

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answer to this question depends on each company’s capabilities, resources, capital structure, and risk appetite. Change is not easy, and real estate companies face challenges that make it even harder. These include: 1 . Mandates that only allow investments in actual physical assets; 2. Legal requirements for profits to be distributed rather than reinvested; 3. Incentive schemes that keep people within the same firm focused on the performance of specific assets but not the firm as a whole; 4. Incentive schemes that that keep partners and employees focused on the performance of the firm’s present portfolio but not its future; 5. Lack of senior management diversity in backgrounds and skills (not to mention gender and age); and 6. A general cultural aversion to new things. With all this talk about strategy, we should also point out that most real estate companies are also far behind in terms of operational effectiveness. Many best practices and new tools are not adopted fast enough or not adopted at all. On a positive note, real estate investors, developers, operators, and even brokers are no strangers to making bold long-term bets. It is now time to bring this audacity and conviction into new types of business activities. Before we conclude this book, here are a few bite-sized instructions on how you can begin to transform your business or career, based on the various companies and anecdotes covered in the chapters in this book. We wanted to call these the Ten Commandments—to offset the impact of the Ten Plagues—but we ended up with 15 of them. They are: 1. Look backward. Consider the history of the assets you’re dealing with. Ask yourself: Why are they located where they are? Why are they designed this way? What are the underlying assumptions that shaped them? Have these assumptions changed? Are they about to? 2. Look sideways. The biggest impact on the way real estate assets are designed, operated, and valued will not come from within the industry or from innovations that focus on real estate. Instead, it will come from innovation in other fields that, in turn, impact the way people live, work, eat, shop, and even die. Many technologies and behaviors emerge in sectors that most real estate professionals pay little attention to such as military industries, gaming, or social media. Looking sideways also includes

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keeping track of how other parts of the real estate industry are changing. Lodging, retail, multifamily, office, and industrial professionals have a lot to learn from each other. 3. Consider if and how transaction costs have changed or are about to change. The current structure of industries, companies, and products is dictated by the cost of triangulation, transfer, and trust. When any of these costs change there is an opportunity to deliver value in a new way. Don’t wait until you notice that transaction costs have changed in your industry; look at new technologies and ask yourself if and how they might impact your industry. 4. Consider bundling and unbundling opportunities. Technology creates opportunities to break up or combine services and activities in new and profitable ways. Are your customers missing items or services that you can add to your offering? Are there any reasons to break up your existing company into separate entities with different investors? Is it time to become more vertically integrated in order to launch a new type of product? For example, should retail landlords integrate logistics spaces and offer tenants a more comprehensive solution? Should they step in to curate smaller brands and offer support services that were previously offered by department stores? Should office landlords launch their own coworking brands? Or should they spin off even their existing operating businesses and focus only on financial ownership? All of the above are bundling and bundling opportunities that are affected by technology. The answer is unique to each company and requires its management to think on its own. 5. Think dynamically. As you consider the future of your business and assets, don’t fall into the static analysis trap. Don’t look only at the interplay of supply and demand; consider the changing nature of demand and the changing definition of supply. Office tenants might require less space per employee or more space for activities that were previously not performed at the office. Demand for industrial space is growing, but industrial uses are also bleeding into locations that were previously used for retail or other infill sites. Some trends might plateau or even reverse course. This has always been true, but changes seem to happen faster in our interconnected world. You can’t account for all of them in advance but you can adjust the confidence level of your current models or augment them with new assumptions and analyses. 6. Consider your customers’ “jobs to be done”. No one wants “space”. Every customer is trying to achieve something. Retailers want to acquire more customers, streamline deliveries, and increase sales across different

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channels. Corporate tenants want to attract and retain the best people. Those people want to be healthy, to feel appreciated, and to find meaning. Or maybe they want something different altogether. Part of your job is to figure out what they are trying to achieve and what’s currently ­preventing them from doing so.3 Even if you “only” own the asset or are “only” a broker, you have a role to play and opportunities to capture and to miss. The more you understand your customers, the better you’ll be able to serve them. 7. Consider your customers’ journey. It’s not enough to offer a great office space, a great apartment, or a great warehouse. Customers often face pains or gaps on their way to becoming your tenants. Even if these gaps seem unrelated to your business, they provide an opening for new businesses that might ultimately become your competitors. Landlords didn’t think it was their job to match roommates, become market-makers for shorter leases, help tenants sublet underused space, or build online listings and booking sites that are pleasant to use. Each of these activities was a launchpad for new companies that now own or operate hundreds of buildings. 8. Reconsider your customers. Don’t think only about the entities that currently sign leases with you. Consider anyone who uses your assets. This could be the employees of your tenants or the people who come to visit them. It could be your tenant’s informal roommates and sub-­tenants. Informal activities that happen within your building provide hints about new business opportunities that you or your partners can capitalize on. 9. Capitalize on new scarcity. As access to some things becomes abundant, other things become scarce. In our world, the things that grow in value are those that cannot be produced by technology—or those that are actually destroyed by it. There is a yearning for human interaction. For silence. For less choice. For disconnection. For being physically active. For organic material and sounds. For meaning. The built environment has a huge role to play in delivering these. And the multitude of human preferences means there’s room for plenty of new ideas and businesses to emerge. And yes, there is something melancholy about the fact that humans rely on businesses to serve many of these needs, but we’ll leave that to a separate book.

 For more examples of how companies discover and cater to customers’ “jobs to be done”, see Clayton M. Christensen, Competing Against Luck: The Story of Innovation and Customer Choice (S.l.: Harpercollins Publishers, 2016). 3

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10. Double down on data and on privacy. When it comes to new scarcity, nothing seems to vanish faster than privacy. Ongoing tracking of human activity was initially an online phenomenon, but it is making its way offline. Physical spaces are being filled with new sensors, cameras, and devices that gather unprecedented amounts of data. This data is personal, and a lot of it is the property—and the responsibility—of those who own and operate physical spaces. This creates new opportunities to make spaces more pleasant and more profitable. It also introduces a growing array of financial, reputation, and political risks. Investors, operators, and entrepreneurs need to think proactively about these issues. Over the last two years, we have been involved in ProperPrivacy.org, a nonprofit initiative to facilitate the adoption of technologies that make physical spaces safer, healthier, and more productive—without undermining the dignity and trust of the people these spaces serve. 11. Seek network effects. Consider how assets and their end users can benefit from being integrated into a broader network, not just in terms of simple economies of scale but in terms of each node contributing to the value of all other nodes in the network. For example, an office building’s value proposition is increased if it also allows access to common areas and business services in other office buildings. Even if you own only one building, there might be ways for you to increase its value by integrating it into a network, possibly in partnership with other owners or operators. 12. Examine your structure and incentives. Does your current corporate structure, fund mandate, or real estate investment trust (REIT) status limit your ability to innovate and maximize the return on your assets? Are your employees or managing partners incentivized to serve the strategic interests of your organization and its long-term success? Some structural limitations are difficult or impossible to change. Understanding them clearly and discussing them openly can help you devise a strategy that works best for your organization. 13. Hire differently. Bring in people with unique backgrounds and skillsets. Empower them to make an impact on your organization. A product manager can help you improve your customer’s journey and experience. A data scientist can help you identify patterns and make better decisions. Designers of various types can help you deliver a consistent experience to your customers. A behavioral scientist can help you understand the impact of your choices on the well-being and productivity of people who spend their days or night within your assets. It has never been easier to tap into human expertise.

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14. Stay informed of new technologies and business models. This is easier than you think. The best way to do so is to be part of a “scene”, to be around people who are doing (or writing about) interesting things. In every big city, there are dozens of small meet-ups and larger events each year that are worth going to. Specifically for real estate, event and content platforms such as CRETech, Unissu, Propmodo, MIPIM PropTech, and others offer great opportunities to meet interesting people and hear about new ventures, practices, and initiatives. You don’t need to live in (or travel to) a big city in order to stay informed. Podcasts allow you to learn from the experiences of others while you are working out or commuting to work. There are multiple newsletters about real estate tech and technology in general. Spending 30 minutes a day on Twitter can help you become better informed than 99% of your competitors. You’re welcome to follow me (@drorpoleg) and discover more interesting people and companies to follow. In 2019, there is no excuse to remain uninformed! 15. Explore venture capital investments. Another great way to stay informed is to look at what start-ups are building and what venture capital investors are betting on. If you’re a big company, you can become an limited partner (LP, or passive investor) in one of the multiple venture capital funds that are focused on real estate and urban technology. Beyond the potential financial benefits, this would give you an opportunity to interact with entrepreneurs and venture investors and look at dozens or hundreds of decks a year. Each deck provides an entrepreneur’s vision of the future that is bound to inform and inspire you. If you are a smaller investor or individual, websites such as AngelList provide an opportunity to invest in start-ups on your own or alongside more experienced investors.

A Tale of Two Worlds As we write the final pages of this book in Brooklyn, an unprecedented event is taking place on the other side of New  York City. Over in Queens, the Arthur Ashe Stadium is filled to the brim. A sold-out crowd of over 23,000 men, women, and children is cheering the final game of the Fortnite World Cup. Millions more are watching the game live on YouTube and Twitch. Fortnite is played on a computer with a keyboard and a pair of headphones. The players can barely hear the crowd and the crowd is following the game on the stadium’s multiple screens. Minutes later, the game is over. The new world

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champion is Kyle “Bugha” Giersdorf, a 16-year-old boy from Pottsgrove, Pennsylvania. The prize is $3 million—a little over what Novak Djokovic received for winning the Wimbledon tennis tournament a couple of weeks earlier. In total, the Fortnite World Cup gave out $30 million in prizes. Teenage gamers epitomize the transition from the physical to the digital world. They spend hours online, chatting and playing with friends that hide behind graphic avatars and nicknames such as “Psalm”, “Ninja”, and “Twizz”. They spend their money on virtual goods and computer gear. And yet, tens of thousands of gaming enthusiasts chose to pay $50–$150 to share a physical space with other people. They paid for the opportunity to sing, clap, drink, and shop in an actual building, at the heart of one of the world’s greatest cities. They paid for a chance to experience something real, together with others. Events of this kind are becoming increasingly common. Goldman Sachs predicts that by 2022, the global audience—spectators, not players—for online gaming will be 276 million.cdxlviii That’s about the same number of people who currently watch the National Football League (NFL), America’s most popular sports league. Dedicated arenas for multiplayer video game competitions, known as “e-sports” or “Esports” or “eSports”, are popping up all over the world. In June 2019, Simon Properties, one of the world’s largest REITs, invested $5 million in Allied Esports International, an operator of eSports venues.cdxlix Are these the best of times or the worst of times? The real estate industry has never been as dynamic and as open to new ideas as it is right now. The next decade provides an unprecedented opportunity for professionals to rethink everything, especially the things we take for granted. Stick around. Get involved. It’s going to be unreal. Brooklyn, July 2019.

Notes







i. “Pharaoh’s Dreams”, Bible Gateway Blog, accessed June 13, 2019, https://www.biblegateway.com/passage/?search=Genesis+41& version=NIV. ii. rockytopwildcat, “Can I Depreciate the Initial Cost of a Farm Purchase? I Purchased a Farm in Dec of 2016 and Began Farming in 2017. Does the Initial Land Investment Get Depreciated?”, Intuit, accessed June 13, 2019, https://ttlc.intuit.com/questions/ 4271581-can-i-depreciate-the-initial-cost-of-a-farm-purchase-ipurchased-a-farm-in-dec-of-2016-and-began-farming-in2017-does-the-initial-land-investment-get-depreciated. iii. Kieran McKeown, “Marx’s Theory of Rent”, in Marxist Political Economy and Marxist Urban Sociology: Review and Elaboration of Recent Developments, ed. Kieran McKeown (London: Palgrave Macmillan, 1987). iv. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: W. Strahan & T. Cadell, 1776), 162. v. Andrew E. Baum, Real Estate Investment: A Strategic Approach, Third edition ed. (Abingdon, Oxon: Routledge, 2015). vi. Joseph Lanza, Elevator Music: A Surreal History of Muzak, EasyListening, and Other Moodsong, Rev. and expanded ed. (Ann Arbor: University of Michigan Press, 2004), 2. vii. Willis Towers Watson, “Global Alternatives Survey 2017”, Willis Towers Watson, last modified July 17, 2017, https://www.willistowerswatson.com/en-US/insights/2017/07/Global-AlternativesSurvey-2017.

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viii. David L. Funk, “Real Estate Takes Its Place as the Fourth Asset Class”, NAOIP, last modified Spring, 2015, https://www.naiop. org/en/Magazine/2015/Spring-2015/Development-Ownership/ Real-Estate-Takes-Its-Place-as-the-Fourth-Asset-Class.aspx. ix. Pulkit Sharma and Michael Buchenholz, “The Role of Core Real Assets in Liability-Aware Portfolios”, JPMorgan Chase & Co., last modified July 20, 2018, https://am.jpmorgan.com/us/institutional/library/the-role-of-core-real-assets. x. Garrett James Black, “Trillion-Dollar Question: What Does Record Dry Powder Mean for PE & VC Fund Managers?”, PitchBook, last modified March 15, 2018, https://pitchbook. com/news/articles/the-trillion-dollar-question-what-does-recorddry-powder-mean-for-pe-vc-fund-managers. xi. Preqin, Preqin Quarterly Update: Real Estate, Q2 2018 (London: Preqin, 2018). xii. Thomas Duffell, “To Be Able to Copy & Paste Content to Share with Others Please Contact Us at [email protected] to Upgrade Your Subscription to the Appropriate Licence”, Pere News, last modified March 23, 2017, https://www.perenews. com/cbre-1-7trn-global-dry-powder-available-for-real-estate/. xiii. Heather Gillers, “U.S. Pension Funds Turn to Riskier Real-Estate Bets”, Wall Street Journal, last modified November 26, 2018, https://www.wsj.com/articles/u-s-pension-funds-turn-to-riskierreal-estate-bets-1543233600. xiv. Ibid. xv. Rich Bockmann, “Public Pension Funds Looking for More Exposure to High-Risk Real Estate”, The Real Deal, last modified November 26, 2018, https://therealdeal.com/2018/11/26/publicpension-funds-looking-for-more-exposure-to-high-risk-realestate/. xvi. Vernia Lim, “Are Alternative Assets the Next Big Thing in Real Estate?”, Jones Lang LaSalle, last modified March 29, 2018, h t t p : / / w w w. a p. j l l . c o m / a s i a - p a c i f i c / e n - g b / n e w s / 4 4 6 / are-alternative-assets-the-next-big-thing-in-real-estate. xvii. Gunnar Herm et  al., “Core Real Estate in a Disruptive Environment”, UBS, last modified September 20, 2018, https:// www.ubs.com/global/en/asset-management/insights/asset-classresearch/real-assets/2018/core-real-estate-in-a-disruptiveenvironment.html.

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xviii. Mikko Syrjänen and Travis Masters, “Commentary: 10 Years after the Housing Crisis  – Opportunities in U.S.  Single-Family Residential”, Pensions & Investments, last modified May 30, 2018, https://www.pionline.com/article/20180530/ONLINE/ 180539982/commentary-10-years-after-the-housing-crisis-8211opportunities-in-us-single-family-residential. xix. “4Q 2018  - Pitchbook-NVCA Venture Monitor”, PitchBook Data, last modified January 9, 2019, https://pitchbook.com/ news/reports/4Q-2018-pitchbook-nvca-venture-monitor. xx. “Global Unicorn Club”, CB Insights, accessed March 14, 2019, https://www.cbinsights.com/research-unicorn-companies. xxi. Aaron Block and Zach Aarons, PropTech 101: Turning Chaos into Cash Through Real Estate Innovation (New York: Advantage Media Group, 2019), 1. xxii. William R. Leach, “Transformations in a Culture of Consumption: Women and Department Stores, 1890–1925”, Journal of American History 71, no. 2 (1984). xxiii. Cited in Elaine S.  Abelson, “Invention of Kleptomania”, Signs 15, no. 1 (1989), 180. xxiv. DuBuisson, Paul, cited in Elaine S.  Abelson, “Invention of Kleptomania.” xxv. Magasinitis, from the French for Department Store (Grand Magazine). xxvi. Patricia O’Brien, “Kleptomania Diagnosis: Bourgeois Women and Theft in Late Nineteenth-Century France”, Journal of Social History 17, no. 1 (1983). xxvii. “Cover Page, Wednesday November 11, 1896”, New York Times, accessed July 18, 2019, https://timesmachine.nytimes.com/ timesmachine/1896/11/11/issue.html. xxviii. Elaine S.  Abelson, When Ladies Go A-Thieving: Middle-Class Shoplifters in the Victorian Department Store (New York: Oxford University Press, 1989). xxix. John Maynard Keynes, The Economic Consequences of the Peace (New York: Harcourt, Brace and Howe, 1920). xxx. Thorstein Veblen, Theory of the Leisure Class (Salt Lake City, UT: Project Gutenberg, [1899] 2008). xxxi. Todd Gillespie, “Going Down? What the Future Holds for the Department Store”, Financial Times, last modified August 22, 2018, https://www.ft.com/content/9971a05e-a16f-11e8-b196da9d6c239ca8.

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xxxii. “This Playroom Is Paying Its Way”, Dry Goods Economist, June 5, 1926. xxxiii. “Going Down? What the Future Holds for the Department Store”. xxxiv. Tim Harford, “How Department Stores Changed the Way We Shop”, BBC World Service, last modified August 14, 2017, https://www.bbc.com/news/business-40448607. xxxv. “松坂屋ことはじめ [Matsuzakaya Beginning]”, Matsuzakaya, accessed April 5, 2019, https://www.matsuzakaya.co.jp/corporate/history/honshi/index.shtml. xxxvi. National Council of Real Estate Investment Fiduciaries, “NCREIF Property Index (NPI)”, NCREIF, accessed April 5, 2019, https://www.ncreif.org/data-products/property/ xxxvii. REIT Indexes, “Performance by Property Sector/Subsector”, NAREIT, last modified March 31, 2019, https://www.reit.com/ data-research/reit-indexes/historical-reit-returns/performanceproperty-sector-subsector. xxxviii. Division of Occupational Employment Statistics, “Charts of the Largest Occupations in Each Area, May 2018”, U.S. Bureau of Labor Statistics, last modified May 2018, https://www.bls.gov/ oes/current/area_emp_chart/area_emp_chart.htm. xxxix. The Crown Estate, Integrated Annual Report 2017/18 (London: The Crown Estate, 2018). xl. Walmart, Walmart 2018 Annual Report (Bentonville, AR: Walmart Inc., 2018). xli. Daniel Hirleman, “Wal-Mart as a Sum of the Parts - Part #1: A REIT Worth More Than the Current Price of the Stock”, Seeking Alpha, last modified February 28, 2017, https://seekingalpha. com/article/4050744-wal-mart-sum-parts-part-1-reit-worthcurrent-price-stock. xlii. McDonald’s, 2017 Annual Report (Oak Brook, IL: McDonald’s Corporation, 2018). xliii. Judith Evans, “IKEA Plans €5.8bn Real Estate Investment”, Financial Times, last modified November 14, 2018, https://www. ft.com/content/a9ebc78a-e80e-11e8-8a85-04b8afea6ea3. xliv. Seritage, “Investor Relations”, S&P Global Market Intelligence, accessed April 5, 2019, http://ir.seritage.com/CorporateProfile. xlv. Chase Purdy, “McDonald’s Isn’t Just a Fast-Food Chain—It’s a Brilliant $30 Billion Real-Estate Company”, Quartz, last modified April 25, 2017, https://qz.com/965779/mcdonalds-isnt-really-afast-food-chain-its-a-brilliant-30-billion-real-estate-company/.

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xlvi. Nielsen, “Changes in the Number of Open Retail Stores in the US from 2007 to 2017”, Marketing Charts, last modified April 9, 2018, https://www.marketingcharts.com/industries/retail-and-ecommerce-83023/attachment/nielsen-retail-open-store-changes2007-2017-apr2018. xlvii. Deborah Weinswig, “Silver Series IV: Retail Reconfigurations for Seniors”, Fung Global Retail & Technology, last modified August 25, 2016, https://www.fbicgroup.com/sites/default/ files/Silver%20Series%204%20Retail%20Reconfiguration%20 f o r % 2 0 t h e % 2 0 Si l ve r % 2 0 Ge n e r a t i o n % 2 0 % 2 0 by % 2 0 Fung%20Global%20Retail%20Tech%20August%2025%20 2016.pdf; Mark Cooper, “Playing the Generation Game in Retail”, PEI Media, last modified July 2, 2018, https://www. perenews.com/retail-generation-game/. xlviii. “Ronald H.  Coase: Facts”, Nobel Media AB, accessed April 5, 2019, https://www.nobelprize.org/prizes/economic-sciences/1991/ coase/facts/. xlix. Carl J. Dahlman, quoted in Ronald H. Coase, Firm, the Market, and the Law (Chicago: University of Chicago Press, 1988), 5. l. Michael C.  Munger, Tomorrow 3.0: Transaction Costs and the Sharing Economy, Cambridge Studies in Economics, Choice, and Society (New York: Cambridge University Press, 2018), 6. li. Christine Monaghan and Lizzie Garlinghouse, “iTunes Store Sets New Record with 25 Billion Songs Sold”, Apple, last modified February 6, 2013, https://www.apple.com/newsroom/2013/02/ 06iTunes-Store-Sets-New-Record-with-25-Billion-Songs-Sold/. lii. Sean Hollister, “Spotify, the Leading Music Streaming App, Is Finally Profitable”, Verge, last modified February 6, 2019, https:// www.theverge.com/2019/2/6/18214331/spotify-earnings-financialannouncement-profits-music-streaming-podcast. liii. nillabyte, “Apple’s Steve Jobs Comments on Music Subscription Model 2003 10 16”, YouTube, last modified September 5, 2009, https://www.youtube.com/watch?v=Avt7GEpHYtI. liv. Coase, Firm, the Market, and the Law, 8. lv. Office of Inspector General, Riding the Returns Wave: Reverse Logistics and the U.S.  Postal Service. Report Number RARCWP-18-008 (Washington, DC: United States Postal Service, 2018). lvi. Andy Dunn, “Book of DNVB”, Medium, last modified May 9, 2016, https://medium.com/@dunn/digitally-native-vertical-brandsb26a26f2cf83.

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lvii. Daphne Howland, “Digitally Native Brands Set to Open 850 Stores in 5 Years”, Retail Dive, last modified October 10, 2018, https://www.retaildive.com/news/e-commerce-pure-playsset-to-open-850-stores-in-five-years/539320/. lviii. Natalie Robehmed and Madeline Berg, “Highest-Paid YouTube Stars 2018: Markiplier, Jake Paul, PewDiePie and More”, Forbes, last modified December 3, 2018, https://www.forbes.com/sites/ natalierobehmed/2018/12/03/highest-paid-youtube-stars-2018markiplier-jake-paul-pewdiepie-and-more/#22e86c20909a. lix. Johana Bhuiyan and Theodore Schleifer, “Travis Kalanick Is Buying a New Company That Rehabs Real Estate and Will Run It as CEO”, Recode, last modified March 20, 2018, https://www. recode.net/2018/3/20/17145032/travis-kalanick-uber-new-jobceo-real-estate-startup-city-storage-systems. lx. Mary Diduch, “Travis Kalanick Sets Sights on Europe, Asia with New Venture”, Real Deal, last modified February 17, 2019, https://therealdeal.com/2019/02/17/travis-kalanick-sets-sightson-europe-asia-with-new-venture/. lxi. Champaign Williams, “Convene Partners with New Stand to Bring Retail Experiences to Coworking”, Bisnow, last modified November 26, 2018, https://www.bisnow.com/national/news/ office/boutique-convenience-store-new-stand-forms-partnershipwith-convene-to-bring-retail-experiences-to-coworking-95325. lxii. The We Company, “The We Company Debuts Made by We”, WeWork Companies, last modified January 22, 2019, https:// www.wework.com/blog/posts/the-we-company-debuts-madeby-we. lxiii. Chaiel Schaffel, “No Cash Needed at This Cafe. Students Pay the Tab with Their Personal Data”, NPR, last modified September 29, 2018, https://www.npr.org/sections/thesalt/2018/09/29/ 643386327/no-cash-needed-at-this-cafe-students-pay-the-tabwith-their-personal-data. lxiv. Lauren Smiley, “Stitch Fix’s Radical Data-Driven Way to Sell Clothes–$1.2 Billion Last Year–Is Reinventing Retail”, Fast Company, last modified February 19, 2019, https://www.fastcompany.com/90298900/stitch-fix-most-innovative-companies2019. lxv. Maureen Farrell and Dana Mattioli, “Peloton Interviews Banks for IPO”, Wall Street Journal, last modified February 11, 2019,

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https://www.wsj.com/articles/peloton-interviews-banks-for-ipo11549924952?cx_testId=16&cx_testVariant=cx&cx_ ar tPos=0&cx_tag=contextual&cx_navSource=ne wsRe el#cxrecs_s. lxvi. International Health Racquet & Sportsclub Association, IHRSA 2018 Global Report: State of the Health Club Industry (Boston: IHRSA, 2018). lxvii. Thuy Ong, “Amazon Patents a Mirror That Dresses You in Virtual Clothes”, Verge, last modified January 3, 2018, https://www. theverge.com/circuitbreaker/2018/1/3/16844300/amazonpatent-mirror-s-clothes-fashion. lxviii. “Market Brief — 2018 Digital Games & Interactive Entertainment Industry Year in Review”, SuperData Research Holdings, accessed April 5, 2019, https://www.superdataresearch.com/market-data/ market-brief-year-in-review/. lxix. Bobby Owsinski, “Marshmello Concert on ‘Fortnite’ May Show the Next Realm for Artists”, Forbes, last modified February 9, 2019, https://www.forbes.com/sites/bobbyowsinski/2019/02/09/ marshmello-fortnite/#522369671e03. lxx. “How Many Products Does Amazon Sell Worldwide – January 2018”, ScrapeHero, last modified January 15, 2018, https:// www.scrapehero.com/how-many-products-amazon-sell-worldwidejanuary-2018/. lxxi. Stephanie Crets, “Beauty Retailers Grow US Online Sales 24%”, Digital Commerce 360, last modified December 26, 2018, https://www.digitalcommerce360.com/article/beauty-ecommercesales/. lxxii. Ella Cerón, “Jeff Bezos Wants to Sell You Some More Beauty Products”, Cut, last modified January 23, 2019, https://www. thecut.com/2019/01/amazon-find-beauty-products.html. lxxiii. “Future of Beauty”, Nielsen Company, last modified 2018, https://www.nielsen.com/content/dam/nielsenglobal/de/images/ WP-CH/Nielsen_2018_the-future-of-beauty-report.pdf. lxxiv. Good Looks, “Sephora Just Launched a Clean-Beauty Seal— Here’s Why That’s a Big Deal (and Our 8 Faves to Shop Now)”, Well+Good, last modified June 3, 2018, https://www.wellandgood.com/good-looks/sephora-clean-beauty-seal/. lxxv. “Love, Bleecker.” Love, Bleecker. Accessed July 10, 2019. https:// www.lovebleecker.com/.

226 Notes



















lxxvi. Macerich Company, “Macerich Launches Brandbox to Bridge Digital and Physical Retail”, PR Newswire, last modified November 16, 2018, https://www.prnewswire.com/news-releases/ macerich-launches-brandbox-to-bridge-digital-and-physicalretail-300751832.html. lxxvii. Sarah Halzack, “Digital Brands Are Booming. But Can They Save Malls?”, Bloomberg, last modified February 15, 2019, https:// w w w. b l o o m b e r g . c o m / o p i n i o n / a r t i c l e s / 2 0 1 9 - 0 2 - 1 5 / brandbox-is-bringing-digital-brands-to-malls. lxxviii. Suzanne Kapner, “Department Store of the Future: Selling Art Off the Walls and Car Insurance at Checkout”, Wall Street Journal, last modified December 24, 2018, https://www.wsj. com/articles/department-store-of-the-future-selling-art-offthe-walls-and-car-insurance-at-checkout-11545647400. lxxix. “Pop-up Guru Appear Here, Led by Ross Bailey, Branches Out”, Sunday Times, last modified February 17, 2019, https://www. thetimes.co.uk/edition/business/pop-up-guru-appear-hereled-by-ross-bailey-branches-out-bxvrcvzrb. lxxx. Catherine Ollinger, “Interview with Melissa Gonzalez: Why Storytelling Is the Future of the Physical Retail Experience”, PSFK, last modified February 15, 2019, https://www.psfk. com/2019/02/melissa-gonzalez-interview-lionesque-group.html. lxxxi. Khadeeja Safdar, “Casper, a Web Pioneer, to Open 200 Stores”, Wall Street Journal, last modified August 8, 2018, https://www. wsj.com/articles/casper-a-web-pioneer-to-open-200-stores1533729600. lxxxii. Adam Najberg, “Future of Retail Is Happening Right Now in China”, Alizila, last modified May 25, 2018, https://www.alizila. com/future-of-retail-happening-in-china/. lxxxiii. Dennis Green, “Amazon Bringing 2-Hour Delivery to Whole Foods Is a Sneaky Change in Strategy, and It Could Mean a Big Change Is Coming”, Business Insider, last modified June 16, 2016, https://www.businessinsider.com/amazon-2-hour-deliverywhole-foods-is-change-in-strategy-2018-6. lxxxiv. Peter Carbonara, “Walmart, Amazon Top World’s Largest Retail Companies”, Forbes, last modified June 6, 2018, https://www. forbes.com/sites/petercarbonara/2018/06/06/worlds-largest-retailcompanies-2018/#d84c0c613e66. lxxxv. Michael J. de la Merced, “Walmart to Buy Bonobos, Men’s Wear Company, for $310 Million”, New  York Times, last modified

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June 16, 2017, https://www.nytimes.com/2017/06/16/business/ walmart-bonobos-merger.html. lxxxvi. Carolyn Cummins, “Steven Lowy’s OneMarket Facing Investor Wrath amid Cash Burn”, The Sydney Morning Herald, July 07, 2019, accessed July 22, 2019, https://www.smh.com.au/business/ companies/steven-lowy-s-onemarket-facing-investor-wrathamid-cash-burn-20190707-p524uy.html. lxxxvii. Ben Thompson, “Amazon Go and the Future”, Stratechery, last modified January 23, 2018, https://stratechery.com/2018/amazongo-and-the-future/. lxxxviii. “Lessons from Spotify”, ibid. last modified March 5, https://stratechery.com/2018/lessons-from-spotify/. lxxxix. Spencer Soper, “Amazon Will Consider Opening up to 3,000 Cashierless Stores by 2021”, Bloomberg, last modified September 19, 2018, https://www.bloomberg.com/news/articles/2018-0919/amazon-is-said-to-plan-up-to-3-000-cashierless-storesby-2021. xc. Jeremy Hobson, Mary Dooe, and Samatha Raphelson, “Inside the Biggest Private Real Estate Development in U.S.  History”, WBUR, last modified August 13, 2018, https://www.wbur.org/ hereandnow/2018/08/13/hudson-yards-real-estate-new-york. xci. “A Dying Breed: The American Shopping Mall”, CBS NEWS, last modified March 23, 2014, https://www.cbsnews.com/ news/a-dying-breed-the-american-shopping-mall/. xcii. “Why Related Should Be Louder About Its Acquisition of Quiet Logistics”, Loose Threads, last modified March 21, 2019, https:// loosethreads.com/espresso/2019/03/21/why-related-should-belouder-about-its-acquisition-of-quiet-logistics/. xciii. Howie Kahn, “The Hotel Where You’ll Be ‘Sleep-Coached’ into Bed”, Wall Street Journal, last modified March 27, 2019, https:// www.wsj.com/articles/the-hotel-where-youll-be-sleep-coachedinto-bed-11553689674. xciv. PFSweb, “Simon and PFSweb Launch New Mall-Based Ecommerce Fulfillment Platform”, Associated Press, last modified January 10, 2019, https://www.apnews.com/ ae235aaeeec2c9597670e89c9f64912d. xcv. Walter Isaacson, Steve Jobs (New York: Simon & Schuster, 2011), 164. xcvi. David Dix, “Virtual Chiat”, Wired, last modified July 1, 1994, https://www.wired.com/1994/07/chiat/.

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xcvii. Evan Schwartz, “Oxygen: Breathing Space for Virtual Communities”, Wired, last modified November 1, 1994, https:// www.wired.com/1994/11/oxygen-breathing-space-forvirtual-communities/. xcviii. In Design Live, “One Person Who Worked at the Famed Chiat/ Day Office Said: ‘It Was Like Working inside a Migraine’”, Indesignlive, last modified February 23, 2017, https://www. indesignlive.com/the-ideas/kitsch-please-danger-kitschworkplace. xcix. By Katharine S. Willis, Netspaces: Space and Place in a Networked World (Farnham, Surrey: Ashgate, 2015), 66. c. Warren Berger, “Lost in Space”, Wired, last modified February 1, 1999, https://www.wired.com/1999/02/chiat-3/. ci. Nicolai Ouroussoff, “Workplace through the Looking Glass”, LA Times, last modified January 31, 1999, http://articles.latimes. com/1999/jan/31/entertainment/ca-3282. cii. John Maechem, “GOOGLEPLEX: A New Campus Community”, Clive Wilkinson Architects, accessed May 23, 2019, https://www. clivewilkinson.com/pdfs/CWACaseStudy_GoogleplexANew CampusCommunity.pdf. ciii. Nikil Saval, Cubed: A Secret History of the Workplace, First edition. ed. (New York: Doubleday, 2014), 287. civ. “NCREIF Property Index (NPI)”, National Council of Real Estate Investment Fiduciaries, accessed July 11, 2019, https:// www.ncreif.org/data-products/property/. cv. “Performance by Property Sector/Subsector”, FTSE Nareit U.S.  Real Estate Index Series, last modified April 30, 2019, https://www.reit.com/data-research/reit-indexes/historical-reitreturns/performance-property-sector-subsector. cvi. Revathi Greenwood, “On the Road∗: A Futuristic Look at SelfDriving Vehicles and CRE”, CBRE Research, last modified April 4, 2016, http://wdcep.com/wp-content/uploads/2016/04/2016_ SelfDrivingCars_Final.pdf. cvii. Jim Costello, “Fed Raises Again but Cap Rates Aren’t Budging”, Real Capital Analytics, last modified June 14, 2018, https://www. rcanalytics.com/usct-preview-cap-rates/. cviii. Stamatina Th. Rassia, “Office Building: A Brief Historical Overview”, in Workplace Environmental Design in Architecture for Public Health, ed. Stamatina Th. Rassia (New York: Springer Berlin Heidelberg, 2017), 9–15.

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cix. Rainer Hascher, Simon Jeska, and Birgit Klauck, Office Buildings: Design Manual (Basel: Birkhäuser, 2002), 13–15. cx. Piero Formica, “Innovative Coworking Spaces of 15th-Century Italy”, Harvard Business Publishing, last modified April 27, 2016, https://hbr.org/2016/04/the-innovative-coworking-spacesof-15th-century-italy. cxi. Baker Library, “Railroads: First Big Business”, Harvard Business School, accessed May 23, 2019, https://www.library.hbs.edu/hc/ railroads/first-big-business.html. cxii. Alfred D.  Chandler, Strategy and Structure: Chapters in the History of the Industrial Enterprise (Washington, DC: Beard Book, 2003), 21–22. cxiii. Ibid., 22. cxiv. Charles Perrow, Organizing America: Wealth, Power, and the Origins of Corporate Capitalism (Princeton, NJ: Princeton University Press, 2002), 215. cxv. History.com Editors, “Railroads Create the First Time Zones”, A&E Television Networks, last modified February 22, 2019, https://www.history.com/this-day-in-history/railroads-createthe-first-time-zones. cxvi. Franklin Becker, “Workplace Planning, Design, and Management”, in Advances in Environment, Behavior, and Design, ed. Erwin H.  Zube and Gary T.  Moore (Boston, MA: Springer, 1991), 116. cxvii. Andreas Bernard, Lifted: A Cultural History of the Elevator (New York: New York University Press, 2014), 6–9. cxviii. Alfred Swenson and Pao-Chi Chang, “Construction”, Encyclopædia Britannica, last modified April 22, 2019, https:// www.britannica.com/technology/building-construction/ Early-steel-frame-high-rises#ref105122. cxix. History.com Editors, “Home Insurance Building”, A&E Television Networks, last modified August 21, 2018, https:// www.history.com/topics/landmarks/home-insurance-building. cxx. Max Weber, Economy and Society: An Outline of Interpretive Sociology (New York: Bedminster Press, 1968), 973. cxxi. Frederick Winslow Taylor, Principles of Scientific Management (New York: Harper & Brothers, 1911). cxxii. “Timeline of Computer History”, Computer History Museum, accessed May 23, 2019, https://www.computerhistory.org/timeline/ networking-the-web/#169ebbe2ad45559efbc6eb35720dd0b6.

230 Notes



cxxiii. Marshall McLuhan and W.  Terrence Gordon, Understanding Media: The Extensions of Man, Critical ed. (London: Gingko Press, 2011), 9. cxxiv. “AI and Real Estate”, Antony Slumbers, last modified June 4, 2018, https://www.antonyslumbers.com/theblog/2018/6/4/ai-andreal-estate. cxxv. David Gelles, “Softbank Bets Big on WeWork. Again”, New York Times, last modified January 7, 2019, https://www.nytimes. com/2019/01/07/business/softbank-wework.html. cxxvi. Andrew E. Baum, Real Estate Investment: A Strategic Approach, Third edition ed. (Abingdon, Oxon: Routledge, 2015). cxxvii. Deirdre Bosa, “WeWork CEO Neumann Says the Company Hit $2.5 Billion in Annualized Revenue and Has Plenty of Cash”, CNBC, last modified January 10, 2019, https://www.cnbc. com/2019/01/10/wework-ceo-says-company-hit-2point5-billion-in-annualized-revenue.html. cxxviii. Mike Phillips, “WeWork Property Fund Raises $400m, Giving It Huge War Chest to Buy Buildings”, Bisnow last modified May 30, 2018, https://www.bisnow.com/national/news/office/weworkproperty-fund-raises-400m-giving-it-huge-warchest-to-buybuildings-88970. cxxix. “Trends for 2019: Global Real Estate Trends Set to Shape the Next 12 Months”, PGIM Real Estate, last modified December 2018, https://www.pgim.com/pgimdoc/getdoc?file=5D71D2EB C628DECB85258267004EF0DF. cxxx. Joanne Bestall, “JLL Reveals Top Markets Primed for Flexible Space Growth”, JLL, last modified January 23, 2019, https:// www.us.jll.com/en/newsroom/flexible-space-office-markets2019. cxxxi. Emma Batha, “WeWork Goes Meat-Free ‘to Leave a Better World’”, Reuters, last modified July 18, 2018, https://www. reuters.com/article/us-environment-meat-ban/wework-goesmeat-free-to-leave-a-better-world-idUSKBN1K82AF. cxxxii. Kevin Lane Keller, “Conceptualizing, Measuring, and Managing Customer-Based Brand Equity”, Journal of Marketing 57, no. 1 (1993). cxxxiii. Peter Bacevice et al., “How Coworking Spaces Affect Employees’ Professional Identities”, Harvard Business Publishing, last modified April 17, 2019, https://hbr.org/2019/04/how-coworking-spacesaffect-employees-professional-identities.

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cxxxiv. Clayton M.  Christensen, Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, 1st HarperBusiness ed., The Management of Innovation and Change Series (New York: HarperBusiness, 2003), Kindle edition, 252. cxxxv. Ibid., Kindle edition, 272. cxxxvi. For a deeper analysis of Gillette vs. Dollar Shave Club, see “Dollar Shave Club and the Disruption of Everything”, Stratechery, last modified July 20, 2016, https://stratechery.com/2016/dollarshave-club-and-the-disruption-of-everything/. cxxxvii. Michael O’Neill and Tracy D. Wymer, “The Metrics of Distributed Work”, Knoll, last modified 2011, https://www.knoll.com/ media/466/356/WP_DistributedWork.pdf. cxxxviii. Adrian Ponsen, “Trends in Square Feet Per Office Employee: An Update”, NAIOP Research Foundation, last modified Fall, 2017, https://www.naiop.org/en/Magazine/2017/Fall-2017/ Marketing-Leasing/Trends-in-Square-Feet-per-Office-EmployeeAn-Update. cxxxix. Roger Vincent, “Office Walls Are Closing in on Corporate Workers”, LA Times, last modified December 15, 2010, https:// www.latimes.com/archives/la-xpm-2010-dec-15-la-fi-officespace-20101215-story.html. cxl. Mark Sullivan, “This Algorithm Might Design Your Next Office”, WeWork, last modified July 31, 2018, https://www.wework.com/ newsroom/posts/this-algorithm-might-design-your-next-office. cxli. “Using Lasers to Capture the Tiniest Details of a Workspace”, WeWork, last modified January 16, 2019, https://www.wework. com/newsroom/posts/using-lasers-to-capture-the-tiniest-detailsof-a-workspace. cxlii. Buckley Gray Yeoman, “Henry Wood House”, Architizer, accessed May 23, 2019, https://architizer.com/idea/1519366/. cxliii. James D. Cook, Scott Homa, and Keisha McDonnough Virtue, “Can Coworking Work at the Mall?: Retail Research Point of View”, JLL, last modified 2018, http://img04.en25.com/Web/ JLLAmericas/%7B500680c7-4f42-479a-b7fc5 f a 0 3 5 6 a 8 2 2 a % 7 D _ C o -Wo rki ng_i n_Re tai l_Re p or t_ FNL_LR.pdf. cxliv. Richard N. Foster and Sarah Kaplan, Creative Destruction: Why Companies That Are Built to Last Underperform the Market, and How to Successfully Transform Them, 1st ed. (New York: Currency, 2001).

232 Notes



cxlv. Note: Throughout the years, Standard & Poor’s made changes to the index’s methodology. This also had an impact on companies joining and leaving the index. cxlvi. Scott D.  Anthony, S.  Patrick Viguerie, and Andrew Waldeck, “Corporate Longevity: Turbulence Ahead for Large Organizations”, Innosight, last modified Spring, 2016, https://www.innosight. com/wp-content/uploads/2016/08/Corporate-Longevity2016-Final.pdf. cxlvii. Mick Bain, Peter Buckland, and David D.  Gammell, “2017 Venture Capital Report”, Harvard Law School Forum on Corporate Governance and Financial Regulation, last modified May 30, 2017, https://corpgov.law.harvard.edu/2017/05/30/ 2017-venture-capital-report. cxlviii. “Global Unicorn Club”, CB Insights, accessed March 14, 2019, https://www.cbinsights.com/research-unicorn-companies. cxlix. “History of Google”, Wikipedia, last modified May 19, 2019, https://en.wikipedia.org/wiki/History_of_Google#cite_ note-washpost-36. cl. Frank Partnoy, “Death of the IPO”, Atlantic, last modified November, 2018, https://www.theatlantic.com/magazine/archive/ 2018/11/private-inequity/570808/. cli. Eliot Brown, “Lyft Leading Wave of Startups That Will Make Debuts with Giant Losses”, Wall Street Journal, last modified March 25, 2019, https://www.wsj.com/articles/lyfts-ipo-to-testinvestors-appetite-for-money-losing-startups-11553515201. clii. “US Venture Capital Investment Reached $130.9 Billion in 2018, Surpassing Dot-Com Era.” Venture Capital, Private Equity and M&A Database. Accessed July 13, 2019. https://pitchbook.com/ media/press-releases/us-venture-capital-investment-reached1309-billion-in-2018-surpassing-dot-com-era. cliii. Eric Feng, “Stats-Based Look Behind the Venture Capital Curtain”, Medium, last modified September 23, 2018, https:// medium.com/@efeng/a-stats-based-look-behind-the-venturecapital-curtain-91630b3239ae. cliv. Louise Lee, “Decline of the IPO”, Stanford Graduate School of Business, last modified April 12, 2018, https://www.gsb.stanford. edu/insights/decline-ipo. clv. “Jeff Bezos on Leading for the Long-Term at Amazon”, Harvard Business Publishing, last modified January 2013, https://hbr. org/2013/01/jeff-bezos-on-leading-for-the.

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233

clvi. John D. Stoll, “Why Investors Don’t Care That Snap and Lyft Are Hemorrhaging Money”, Wall Street Journal, last modified April 26, 2019, https://www.wsj.com/articles/why-investors-dont-carethat-snap-and-lyft-are-hemorrhaging-money-11556289952. clvii. Eliot Brown, “WeWork’s Annual Loss Doubles to Nearly $2 Billion Amid Rapid Expansion”, Wall Street Journal, last modified March 25, 2019, https://www.wsj.com/articles/weworks-annualloss-doubles-to-nearly-2-billion-amid-rapid-expansion11553552216. clviii. Hany Guirguis and Joshua Harris, “Forecasting Office Space Demand”, NAIOP Research Foundation, last modified 2016, https://www.naiop.org/-/media/Research/Research/ResearchReports/Office-Space-Demand-Forecast/NAIOP-ForecastingOffice-Space-Demand-Research-Report.ashx?la=en. clix. Nanette Byrnes, “As Goldman Embraces Automation, Even the Masters of the Universe Are Threatened”, MIT Technology Review, last modified February 7, 2017, https://www.technologyreview.com/s/603431/as-goldman-embraces-automationeven-the-masters-of-the-universe-are-threatened/. clx. Nathaniel Popper, “Robots Are Coming for Wall Street”, New York Times, last modified February 25, 2016, https://www. nytimes.com/2016/02/28/magazine/the-robots-are-coming-forwall-street.html?_r=0. clxi. Allison Prang, “Thousands of Bank Branches Are Closing, Just Not at These Banks”, Wall Street Journal, last modified June 15, 2018, https://www.wsj.com/articles/the-bank-branch-is-dyingjustnot-at-these-banks-1529055000. clxii. Rachel Louise Ensign, Christina Rexrode, and Coulter Jones, “Banks Shutter 1,700 Branches in Fastest Decline on Record”, Wall Street Journal, last modified February 5, 2018, https://www. wsj.com/articles/banks-double-down-on-branch-cutbacks1517826601. clxiii. William D.  Eggers, Schatsky David, and Peter Viechnicki, “AI-Augmented Government: Using Cognitive Technologies to Redesign Public Sector Work”, Deloitte Insights, last modified April 26, 2017, https://www2.deloitte.com/insights/us/en/focus/ cognitive-technologies/artificial-intelligence-government.html. clxiv. Mark Smith, “Deloitte: Automation Set to Transform Public Services”, Deloitte, last modified October 25, 2016, https:// www2.deloitte.com/uk/en/pages/press-releases/articles/automation-set-to-transform-public-services.html.

234 Notes



clxv. Katja Grace et  al., “Viewpoint: When Will AI Exceed Human Performance? Evidence from AI Experts”, Journal of Artificial Intelligence Research 62 (2018). clxvi. James Manyika et  al., “Jobs Lost, Jobs Gained: Workforce Transitions in a Time of Automation”, McKinsey Global Institute, last modified December 6, 2017, https://www.mckinsey.com/~/ media/McKinsey/Featured%20Insights/Future%20of%20 Organizations/What%20the%20future%20of%20work%20 will%20mean%20for%20jobs%20skills%20and%20wages/ MGI-Jobs-Lost-Jobs-Gained-Executive-summary-December-62017.ashx. clxvii. Centre for the New Economy and Society, Insight Report: Future of Jobs Report 2018 (Geneva: World Economic Forum, 2018). clxviii. Daron Acemoglu and Pascual Restrepo, Artificial Intelligence, Automation and Work  - NBER Working Paper 24196 (Cambridge, MA: National Bureau of Economic Research, 2018). clxix. Daniel H. Pink, Whole New Mind: Moving from the Information Age to the Conceptual Age (New York: Riverhead Books, 2005), 1. clxx. Manyika et al., “Jobs Lost, Jobs Gained”; Angus Knowles-Cutler and Harvey Lewis, “Talent for Survival: Essential Skills for Humans Working in the Machine Age”, Deloitte, last modified 2016, https://www2.deloitte.com/content/dam/Deloitte/uk/ Documents/Growth/deloitte-uk-talent-for-survival-report.pdf. clxxi. McLuhan and Gordon, Understanding Media…, 471. clxxii. Adam Davidson, “What Hollywood Can Teach Us About the Future of Work”, New York Times Magazine, last modified May 5, 2015, https://www.nytimes.com/2015/05/10/magazine/whathollywood-can-teach-us-about-the-future-of-work.html?_r=0. clxxiii. Esko Kilpi, “New Commons of Work”, Medium, last modified January 15, 2019, https://medium.com/@EskoKilpi/the-newcommons-of-work-39bdaa4d6796. clxxiv. Rani Molla, “Facebook, Google and Netflix Pay a Higher Median Salary Than Exxon, Goldman Sachs or Verizon”, Vox, last modified April 30, 2018, https://www.recode.net/2018/4/30/17301264/ how-much-twitter-google-amazon-highest-paying-salary-tech. clxxv. Chris Stokel-Walker, “From Egg-Freezing to Sabbaticals, Workplace Perks Are Big Business”, Wired, last modified April 22, 2019, https://www.wired.co.uk/article/work-smarter-productivityperks. clxxvi. Knowles-Cutler and Lewis, “Talent for Survival…”.

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235

clxxvii. Dan Kopf, “Almost All the US Jobs Created since 2005 Are Temporary”, Quartz Membership, last modified December 5, 2016, https://qz.com/851066/almost-all-the-10-million-jobscreated-since-2005-are-temporary/. clxxviii. Lawrence F. Katz and Alan B. Krueger, Understanding Trends in Alternative Work Arrangements in the United States  - NBER Working Paper No. 25425 (Cambridge, MA: National Bureau of Economic Research, 2019). clxxix. Michael Dimock, “Defining Generations: Where Millennials End and Generation Z Begins”, Pew Research Center, last modified January 17, 2019, https://www.pewresearch.org/fact-tank/2019/ 01/17/where-millennials-end-and-generation-z-begins/. clxxx. “What It’s Like to Work ‘the Spotify Way’”, Corporate Rebels, last modified September 27, 2016, https://corporate-rebels.com/ spotify-1/. clxxxi. Day One Staff, “Peek inside Workspaces at Amazon’s Headquarters”, Blog About Amazon, last modified January 16, 2018, https://blog.aboutamazon.com/working-at-amazon/rechargeand-reset. clxxxii. “Locations”, Spotify Jobs, accessed May 23, 2019, https://www. spotifyjobs.com/locations/. clxxxiii. Joshua Fruhlinger, “Remote and Work-from-Home Job Listings Have Grown 151% since 2018”, Thinknum, last modified April 2019, https://media.thinknum.com/articles/remote-job-listingsat-the-worlds-largest-companies-have-grown-151-since-2018/. clxxxiv. Society for Human Resource Management, “2017 Employee Benefits”, SHRM, last modified June 2017, https://www.shrm. org/hr-today/trends-and-forecasting/research-and-surveys/ Documents/2017%20Employee%20Benefits%20Report.pdf; “2018 Employee Benefits”, SHRM, last modified June 2018, https://www.shrm.org/hr-today/trends-and-forecasting/researchand-surveys/Documents/2018%20Employee%20Benefits%20 Report.pdf. clxxxv. Jim Clifton and Jim Harter, It’s the Manager: Gallup Finds the Quality of Managers and Team Leaders Is the Single Biggest Factor in Your Organizations Long-Term Success (New York: Gallup Press, 2019), 151. clxxxvi. “Pigeons Use Foster Home”, New York Times, April 27, 1941, 33. clxxxvii. Charlie Green (CEO and Co-founder of The Office Group), in email interview with Dror Poleg, May 2019.

236 Notes

clxxxviii. Lisa Picard, “Why Real Estate Needs Agility to Survive”, Medium, last modified March 14, 2019, https://medium.com/@lmpicard/ why-real-estate-needs-agility-to-survive-64b7d88a18ff. clxxxix. Ellen Huet, “WeWork Will Renovate UBS Office in Its Biggest Design Deal”, Bloomberg, last modified July 30, 2018, https:// www.bloomberg.com/news/articles/2018-07-30/weworkwill-renovate-ubs-office-in-its-biggest-design-deal. cxc. Herbert Lash, “WeWork Starts $2.9 Billion Property Platform with Canada’s CDPQ”, Reuters, last modified May 15, 2019, https://www.reuters.com/article/us-wework-investment/ wework-starts-29-billion-property-platform-with-canadas-cdpqidUSKCN1SL1BZ. cxci. The Cardinals, Ansonia Images & Memories: One of the Largest, Handsomest and Most Complete Apartment Hotels in the World (New York: Campfire Networks, 2015). cxcii. Elizabeth Collins Cromley, Alone Together: A History of New  York’s Early Apartment’s (Ithaca, NY: Cornell University Press, 1992), 195. cxciii. Fran Leadon, Broadway: A History of New York City in Thirteen Miles (New York: W.W. Norton & Company, 2018). cxciv. Cromley, Alone Together, 195. cxcv. Curbed Staff, “From Utopia to Scandal to Luxury, the History of the Ansonia”, Curbed New  York, last modified February 13, 2013, https://ny.curbed.com/2013/2/13/10273862/from-utopiato-scandal-to-luxury-the-history-of-the-ansonia. cxcvi. Steven S.  Gaines, The Sky’s the Limit: Passion and Property in Manhattan, 1st ed. (New York: Little, Brown and Company, 2005). cxcvii. Jonathan Vespa, “Marrying Older, but Sooner?”, U.S.  Census Bureau, last modified February 10, 2014, https://www.census. gov/newsroom/blogs/random-samplings/2014/02/marryingolder-but-sooner.html. cxcviii. Eric Klinenberg, Going Solo: The Extraordinary Rise and Surprising Appeal of Living Alone (London: Duckworth, 2012). cxcix. Ruth Schwartz Cowan and Matthew H. Hersch, A Social History of American Technology, Second edition. ed. (New York: Oxford University Press, 2018), 126. cc. Kate Julian, “Why Are Young People Having So Little Sex?”, Atlantic, last modified December 2018, https://www.theatlantic. com/magazine/archive/2018/12/the-sex-recession/573949/

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237

cci. Arthur W.  Calhoun, A Social History of the American Family from Colonial Times to the Present. Vol. 3, 3 vols. (Cleveland: Arthur H. Clark, 1919), 168. ccii. Ibid., 240. cciii. Walt Whitman, “New York Dissected (August 16, 1856)”, The Walt Whitman Archive, accessed 2019, https://whitmanarchive. org/published/periodical/journalism/tei/per.00273.html. cciv. Todd DePastino, Citizen Hobo: How a Century of Homelessness Shaped America (Chicago: University of Chicago Press, 2003). ccv. Andrew K. Sandoval-Strausz, Hotel: An American History (New Haven, CT: Yale University Press, 2009), 279. ccvi. Sarah Laskow, “French Invented the Apartment”, CityLab, last modified October 22, 2014, https://www.citylab.com/equity/ 2014/10/the-french-invented-the-apartment/381770/. ccvii. Paul Erling Groth, Living Downtown: The History of Residential Hotels in the United States (Berkeley: University of California Press, 1994), 1. ccviii. Sandoval-Strausz, Hotel, 276–277. ccix. Sharon Marcus, Apartment Stories: City and Home in NineteenthCentury Paris and London (Berkeley: University of California Press, 1999), 17. ccx. Jeffrey Becker, “Roman Domestic Architecture: The Insula”, Smarthistory, last modified February 27, 2016, https://smarthistory.org/roman-domestic-architecture-insula/. ccxi. Editors of Encyclopaedia Britannica, “Insula”, Encyclopædia Britannica, last modified February 29, 2012, https://www.britannica.com/technology/insula. ccxii. Ibid. ccxiii. Cromley, Alone Together, 111. ccxiv. Richard Plunz and Kenneth T.  Jackson, History of Housing in New York City: Dwelling Type and Social Change in the American Metropolis, Revised edition. ed., Columbia History of Urban Life (New York: Columbia University Press, 2016), 58. ccxv. Groth, Living Downtown, 8. ccxvi. Ibid. ccxvii. Calhoun, Social History of the American Family, 75. ccxviii. Groth, Living Downtown, 201. ccxix. Ibid. describes these objections in detail, as does SandovalStrausz, Hotel.

238 Notes



ccxx. Mark Muro and Jacob Whiton, “Geographic Gaps Are Widening While U.S. Economic Growth Increases”, Brookings Institution, last modified January 23, 2018, https://www.brookings.edu/ blog/the-avenue/2018/01/22/uneven-growth/. ccxxi. National Council of Real Estate Investment Fiduciaries, “NCREIF Property Index (NPI)”, NCREIF, accessed 2019, https://www.ncreif.org/data-products/property/ ccxxii. FTSE Nareit U.S.  Real Estate Index Series, “Investment Performance by Property Sector and Subsector”, Nareit, last modified June 30, 2019, https://www.reit.com/sites/default/files/ returns/prop.pdf. ccxxiii. Svenja Gudell and Zillow, “Total Value of All U.S. Homes: $31.8 Trillion”, Forbes, last modified January 3, 2018, https://www. forbes.com/sites/zillow/2018/01/03/total-value-of-all-u-s-homes31-8-trillion/#3ab2c4a43ca8. ccxxiv. Ibid. ccxxv. Yolande Barnes, “Eight Things to Know About Global Real Estate Value”, Savills, last modified June 20, 2019, https://www.savills. com/impacts/market-trends/8-things-you-need-to-know-aboutthe-value-of-global-real-estate.html. ccxxvi. Owners’ imputed rent is an estimate of how much it would cost an owner-occupier to rent the house or apartment in which they live. ccxxvii. Robert Dietz, “Housing Share of GDP”, National Association of Home Builders, last modified April 2018, http://eyeonhousing. org/2018/04/housing-share-of-gdp/. ccxxviii. John D. Benjamin, Peter Chinloy, and G. Donald Jud, “Why Do Households Concentrate Their Wealth in Housing?”, Journal of Real Estate Research 26, no. 4 (2004). ccxxix. Kenji Kawase, “China’s Housing Glut Casts Pall over the Economy”, Nikkei Asian Review, last modified February 13, 2019, https://asia.nikkei.com/Spotlight/Cover-Story/China-shousing-glut-casts-pall-over-the-economy. ccxxx. Hotel News Now, Big Brands Report (Ohio: HNN, 2015); Raquel Ortiz, “How Full-Service Independents Compare to FullService Chain-Affiliated Hotels”, Lodging Magazine, last modified September 17, 2018, https://lodgingmagazine.com/how-fullservice-independents-compare-to-full-service-chain-affiliatedhotels/.

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239

ccxxxi. Michael C. Sturman, Jack B. Corgel, and Rohit Verma, Cornell School of Hotel Administration on Hospitality: Cutting Edge Thinking and Practice (Hoboken, NJ: Wiley, 2011), 255. ccxxxii. “Hotel Portfolio as of December 31, 2018”, Accor, last modified February 25, 2019, https://group.accor.com/en/investors/eventsand-announcements/annual-and-half-yearly-information. ccxxxiii. Marriott International, Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934. For the Fiscal Year Ended December 31, 2018 (Washington, DC: United States Securities and Exchange Commission, 2019). ccxxxiv. John W. O’Neill and Qu Xiao, “Role of Brand Affiliation in Hotel Market Value”, Cornell Hotel and Restaurant Administration Quarterly 47, no. 3 (2006). ccxxxv. Jack B. Corgel, Robert Mandelbaum, and R. Mark Woodworth, “Hospitality Property Ownership: Where You Fit In”, in Cornell School of Hotel Administration on Hospitality: Cutting Edge Thinking and Practice, ed. Michael C. Sturman, Jack B. Corgel, and Rohit Verma, Wiley Online Books (Hoboken, NJ: Wiley, 2012), 264. ccxxxvi. Aaron Smith, “Internet’s Role in Campaign 2008”, Pew Research Center, last modified April 15, 2009, https://www.pewinternet. org/2009/04/15/the-internets-role-in-campaign-2008/. ccxxxvii. Adam Nagourney and Jeff Zeleny, “Obama Forgoes Public Funds in First for Major Candidate”, New  York Times, last modified June 20, 2008, https://www.nytimes.com/2008/06/20/us/politics/ 20obamacnd.html. ccxxxviii. Marc Andreessen, “Hour and a Half with Barack Obama”, Pmarchive, last modified March 3, 2008, https://pmarchive.com/ an_hour_and_a_half_with_barack_obama.html. ccxxxix. David Carr, “How Obama Tapped into Social Networks’ Power”, New York Times, last modified November 9, 2008, https://www. nytimes.com/2008/11/10/business/media/10carr.html. ccxl. Chelsey Leffet, “HVS Market Pulse: Washington, D.C.”, HVS, last modified November 20, 2018, https://hvs.com/article/8390HVS-Market-Pulse-Washington-DC. ccxli. Brad Stone, Upstarts: Uber, Airbnb, and the Battle for the New Silicon Valley (New York Back Bay Books, 2018). ccxlii. “The $99 Billion Idea: How Uber and Airbnb Won”, Bloomberg Businessweek, last modified January 26, 2017, https://www. bloomberg.com/features/2017-uber-airbnb-99-billion-idea/.

240 Notes









ccxliii. Official Catalogue and Guide Book to the Pan-American Exposition: With Maps of Exposition and Illustrations, Buffalo, NY, May 1st to Nov. 1st, 1901 (Buffalo, NY: Charles Ahrhart, 1901), 5. ccxliv. Harold F.  Peterson, “Buffalo Builds the 1901 Pan-American Exposition”, in Niagara Land  - the First 200 Years: Reprinted from the Series Featured in Sunday, the Courier-Express Magazine, ed. Buffalo courier express (Buffalo, NY: CourierExpress, 1976). ccxlv. Mark Young, “Inside Inn Was the World’s Largest Hotel During the 1904 St. Louis World’s Fair  - Then It Was Torn Down”, Lodging Magazine, last modified October 30, 2018, https://lodgingmagazine.com/inside-inn-offered-magnificentaccommodations-1904-st-louis-worlds-fair-torn/. ccxlvi. Editors of Encyclopaedia Britannica, “Ellsworth Milton Statler”, Encyclopædia Britannica, last modified April 12, 2019, https:// www.britannica.com/biography/Ellsworth-Milton-Statler. ccxlvii. Sandoval-Strausz, Hotel, 132–133. ccxlviii. Lodging Stuff, “Ten Most Valuable Hotel Brands in the World”, Lodging Magazine, last modified May 13, 2019, https://lodgingmagazine.com/the-10-most-valuable-hotel-brands-in-the-world/. ccxlix. Editors of Encyclopaedia Britannica, “Model T”, Encyclopædia Britannica, last modified March 28, 2019, https://www.britannica. com/technology/Model-T. ccl. Sandoval-Strausz, Hotel, 133. ccli. Editors of Encyclopaedia Britannica, “Model T”. cclii. Federal Highway Administration and Office of Highway Information Management, FHWA Highway Statistics Summary to 1995 (Washington, DC: BiblioGov, 1997). ccliii. Kenneth T. Jackson, Crabgrass Frontier: The Suburbanization of the United States (New York: Oxford University Press, 1985), 157–162. ccliv. Sandoval-Strausz, Hotel, 134. cclv. Ibid. cclvi. Victor H. Green, Negro Traveler’s Green Book: The Guide to Travel and Vacations (New York, NY: Victor H. Green & Co. 1955), 4. cclvii. “Anti-Jewish Discrimination in American Hotels Declines Sharply (January 31, 1964)”, Jewish Telegraphic Agency, accessed July 18, 2019, https://www.jta.org/1964/01/31/archive/anti-jewishdiscrimination-in-american-hotels-declines-sharply.

 Notes 







241

cclviii. Morgan Westcott, ed. Introduction to Tourism and Hospitality in BC (Victoria, BC: BCcampus, 2015). cclix. Stanislav Ivanov et  al., Routledge Handbook of Hotel Chain Management (London: Routledge, 2016), 324. cclx. Alan Fyall et  al., Marketing for Tourism and Hospitality: Collaboration, Technology and Experiences (Abingdon, Oxon: Routledge, 2019). cclxi. Maya Tchernina, “Week of Oct. 26, 2009”, Foodservice and Hospitality, last modified November 3, 2009, https://www.foodserviceandhospitality.com/week-of-oct-26-2009/. cclxii. Hee Andy Lee, Basak Denizci Guillet, and Rob Law, “Examination of the Relationship between Online Travel Agents and Hotels: A Case Study of Choice Hotels International and Expedia.Com”, Cornell Hospitality Quarterly 54, no. 1 (2012). cclxiii. Ibid. cclxiv. Jill Barthel and Sophie Perret, OTAs  – a Hotel’s Friend or Foe (London: HVS, 2015). cclxv. Thomas Hobbes, Leviathan. Reprinted from the Edition of 1651, with an Essay by the Late W.G.  Pogson Smith (Oxford, UK: Clarendon Press, 1909). cclxvi. Global population 2000 BC. cclxvii. “U.S.  And World Population Clock”, U.S.  Census Bureau, accessed 2019, https://www.census.gov/popclock/. cclxviii. U.S.  Census Bureau, “Housing Inventory Estimate: Total Housing Units for the United States”, Federal Reserve Bank of St. Louis, last modified April 25, 2019, https://fred.stlouisfed.org/ series/ETOTALUSQ176N. cclxix. Michael E.  Porter, Competitive Advantage: Creating and Sustaining Superior Performance: With a New Introduction, 1st Free Press ed. (New York: Free Press, 1998), 36–40. cclxx. Based on ibid., 37–40. cclxxi. “Modularity Theory”, Clayton Christensen Institute, accessed 2019, https://www.christenseninstitute.org/interdependencemodularity/. cclxxii. Nancy J.  Lyons, “Disruptive Start-Up: Clayton Christensen on How to Compete with the Best”, Inc., last modified February 1, 2002, https://www.inc.com/magazine/20020201/23854.html. cclxxiii. Dell Computer Corporation, Annual Report 1997 (Round Rock, TX: Dell Computer Corporation, 1998).

242 Notes



cclxxiv. “Breakthrough Ideas for 2004”, Harvard Business Review, last modified February 2004, https://hbr.org/2004/02/breakthroughideas-for-2004. cclxxv. Ibid. cclxxvi. Inspired by Joan Magretta, Understanding Michael Porter: The Essential Guide to Competition and Strategy (Boston, MA: Harvard Business Review Press, 2012). cclxxvii. “Oravel Shuts Down; Founder Launches OYO Rooms”, NextBigWhat, last modified June 11, 2014, https://nextbigwhat. com/oravel-shuts-down-launch-oyorooms/. cclxxviii. Radhika P. Nair, “Ritesh Agarwal, a Young Indian Entrepreneur Selected for ‘Thiel Fellowship’”, Economic Times, last modified May 11, 2013, https://economictimes.indiatimes.com/small-biz/ entrepreneurship/ritesh-agarwal-a-young-indian-entrepreneurselected-for-thiel-fellowship/articleshow/20003560.cms. cclxxix. Madhav Chanchani, “Ritesh Agarwal’s Journey from Being a Sim-Seller to the Helm of OYO Rooms”, Economic Times, last modified August 3, 2015, https://economictimes.indiatimes.com/ small-biz/entrepreneurship/ritesh-agarwals-journey-from-beinga - s i m - s e l l e r - t o - t h e - h e l m - o f - oyo - ro o m s / a r t i c l e s h ow / 48322588.cms. cclxxx. Kim-Mai Cutler, “Thiel Fellow Raises $25m for OYO Rooms, a Network of Branded Budget Hotels in India”, TechCrunch, last modified April 6, 2015, https://techcrunch.com/2015/04/06/ oyo-rooms/. cclxxxi. Jon Russell, “Softbank Leads $100m Investment in IndiaBased Budget Hotel Network OYO Rooms”, TechCrunch, last modified August 3, 2015, https://techcrunch.com/2015/08/03/ softbank-oyo-rooms/. cclxxxii. Airbnb, “Airbnb Launches Global Hotel Technology Partnership to Support Boutique Hotels, Bed and Breakfasts”, Airbnb, last modified February 7, 2018, https://press.airbnb.com/airbnblaunches-global-hotel-technology-partnership-to-support-boutiquehotels-bed-and-breakfasts/. cclxxxiii. Deanna Ting, “Airbnb Is Buying Hoteltonight: Here’s What That Means”, Skift, last modified March 7, 2019, https://skift. com/2019/03/07/airbnb-is-buying-hoteltonight-heres-whatthat-means/.

 Notes 

243

cclxxxiv. Alice Hancock, “Airbnb Seeks to Lure More Hotels with New Fee Structure”, Financial Times, last modified June 4, 2019, https:// www.ft.com/content/4df4293c-86dc-11e9-a028-86cea8523dc2. cclxxxv. Jamie Biesiada, “In Homesharing, Booking Holdings Right up There with Airbnb”, Travel Weekly, last modified March 21, 2019, https://www.travelweekly.com/Travel-News/Travel-AgentIssues/Booking-Holdings-right-up-there-with-Airbnb. cclxxxvi. Romain Dillet, “Accorhotels Acquires Onefinestay for $170 Million”, TechCrunch, last modified April 4, 2016, https:// techcrunch.com/2016/04/04/accorhotels-acquires-onefinestayfor-170-million/. cclxxxvii. Patrick Whyte, “Accorhotels Takes $288 Million Hit on Onefinestay and John Paul Investments”, Skift, last modified July 26, 2018, https://skift.com/2018/07/26/accorhotels-takes-288million-hit-on-onefinestay-and-john-paul-investments/. cclxxxviii. Biswarup Gooptu, “Accor in Advanced Talks to Invest up to $40m in Treebo”, Economic Times, last modified May 11, 2019, https://tech.economictimes.indiatimes.com/news/startups/ accor-in-advanced-talks-to-invest-up-to-40m-in-treebo/ 69275751. cclxxxix. Steve McLean, “Brookfield Lays out Its Niido/Airbnb Partner Strategy”, Renx, last modified September 6, 2018, https://renx. ca/brookfield-strategy-niido-airbnb-partnership/. ccxc. Matthew Rothstein, “Airbnb Partners with RXR Realty to Carve Hotel Rooms out of Midtown Manhattan Office Building”, Bisnow, last modified May 1, 2019, https://www.bisnow.com/ new-york/news/hotel/airbnb-rxr-realty-75-rockefeller-hoteldeal-98765. ccxci. “RXR Realty & Airbnb Launch Hospitality Partnership for New  York City”, RXR, last modified April 29, 2019, https:// www.rxrrealty.com/2019/04/rxr-realty-airbnb-launch-hospitalitypartnership-for-new-york-city/. ccxcii. Ellie Stathaki, “Airbnb Launches Backyard, an Innovative Home Design Initiative”, Wallpaper, last modified November 29, 2018, https://www.wallpaper.com/architecture/airbnb-joe-gebbiahousing-initiative-backyard. ccxciii. HNN Newswire, “STR: US Hotels Post Another Record Year in 2018”, Hotel News Now, last modified January 18, 2019, http:// www.hotelnewsnow.com/Articles/292373/STR-US-hotels-postanother-record-year-in-2018.

244 Notes



ccxciv. Deanna Ting, “U.S.  Hotel Occupancy Projected to Hit New Record in 2019 Despite Recent Softness”, Skift, last modified November 29, 2018, https://skift.com/2018/11/29/u-s-hoteloccupancy-projected-to-hit-new-record-in-2019-despite-recentsoftness/. ccxcv. “Airbnb Hires Aviation Industry Veteran to Lead New Transportation Division”, Skift, last modified February 7, 2019, https://skift.com/2019/02/07/airbnb-hires-aviation-industryveteran-to-lead-new-transportation-division/. ccxcvi. Morgan Stanley Global Insight, Internet, Lodging, Leisure and Hotels: Global Insight: Who Will Airbnb Hurt More - Hotels or OTAs? (New York: Morgan Stanley, 2015). ccxcvii. “Airbnb Economic Part”, Airbnb Blog, accessed 2019, https:// blog.atairbnb.com/economic-impact-airbnb/. ccxcviii. Alexandra Scaggs, “Morgan Stanley Says We’re Reaching Peak Airbnb”, Financial Times, last modified November 10, 2017, https://ftalphaville.ft.com/2017/11/10/2195745/morgan-stanleysays-were-reaching-peak-airbnb/. ccxcix. Chris Bledsoe, interview by Dror Poleg, July 27, 2019, New York. ccc. Eddie Small, “Simon Baron Gets $240m Refi for What’s Billed as Country’s Largest Co-Living Project”, The Real Deal, last modified June 25, 2019, https://therealdeal.com/2019/06/25/ simon-baron-gets-240m-refi-for-whats-billed-as-countryslargest-co-living-development/. ccci. Kin, “Tishman Speyer and Common Launch Kin, First-of-ItsKind Housing for Families”, PR Newswire, last modified March 19, 2019, https://www.prnewswire.com/news-releases/tishmanspeyer-and-common-launch-kin-first-of-its-kind-housing-forfamilies-300814783.html. cccii. Based on Christensen, Raynor, and McDonald, “What Is Disruptive Innovation?”. ccciii. Julie Litman, “As More Investors Buy into Co-Living, Starcity Seeks New Opportunities”, Bisnow, last modified June 26, 2018, https://www.bisnow.com/san-francisco/news/multifamily/ starcity-investors-90021. ccciv. Mike Phillips, “Medici Living Raises $1.1b to Become ‘the WeWork of Co-Living’”, Bisnow, last modified December 12, 2018, https://www.bisnow.com/national/news/multifamily/mediciliving-raises-11b-to-become-the-wework-of-co-living-95910.

 Notes 

















245

cccv. Augusta Pownall, “Space10 and Effekt Develop Subscription Housing Where You Share with Your Neighbours”, DeZeen, last modified June 4, 2019, https://www.dezeen.com/2019/06/04/ urban-village-project-space10-effekt-sustainable-design-builtenvironment/. cccvi. James B.  Stewart, “Birthday Party: How Stephen Schwarzman Become Private Equity’s Designated Villain”, New  Yorker, last modified February 4, 2008, https://www.newyorker.com/magazine/2008/02/11/the-birthday-party-2. cccvii. Ruth Mantell, “Home Prices Off Record 18% in Past Year, CaseShiller Says”, Market Watch, last modified December 30, 2008, https://www.marketwatch.com/story/home-prices-off-record18-in-past-year-case-shiller-says. cccviii. Board of Governors of the Federal Reserve System (US), “Delinquency Rate on Single-Family Residential Mortgages, Booked in Domestic Offices, All Commercial Banks”, Federal Reserve Bank of St. Louis, last modified May 23, 2019, https:// fred.stlouisfed.org/series/DRSFRMACBS. cccix. “Blackstone Creates National Single-Family Rental Home Platform”, Blackstone Group, last modified November 9, 2012, https://www.blackstone.com/media/press-releases/article/ blackstone-creates-national-single-family-rental-homeplatform. cccx. Reuters, “Blackstone’s Invitation Homes Raises $1.54 Billion in IPO: Source”, CNBC, last modified January 31, 2017, https:// www.cnbc.com/2017/01/31/invitation-homes-raises-154-billionin-ipo-source.html. cccxi. U.S.  Census Bureau, “Housing Inventory Estimate: Renter Occupied Housing Units for the United States”, Federal Reserve Bank of St. Louis, last modified April 25, 2019, https://fred. stlouisfed.org/series/ERNTOCCUSQ176N. cccxii. “Origination Activity”, Consumer Financial Protection Bureau, accessed 2019, https://www.consumerfinance.gov/data-research/ consumer-credit-trends/mortgages/origination-activity/. cccxiii. “Home Value Explorer”, Freddie Mac, accessed 2019, http:// www.freddiemac.com/hve/hve.html. cccxiv. Mary-Lou Downie and Gill Robson, Automated Valuation Models: An International Perspective (London: Northumbria Research Link, 2008).

246 Notes















cccxv. Kim-Mai Cutler, “Keith Rabois’ Homebuying Startup Opendoor Raises $9.95m from Everyone”, TechCrunch, last modified July 7, 2014, https://techcrunch.com/2014/07/07/opendoor/. cccxvi. Take Wiggin, “How Opendoor Makes ‘Instant Offers’ on Properties”, Inman, last modified September 10, 2015, https:// www.inman.com/2015/09/10/how-opendoor-makes-instantoffers-on-properties/. cccxvii. Lauren Shanesy, “Lennar’s Miller on Opendoor Home Trade-in Program: ‘It’ll Be as Easy as Trading in a Car’”, Builder Online, last modified June 25, 2018, https://www.builderonline.com/ builder-100/marketing-sales/lennars-miller-on-opendoorhome-trade-in-program-itll-be-as-easy-as-trading-in-a-car_o. cccxviii. Connie Loizos, “Ambitious Real Estate ‘Unicorn’ Opendoor Just Made Its First Acquisition, Snapping up Open Listings”, TechCrunch, last modified September 11, 2017, https://techcrunch.com/2018/09/11/the-ambitious-real-estate-unicornopendoor-just-made-its-first-acquisition-snapping-up-openlistings/. cccxix. Zoë Bernard, “Opendoor Lays Off 50 Employees, Cuts Free Lunch”, Information, last modified July 2, 2019, https://www. theinformation.com/briefings/a8f903? cccxx. “Opendoor: A Startup Worth Emulating”, Stratechery LLC, last modified December 7, 2016, https://stratechery.com/2016/ opendoor-a-startup-worth-emulating/. cccxxi. Mike DelPrete, “Will ibuying Become Mainstream?: Speech at InMan Connect Conference, New York”, YouTube, last modified February 19, 2019, https://www.youtube.com/watch?v= l2OmyguHNQE. cccxxii. Nadia Judith Enchassi, “Amazon Delivery Driver Arrested after Stealing Package Off Porch”, Oklahoma’s News Channel 4, last modified November 30, 2017, https://kfor.com/2017/11/30/ amazon-delivery-driver-arrested-after-stealing-packageoff-porch/. cccxxiii. Danielle Abril, “Postmates Has a New Autonomous Rover That Will Bring You Deliveries”, Fortune, last modified December 13, 2018, http://fortune.com/2018/12/13/postmates-autonomousrover-serve/. cccxxiv. Graham Rapier, “People Are Attacking Waymo’s Self-Driving Cars in Arizona by Slashing Tires and, in Some Cases, Pulling Guns on the Safety Drivers”, Business Insider, last modified

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December 12, 2018, https://www.businessinsider.com/waymosself-driving-cars-are-getting-attacked-in-arizona-2018-12. cccxxv. “Investor Presentation Fall/Winter 2017”, STAG Industrial, last modified November, 2017, http://www.snl.com/interactive/ n e w l o o k a n d f e e l / 4 2 6 3 3 8 5 / S TA G % 2 0 I n d u s t r i a l % 2 0 Presentation%20-%20DEC4%20-%20FINAL.pdf. cccxxvi. Revathi Greenwood, “U.S.  Marketbeat Reports Q3 2018”, Cushman & Wakefield, last modified October 17, 2018, http:// www.cushmanwakefield.com/en/research-and-insight/2018/ us-q3-2018-marketbeat. cccxxvii. Jon Ostrower, “Why Amazon Is Buying 210 Acres Near a Kentucky Airport”, CNN Business, last modified January 18, 2018, https://money.cnn.com/2018/01/18/news/companies/ amazon-hq-prime-air-cvg-expansion/index.html. cccxxviii. National Council of Real Estate Investment Fiduciaries, “NCREIF Property Index (NPI)”, NCREIF, accessed 2019, https://www.ncreif.org/data-products/property/ cccxxix. REIT Indexes, “Performance by Property Sector/Subsector”, Nareit, last modified March 31, 2019, https://www.reit.com/ data-research/reit-indexes/historical-reit-returns/performanceproperty-sector-subsector. cccxxx. “Warehousing and Storage: NAICS 493”, U.S. Bureau of Labor Statistics, last modified July 16, 2019, https://www.bls.gov/iag/ tgs/iag493.htm#workforce. cccxxxi. Colin Lecher, “How Amazon Automatically Tracks and Fires Warehouse Workers for ‘Productivity’”, Verge, last modified April 25, 2019, https://www.theverge.com/2019/4/25/18516004/ amazon-warehouse-fulfillment-centers-productivity-firingterminations. cccxxxii. Amazon.com INC, Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934. For the Fiscal Year Ended December 31, 2018 (Washington, DC: United States Securities and Exchange Commission, 2019). cccxxxiii. “Truck Transportation: NAICS 484”, U.S.  Bureau of Labor Statistics, last modified July 16, 2019, https://www.bls.gov/iag/ tgs/iag484.htm. cccxxxiv. Quoctrung Bui, “Map: The Most Common∗ Job in Every State”, National Public Radio, last modified February 5, 2015, https:// www.npr.org/sections/money/2015/02/05/382664837/ map-the-most-common-job-in-every-state.

248 Notes

cccxxxv. Moody’s Analytics, “Industrial Capital Market Update, Q4 2018”, REIS, last modified March 11, 2019, https://www.reis. com/industrial-capital-market-update-q4-2018/. cccxxxvi. CBRE Research, 2018 U.S.  Real Estate Market Outlook (Los Angeles: CBRE Global Investors, 2017). cccxxxvii. Dafna Tapiero, Meredith Balenske, and Jennifer Friedman, “Blackstone to Buy U.S.  Logistics Assets from GLP for $18.7 Billion”, Blackstone, last modified June 2, 2019, https://www. blackstone.com/media/press-releases/article/blackstone-to-buyu.s.-logistics-assets-from-glp-for-$18.7-billion. cccxxxviii. CBRE Research, “Global Investor Intentions Survey 2019”, CBRE Global Investors, last modified March 2019, https://www. cbre.com/research-and-reports/Global-Investor-IntentionsSurvey-2019. cccxxxix. “The 1919 Transcontinental Motor Convoy”, Eisenhower Library, accessed July 16, 2019, https://www.eisenhowerlibrary.gov/research/ online-documents/1919-transcontinental-motor-convoy. cccxl. Sarah Laskow, “Eisenhower and History’s Worst Cross-Country Road Trip”, Slate, last modified August 24, 2015, https://slate. com/human-interest/2015/08/in-1919-eisenhower-took-a-disastrous-road-trip-that-led-to-his-support-of-the-modern-pavedhighway.html. cccxli. “In Defense of Highways”, Brown Political Review, last modified July 25, 2015, https://www.brownpoliticalreview.org/tag/federalaid-highway-act-of-1956/. cccxlii. Kenneth T. Jackson, Crabgrass Frontier: The Suburbanization of the United States (New York: Oxford University Press, 1985), 204. cccxliii. Ibid., 283. cccxliv. T. F. Hoad, The Concise Oxford Dictionary of English Etymology, Oxford Paperback Reference (Oxford: Oxford University Press, 2004). cccxlv. Jackson, Crabgrass Frontier, 111. cccxlvi. Ibid. cccxlvii. William A. Fischel, Zoning Rules!: The Economics of Land Use Regulation (Cambridge, MA: Lincoln Institute of Land Policy, 2015), Kindle edition, 3409. cccxlviii. Ibid., Kindle edition, 3427. cccxlix. Ibid., Kindle edition, 3445. cccl. Ibid. cccli. Ibid.

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249

ccclii. United States v. National City Lines, 186 F.2d 562 (7th Cir. 1951). cccliii. June Manning Thomas and Marsha Ritzdorf, Urban Planning and the African American Community: In the Shadows (Thousand Oaks, CA: Sage Publications, 1997). cccliv. Village of Euclid, Ohio, Et al. v. Ambler Realty Company, 272 U.S. 365 (1926). ccclv. Victor Jew, “George Sutherland and American Ethnicity: A Pre History to ‘Thind’ and ‘Ozawa’”, Centennial Review 41, no. 3 (1997). ccclvi. United States v. Bhagat Singh Thind, 261 U.S. 204 (1923). ccclvii. Erica E.  Phillips, “E-Commerce Companies Get Creative in Quest for ‘Last Mile’ Space”, Wall Street Journal, last modified December 9, 2018, https://www.wsj.com/articles/e-commercecompanies-get-creative-in-quest-for-last-mile-space1544364000. ccclviii. Amazon.com INC, Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934. For the Fiscal Year Ended December 31, 2018. ccclix. Samantha Sharf, “Amazon’s Landlord: How the E-Commerce Boom Is Propelling Warehouse King Prologis to New Heights”, Forbes, last modified December 12, 2017, https://www.forbes. com/sites/samanthasharf/2017/11/21/amazons-landlordhow-the-e-commerce-boom-propelled-warehouse-king-prologisto-new-heights/#36703d6c4bd9. ccclx. Global Logistic Properties, Leading with Innovation: Global Logistic Properties Annual Report for the Financial Year Ended March 31, 2017 (Singapore: GLP, 2017). ccclxi. Sarah Mulholland and Sarah Syed, “Blackstone Bets $7.6 Billion More on the Amazon Revolution”, Bloomberg, last modified May 7, 2018, https://www.bloomberg.com/news/articles/201805-07/blackstone-to-acquire-gramercy-property-trust-for7-6-billion. ccclxii. Amazon.com INC, Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934. For the Fiscal Year Ended December 31, 2018. ccclxiii. Matthew Rothstein, “Amazon Reportedly Building Multistory Distribution Centers All over the Country”, Bisnow, last modified September 18, 2018, https://www.bisnow.com/national/ news/industrial/amazon-multistory-distribution-centersplanned-92978.

250 Notes

















ccclxiv. Lloyds Loading List, “Heathrow Underground Warehousing Plan Approved”, BIFA, last modified July 2017, https://www.bifa.org/ news/articles/2017/jul/heathrow-underground-warehousingplan-approved. ccclxv. Amy-Mae Turner, “Amazon.com Facts: 10 Things You Didn’t Know About the Web’s Biggest Retailer”, Mashable, last modified July 22, 2011, https://mashable.com/2011/07/22/facts-amazoncom/#rvxQIyVI.qqg. ccclxvi. Evelyn M.  Rusli, “Amazon.com to Acquire Manufacturer of Robotics”, New  York Times, last modified March 19, 2012, https://dealbook.nytimes.com/2012/03/19/amazon-com-buyskiva-systems-for-775-million/. ccclxvii. Adam Putz, “M&A Flashback: Amazon Announces $775m Kiva Systems Acquisition”, Pitch Book, last modified March 19, 2018, https://pitchbook.com/news/articles/ma-flashback-amazonannounces-775m-kiva-systems-acquisition. ccclxviii. Natalie Kitroeff, “Warehouses Promised Lots of Jobs, but Robot Workforce Slows Hiring”, LA Times, last modified December 4, 2016, https://www.latimes.com/projects/la-fi-warehouse-robots/. ccclxix. Chip Cutter, “Amazon to Retrain a Third of Its U.S. Workforce”, Wall Street Journal, last modified July 11, 2019, https://www.wsj. com/articles/amazon-to-retrain-a-third-of-its-u-s-workforce11562841120?mod=hp_lead_pos5. ccclxx. James Vincent, “Amazon’s Vision for the Future: Delivery Drone Beehives in Every City”, Verge, last modified June 23, 2017, h t t p s : / / w w w. t h e v e r g e . c o m / 2 0 1 7 / 6 / 2 3 / 1 5 8 6 0 6 6 8 / amazon-drone-delivery-patent-city-centers. ccclxxi. Alina Selyukh, “Optimized Prime: How AI and Anticipation Power Amazon’s 1-Hour Deliveries”, National Public Radio, last modified November 21, 2018, https://www.npr.org/2018/11/ 21/660168325/optimized-prime-how-ai-and-anticipationpower-amazons-1-hour-deliveries. ccclxxii. Joel R. Spiegel et al. Method and System for Anticipatory Package Shipping. US Patent 8,615,473 B2, filed August 24, 2012, and issued December 24, 2013. ccclxxiii. Selyukh, “Optimized Prime: How AI and Anticipation Power Amazon’s 1-Hour Deliveries”. ccclxxiv. Marc Bain, “Uniqlo Replaced 90% of Staff at Its Newly Automated Warehouse with Robots”, Quartz, last modified October 10, 2018, https://qz.com/1419418/uniqlo-cut-90-of-staff-at-onewarehouse-by-replacing-them-with-robots/.

 Notes 

251

ccclxxv. Supply Chain Technology, “Crowdsourced Delivery”, Walmart, last modified January 15, 2018, https://www.walmartlabs.com/ case-studies/crowdsourced-delivery-for-online-grocery. ccclxxvi. Jet Technology, “Associate Delivery”, Walmart, last modified August 1, 2017, https://www.walmartlabs.com/case-studies/ associate-delivery. ccclxxvii. “Walmart Announces Acquisition of Social Media Company Kosmix”, Walmart, last modified April 18, 2011, https://corporate. walmart.com/_news_/news-archive/2011/04/18/walmartannounces-acquisition-of-social-media-company-kosmix. ccclxxviii. Steve LeVine, “In China, a Picture of How Warehouse Jobs Can Vanish”, Axios, last modified June 13, 2018, https://www.axios. com/china-jd-warehouse-jobs-4-employees-shanghai-d19f5cf1f35b-4024-8783-2ba79a573405.html. ccclxxix. JD.com, “JD.com and Google Announce Strategic Partnership”, GlobeNewswire, last modified June 18, 2018, https://globenewswire.com/news-release/2018/06/18/1525514/0/en/JD-comand-Google-Announce-Strategic-Partnership.html. ccclxxx. Ouyang Shijia, “Alibaba’s Cainiao to Create Smart Logistics Network”, China Daily, last modified May 31, 2018, http:// w w w. c h i n a d a i l y. c o m . c n / a / 2 0 1 8 0 5 / 3 1 / WS5b0fa0a0a31001b82571d739.html. ccclxxxi. Arjun Kharpal, “Firm Linked to Alibaba Opens China’s Biggest Robot Warehouse to Help Deal with Singles Day Demand”, CNBC, last modified October 28, 2018, https://www.cnbc.com/ 2018/10/30/alibaba-cainiao-chinas-biggest-robot-warehousefor-singles-day.html. ccclxxxii. “Alibaba Group”, CrunchBase, accessed June 17, 2019, https:// www.crunchbase.com/organization/alibaba. ccclxxxiii. Morgan Hass, “TOMS Used Flexe Pop-Up Fulfillment to Expand to New Markets”, FLEXE, last modified October 10, 2017, https://www.flexe.com/case-studies/toms-used-flexe-popfulfillment-expand-new-markets. ccclxxxiv. Lev Grossman, “You—Yes, You—Are Time’s Person of the Year”, Time, last modified December 25, 2006, http://content.time. com/time/magazine/article/0,9171,1570810,00.html. ccclxxxv. The same reduction in distribution costs that powered a separate revolution in the way music was marketed and sold — one song a time, in Steve Jobs’s iTunes store.

252 Notes

ccclxxxvi. Chris Anderson’s original 2004 article on Wired Magazine, titled The Long Tail, is well worth a read: Chris Anderson, “Long Tail”, Wired, last modified October 1, 2014, https://www.wired.com/ 2004/10/tail/. ccclxxxvii. John Hagel et al., “Future of Manufacturing: Making Things in a Changing World”, Deloitte Insights last modified March 31, 2015, https://www2.deloitte.com/insights/us/en/industry/manufacturing/future-of-manufacturing-industry.html. ccclxxxviii. Wolfgang Lehmacher and Martin Schwemmer, “3D-Printing Might Not Kill Global Trade After All. Here’s Why”, World Economic Forum, last modified October 5, 2017, https://www. weforum.org/agenda/2017/10/3d-printing-global-tradesupply-chains/. ccclxxxix. Kipp Bodnar, “Happy Customers Are the Biggest Marketing Opportunity of 2019”, HubSpot, last modified February 5, 2019, https://blog.hubspot.com/marketing/happy-customersmarketing-opportunity. cccxc. Etsy, 2017 Annual Report (Brooklyn: Etsy, 2018). cccxci. Anjali Lai, “Data Digest: The Values-Based Consumer”, Forrester Research, last modified March 17, 2017, https://go.forrester. com/blogs/17-03-17-the_data_digest_the_values_based_ consumer/. cccxcii. “We Believe We Can All Make a Difference”, Everlane, accessed June 17, 2019, https://www.everlane.com/about. cccxciii. Marc Bain, “H&M’s New Brand, Arket, Names the Factory That Made Its Clothes. But the Name Isn’t Enough”, Quartz, last modified August 30, 2017, https://qz.com/1064098/hms-new-brandarket-is-fashions-transparency-conundrum-in-a-nutshell/. cccxciv. Karen McVeigh, “Cambodian Female Workers in Nike, Asics and Puma Factories Suffer Mass Faintings”, Guardian, last modified June 25, 2017, https://www.theguardian.com/business/2017/ jun/25/female-cambodian-garment-workers-mass-fainting. cccxcv. “Drive Sustainability”, CSR Europe, accessed June 18, 2019, https://drivesustainability.org. cccxcvi. Olivier Scalabre, “Embracing Industry 4.0 and Rediscovering Growth”, Boston Consulting Group, accessed June 18, 2019, https://www.bcg.com/en-us/capabilities/operations/embracingindustry-4.0-rediscovering-growth.aspx. cccxcvii. “Robotic Revolution”, Raconteur - Future of Manufacturing, last modified August 22, 2018, https://raconteur.uberflip.com/i/ 1017254-future-of-manufacturing-2018/7?m4=.

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253

cccxcviii. Chris Sulavik, Craig Scalise, and Tom Waller, “Robot-Ready: Adopting a New Generation of Industrial Robots”, PwC, last modified June 2018, https://www.pwc.com/us/en/industrialproducts/publications/assets/pwc-industrial-robot-ready.pdf. cccxcix. Philip Harris et al., Reality Check for Today’s C-Suite on Industry 4.0: The Time for Experimentation Is Ending (Atlanta: KPMG International, 2018). cd. Siobhan Roberts, “Yoda of Silicon Valley”, New  York, last modified December 17, 2018, https://www.nytimes.com/ 2018/12/17/science/donald-knuth-computers-algorithmsprogramming.html. cdi. Ibid. cdii. Andrew Meola, “Drone Market Shows Positive Outlook with Strong Industry Growth and Trends”, Business Insider, last modified July 13, 2017, https://www.businessinsider.com/droneindustry-analysis-market-trends-growth-forecasts-2017-7. cdiii. Jonathan Brasse, “GLP Breaks into Infrastructure with $2bn China Solar JV”, PERE News, last modified March 21, 2018, https://www.perenews.com/glp-breaks-infrastructure-2bnchina-solar-jv. cdiv. Antoine Gara, “Billionaire Bruce Flatt Reveals Brookfield’s Huge Bet on China’s Ascendance”, Forbes, last modified April 15, 2018, https://www.forbes.com/sites/antoinegara/2018/04/15/ bruce-flatt-brookfield-china/#66082f203666. cdv. “Brookfield and GLP Establish Partnership to Pursue Rooftop Solar Opportunities in China”, GLP, last modified March 21, 2018, https://www.glprop.com/news-releases/536-brookfieldand-glp-establish-partnership-to-pursue-rooftop-solar-opportunities-in-china.html. cdvi. “About GLP”, GLP, accessed June 18, 2019, https://www.glprop. com/about-glp.html. cdvii. “Prologis Partners with Plug and Play to Support Startups in Supply Chain and Logistics”, Prologis, last modified June 29, 2017, https://www.prologis.com/logistics-industry-news/pressreleases/prologis-partners-plug-and-play-support-startupssupply. cdviii. Connie Loizos, “New Venture Firm Focused on Real Estate Has Raised $212 Million from Real Estate Industry Giants”, TechCrunch, last modified May 2, 2017, https://techcrunch. com/2017/05/02/a-new-venture-firm-focused-on-real-estatehas-raised-212-million-from-real-estate-giants/.

254 Notes



















cdix. “Visionary Companies Reshaping the Built World”, Fifth Wall, accessed June 18, 2019, https://fifthwall.vc/companies. cdx. Emily Wright, “Techtalk Radio: Prologis on Its Foray into Real and Virtual Labs”, EG, last modified November 20, 2018, https:// www.egi.co.uk/news/techtalk-radio-prologis-on-its-forayinto-real-and-virtual-labs/. cdxi. “Prologis Labs, an Innovation Center, Opens in Northern California”, Prologis, last modified May 20, 2019, https://www. prologis.com/logistics-industry-feature/prologis-labs-innovationcenter-opens-northern-california. cdxii. Linda Baker, “‘Not Your Grandfather’s Warehouse’: Prologis Workforce Initiative Takes Aim at Labor Shortage”, FreightWaves, last modified January 22, 2019, https://www.freightwaves.com/ news/economics/prologis-workforce-initiative. cdxiii. Joseph Pimentel, “To Combat Shortage of Industrial Workers, Prologis Internship Program Aims to Attract High School Kids”, Bisnow, last modified November 14, 2018, https://www.bisnow. com/los-angeles/news/industrial/to-combat-shortage-of-workersprologis-internship-program-aims-to-attract-high-school-kidsto-industrial-workforce-94797. cdxiv. “Top Solutions to Source, Train and Retain Labour in Logistics Facilities”, Prologis, last modified March 2019, https://www. prologis.com/logistics-industry-research/top-solutions-sourcetrain-and-retain-labour-logistics-facilities. cdxv. Peter Grant, “Cold Snap: Developers Pour Money into Cold Storage in China”, Wall Street Journal, last modified January 3, 2017, https://www.wsj.com/articles/cold-snap-developers-pourmoney-into-cold-storage-in-china-1483476867. cdxvi. Prashant Gopal, “Wall Street’s Great Ice Cream Buyout”, Bloomberg, last modified July 16, 2019, https://www.bloomberg. com/news/articles/2019-07-16/wall-street-s-great-ice-creambuyout. cdxvii. Kris Hudson, “Cold Storage Industry Likely to See Demand for Another 100m Sq Ft from Online Grocery Sales”, CBRE, last modified June 5, 2019, https://www.cbre.us/about/media-center/ cold-storage-industry-likely-to-see-demand-for-another-100msq-ft-from-online-grocery-sales. cdxviii. Lara Sorokanich, “This Cold-Storage Company That Works with Walmart and McDonald’s Cut Its Energy Consumption 34% and Saves Millions of Dollars a Year”, Fast Company, last modified

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255

February 19, 2019, https://www.fastcompany.com/90299025/ lineage-logistics-most-innovative-companies-2019. cdxix. GT Stuff, “Lineage Logistics Recognized for Exemplary Energy Management Project”, Global Trade, last modified July 8, 2019, https://www.globaltrademag.com/global-trade-daily/ lineage-logistics-recognized-for-exemplary-energy-managementproject/. cdxx. “Why Related Should Be Louder About Its Acquisition of Quiet Logistics”, Loose Threads, last modified March 21, 2019, https:// loosethreads.com/espresso/2019/03/21/why-related-should-belouder-about-its-acquisition-of-quiet-logistics/. cdxxi. Herbert David Klein, “Cujus Est Solum Ejus Est… Quousque Tandem”, Journal of Air Law and Commerce 26, no. 3 (1959). cdxxii. United States v. Causby, 328 U.S. 256 (946). cdxxiii. Ibid. cdxxiv. “Hillview Man Arrested for Shooting Down Drone; Cites Right to Privacy”, WDRB, last modified July 28, 2015, https://www. wdrb.com/news/crime-reports/hillview-man-arrested-for-shooting-down-drone-cites-right-to/article_f22f00b3-b3a1-5e1b9829-8e7ea914628c.html. cdxxv. Boggs v. Merideth, Civil Action No. 3:16-CV-00006-TBR (W.D. Ky. Mar. 21, 2017). cdxxvi. Paul B. Larsen, Joseph C. Sweeney, and John E. Gillick, Aviation Law: Cases, Laws and Related Sources, 2nd ed. (Leiden: Martinus Nijhoff Publishers, 2012). cdxxvii. Charlie Rose, “Amazon’s Jeff Bezos Looks to the Future”, CBS News, last modified December 1, 2013, https://www.cbsnews. com/news/amazons-jeff-bezos-looks-to-the-future/. cdxxviii. Tony Spillett, “Drone Patents Jump 34% as Businesses Worldwide Adopt Drone Technology”, BDO UK, last modified June 17, 2019, https://www.bdo.co.uk/en-gb/news/2019/drone-patentsjump. cdxxix. Martin Coulter, “Walmart Outpaces Amazon in Drone Patent Race”, Financial Times, last modified June 16, 2019, https:// www.ft.com/content/7cd22fb6-8e79-11e9-a24d-b42f641eca37. cdxxx. Robin Lineberger et  al., “Elevating the Future of Mobility: Passenger Drones and Flying Cars”, Deloitte Insights, last modified January 18, 2018, https://www2.deloitte.com/insights/us/ en/focus/future-of-mobility/passenger-drones-flying-cars.html.

256 Notes

cdxxxi. Morgan Stanley Research, “Are Flying Cars Preparing for Takeoff?”, Morgan Stanley, last modified January 23, 2019, https://www.morganstanley.com/ideas/autonomous-aircraft. cdxxxii. Marcus Fairs, “London Rooftops Snapped up for ‘Vertiports’ as Drone Travel Moves Closer”, DeZeen, last modified August 23, 2018, https://www.dezeen.com/2018/08/23/skyports-barr-gazetaslondon-rooftops-vertiports-drones-technology/. cdxxxiii. Jeffrey Rothfeder, “For Years, Automakers Wildly Overpromised on Self-Driving Cars and Electric Vehicles - What Now?”, Fast Company, last modified October 7, 2019, https://www.fastcompany.com/90374083/for-years-automakers-wildly-overpromisedon-self-driving-cars-and-electric-vehicles-what-now. cdxxxiv. Horace Dediu, “Part 2: Disruption”, Micromobility, last modified January 22, 2019, https://micromobility.io/blog/2019/1/22/ part-2-disruptionnbsp. cdxxxv. National Association of City Transportation Officials, “84 Million Trips Taken on Shared Bikes and Scooters across the U.S.  In 2018”, NACTO, last modified April 17, 2019, https://nacto. org/2019/04/17/84-million-trips-on-shared-bikes-and-scooters/. cdxxxvi. Kersten Heineke et al., “Micromobility’s 15,000-Mile Checkup”, McKinsey Insights, last modified January 2019, https://www. mckinsey.com/industries/automotive-and-assembly/ourinsights/micromobilitys-15000-mile-checkup. cdxxxvii. Lawrence D.  Burns and Christopher Shulgan, Autonomy: The Quest to Build the Driverless Car - and How It Will Reshape Our World, First edition. ed. (New York: Harper Collins, 2018), 2. cdxxxviii. Ali Ahmad, “RIHA Releases New Report: Quantified Parking Comprehensive Parking Inventories for Five Major U.S. Cities”, Mortgage Bankers Association, last modified July 9, 2019, https:// www.mba.org/2018-press-releases/july/riha-releases-newreport-quantified-parking-comprehensive-parking-inventoriesfor-five-major-us-cities. cdxxxix. Elijah Chiland, “In LA, Land Dedicated to Parking Is Larger Than Manhattan”, Curbed LA, last modified November 8, 2018, https://la.curbed.com/2018/11/30/18119646/los-angeles-parkinglots-total-size-development. cdxl. Kyle Wiggers, “CommonSense Robotics Announces ‘World’s First’ Underground Micro-Fulfillment Center”, Venture Beat, last modified July 11, 2019, https://venturebeat.com/2019/07/11/ commonsense-robotics-announces-worlds-first-undergroundmicro-fulfillment-center/.

 Notes 







257

cdxli. “Innovation, Disruption and the Value of Time: The Next 10 Years in Logistics Real Estate”, Prologis, last modified September 2018, https://www.prologis.com/logistics-industry-research/ innovation-disruption-and-value-time-next-10-years-logisticsreal. cdxlii. Neil Abt, “Starsky’s First Unmanned Test in Live Traffic Lasted for over 9 Miles on the Florida Turnpike”, Fleet Owner, last modified June 28, 2019, https://www.fleetowner.com/autonomous-vehicles/ starsky-robotics-testing-unmanned-trucks-livetraffic?mod=article_inline. cdxliii. Anthony M.  Townsend, interview by Dror Poleg, July 11, 2019, New York. cdxliv. Michael E. Porter, “What Is Strategy?”, Harvard Business Review, last modified November–December, 1996, https://hbr.org/1996/ 11/what-is-strategy. cdxlv. Ibid. cdxlvi. Joan Magretta, Understanding Michael Porter: The Essential Guide to Competition and Strategy (Boston, MA: Harvard Business Review Press, 2012). cdxlvii. Porter, “What Is Strategy?”. cdxlviii. Christopher D. Merwin et al., “The World of Games”, Goldman Sachs, last modified October 12, 2018, https://www.goldmansachs.com/insights/pages/infographics/e-sports/report.pdf. cdxlix. Esther Fung, “Retail Landlords Look to Esports to Lure Young Gamers”, Wall Street Journal, last modified July 30, 2019, https:// www.wsj.com/articles/retail-landlords-look-to-esports-tolure-young-gamers-11564484401.

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Index1

NUMBERS AND SYMBOLS

1820s, 65 1850s, 65, 66 1860s, 111, 174 1880s, 112 1890s, 11, 110, 111 1950s, 14, 110, 113, 128 1960s, 14, 67, 80, 85 1980s, 14 A

Aarons, Zachary, 8 Abundance, 1, 3, 22, 25, 33–34, 36, 74, 77, 90, 91, 97, 101, 112, 129, 163, 206, 208 Accenture, 95 Access Hotels & Resorts, 118 Accessibility, ix, 105, 178, 187, 204 Accor hotels, 45, 118, 140, 141 Advertising, 12, 23, 29, 37, 59, 66 Africa, 15 Agrawal, Ritesh, 138, 139 Agriculture (agricultural), 1

See also Farmland Airbnb (Airbedandbreakfast), x, 7, 78, 86, 110, 126, 127, 131–133, 136–145, 147, 164, 165 Alibaba (Alibaba Group, Alibaba.com), 38–40, 52, 180, 181, 186, 188 Aimbridge Hospitality, 118 Allbirds, 27 Allocation, 5n1, 6, 44, 66, 78, 79, 205 aLoft, 118 Alphabet, 193 See also Google Alternative asset, 4, 205 Alternative investment, 5 Altman, Sam, 158 Amazon Amazon.com, 33, 37, 39 Amazon 4-Star, 33 Amazon Echo, 92 AmazonGo, 41, 42 Amazon Prime, 33 Amazon Robotics, 178 Amazon Web Services (AWS), 27, 28, 86

 Note: Page numbers followed by ‘n’ refer to notes.

1

© The Author(s) 2020 D. Poleg, Rethinking Real Estate, https://doi.org/10.1007/978-3-030-13446-4

291

292 Index

Amenities, 12, 73, 80–82, 109, 113, 114, 122, 132, 133, 142, 148, 149, 152, 154–156, 172, 187, 201 American Express, 95 Americold Realty Trust, 188 Amsterdam, 65, 144, 150, 187 Andreessen, Marc, 22, 125 Andreessen Horowitz (A16Z), 8 Ansonia, 109–111 Apartment, ix, 14, 15, 31, 47, 49, 62, 64, 78, 100, 109–117, 126, 132, 133, 137–139, 142, 143, 145, 147, 148, 150–152, 154, 156, 157, 163, 165, 171, 172, 174–176, 203, 204, 206, 208–210, 214 App, 30, 34, 79, 80, 85, 91, 96, 98–100, 126, 132, 133, 139, 140, 149, 150, 152, 165, 169 See also Mobile app Appear Here, 27, 35, 36, 51 Apple, 20–22, 32, 59, 92, 96, 133n1, 134, 188, 194 Architect, ix, x, 35, 60, 80, 94 ARK, 102–104 See also We Company/We Co. Artificial intelligence (AI), 19, 30, 31, 88–90, 161, 179 Asia, 14, 15, 84, 90, 91, 104 Asset, ix–xiii, 1–8, 5n1, 14–17, 28, 32, 38, 40, 43–46, 51–54, 63–65, 68–71, 74, 82, 84, 87, 97, 99, 101, 103–106, 115–120, 122, 123, 127, 130–131, 133, 137, 138, 142, 143, 149, 155–158, 160, 161, 164, 165, 170–172, 177, 185, 186, 188, 189, 199–202, 204–208, 211–215 AT&T (Wireless), 22 Automated valuation models (AVMs), 158–160

Automation (automate), 67, 88–91, 91n1, 105, 158–161, 172, 178–180, 184, 196, 201 Automattic Inc., 95 Autonomous mobility, xii, 194, 200 Autonomous vehicles (AVs, autonomous delivery), 164, 180, 188, 194, 195 AvalonBay Communities, xi, 157 Away Luggage, 50, 189 B

B8TA, 36 BA&SH, 38 Baby Boomer, 94, 111 Barksdale, Jim, 22 Barnes & Noble, 13 Baum, Andrew, 2 Bay Grove Capital, 188 Bedvetter, 149 Benefit, 5, 36, 39, 44, 45, 73–75, 78, 80, 94, 101–103, 118, 141, 154, 155, 159, 173, 204, 209, 215, 216 Berlin, 150, 154, 155 Best Buy, 13 Bethlehem Steel, 67 Beyond Pricing (company), 133 Bezos, Jeff, 88, 178, 192, 193 Bible (biblical), 131 Bifurcation, 92–93 Big box, 15, 37 Big business, 65 BigCommerce, 27 Big data, 184 BirchBox, 31 Bird (company), 51, 195 Blackstone Group, xi, 156 Blade (company), 193 Blecharczyk, Nathan, 126 Bledsoe, Chris, 147, 149 Block, Aaron, 8

 Index 

Blockchain, 187 Bloomberg, 42, 148, 188, 189 Bloomingdales, 13 Blueprint Power, 187 Bluestone Lane, 50 BMW, 194 Bonobos, 26, 27, 40, 50, 189 Booking Holdings (Booking.com), 130, 137 Boston, 174 Bourget, Paul, 111 Brand, 13, 17, 23, 25–28, 33–41, 45, 46, 49–52, 54, 55, 61, 63, 64, 69–71, 73, 75, 76, 80, 81, 91, 99, 100, 103, 104, 106, 117–123, 122n2, 125, 127–131, 133, 137, 141, 144, 148, 151–154, 164, 165, 183, 189, 190, 204, 205, 208n2, 209–211, 213 BrandBox, 35 Branded experience, x, 37, 122, 128 Breather, 36, 71, 79, 80, 94, 100, 209 BrewDog, 83 British Broadcasting Company (BBC), 80, 84 British Land (company), 100, xi Brookfield Asset Management, xi Properties, 34, 100 Property Partners, 52, 142 Brooklyn, 150, 151, 154, 155, 182, 208, 216 Brown University, 29 Buffalo, NY, 126, 127 Buffer, 95 Bumblebee Spaces, 165 Bundling, 19–22, 101, 154, 213 Bunkitsu, 29 Bureau of Labor Statistics (BLS), 171 Burns, Lawrence D., 195 Business-to-business (B2B), 120

293

Business-to-consumer (B2C), 106, 120 Business unit, 106, 133, 133n1, 134 Bytedance, 86 C

Cainiao, 180 Caisse de dépôt et placement du Québec (CDPQ), 100, 102 Calhoun, Arthur, 111, 113 California, 33, 60, 95, 180 C.A.M.P., 29 Camp, Garrett, 126 CapitaLand, xi, 8, 100, 104 Caplan, Kenneth, 171 Cap rate (capitalization rate), 63, 63n2, 171, 199 Car, 11, 13, 46, 74, 75, 91, 126–128, 159, 163, 164, 169, 170, 173–180, 193–196, 200 Carmel Place, 148 Case-Shiller Index, 156 Casper, 27, 37 Castle, Ella, 12 Causby, Thomas Lee, 191 CBRE, 8, 62, 171, 188 Chandler, Alfred B., 65 Chesapeake Lodging, 118 Chesky, Brian, 126 Chiang Mai, 29 Chiat, Jay, 59, 60, 62 Chiat/Day, 59, 60 Chicago, 41, 66 China, xiv, 38, 39, 65, 76, 90, 114, 116, 180, 181, 186, 195, 199 Chinese, 38 Choice Hotels International (Choice Hotels), 129 Christensen, Clayton M., 74, 75, 135, 136, 143 Cinema, 23, 39 Citibank, 95

294 Index

CitizenM, 81 City Storage Systems (company), 28 Clive Wilkinson Architects (CWa), 61 Cloud kitchens, 27, 28 CloudKitchens (company), 27, 28 Cloud software (cloud collaboration, cloud collaboration, cloud-­based), 62, 184 Clutter Storage, 186 Coase, Ronald H., 19, 20, 22 Cold storage, 6, 188–189, 201, 210 See also Storage Coliving/co-living, 110, 148–150, 152–154, 205, 210 Colony Capital, 193 Commercial real estate, 4–6, 16, 41, 63, 100, 123, 161 Commodity (commodities), 1, 4, 40, 136, 185, 205 Common/Common Living (company), x, 149–153, 164, 208–211 CommonSense Robotics, 196 Community, 61, 78, 80, 82, 101, 109, 110, 149, 152, 154, 159, 165, 176, 208, 209 Compact disc (CD), 21 Compass, 8 Conan Doyle, Arthur, 12 Conceptual Age, 90–91, 93 Connected device, 31, 32, 165 Conspicuous consumption, 12, 32 Consumer good, 5, 13, 184 Convene, 28, 36, 71, 100, 104, 143 Core, xi, 5, 6, 30, 50, 71, 102, 127, 128, 174, 204n1 Core plus, 5 CORESTATE Capital Group, 153 Corgel, Jack, 122 Corigin, 8 Cornell (university), 122 CoStar, 62 Covivio, 118

Coworking/co-working, ix, 28, 29, 61, 65, 74, 77, 80–83, 99–102, 142, 148, 154, 182, 213 Craigslist, 147 Credit, 12, 12n3, 23, 30, 52, 90, 91, 105, 147, 158 Credit card, 19, 23, 132 Crowdfund (crowdfunding), 27, 153 Crown Estate, 15 Cruise Automation, 180, 194 Culture (cultural), 6, 13, 14, 17, 40, 55, 106, 113, 154, 212 Curation (curate), 33, 34, 36, 54, 213 Cushman & Wakefield, 8 Customer acquisition cost (CAC), 37, 38 Customer lifetime value (CLTV), 38 Cybersecurity, 184 Cycling, 11 D

Daifuku, 179 Daimler, 196 Dallas-Fort Worth, 52 D’Angelo, Adam, 158 Data, x, 5n1, 6, 8, 13, 29–31, 33, 35, 38, 41, 50, 51, 54, 71, 77, 79, 87, 89, 93, 94, 96, 104, 105, 133, 144, 150, 157–161, 165, 171, 177–179, 184, 188, 189, 192, 195, 205, 215 Davison, Adam, 91 Debt, 4, 5, 12n3, 17, 70, 100, 101, 119, 150, 154, 158, 160 Dediu, Horace, 194, 195 Deliv (company), 51 Delivery (deliveries), 12, 15, 23, 26, 27, 31, 32, 38–40, 52, 54, 55, 88, 98, 110, 132, 134, 150, 165, 169, 170, 174, 176–182, 186, 189, 190, 192, 193, 196, 199, 200, 213

 Index 

Dell Computer, 135–137 Deloitte, 89, 90, 93, 193 DelPrete, Mike, 160 Demand, xi, 3, 25, 61, 62, 65–67, 71, 72, 74, 79, 83–98, 105, 112, 114, 115, 123, 126, 127, 130, 137, 140, 148, 149, 157, 163, 171–185, 187, 195, 196, 199–201, 205, 206, 213 Densification, 77–78, 105 Department store, 11, 13, 14, 16, 22–24, 35, 41, 49, 82 Depreciation (depreciate), 1 Derwent London, 80 Design, xi, xiii, 17, 34, 35, 64, 65, 67, 71, 75, 78–80, 91, 97, 101, 102, 117, 127, 133, 134, 148, 150, 155, 160, 163, 201, 207–209 DeskDog, 83 Detroit, 126 Deutsche Pfandbriefbank, 149 Devonshire Square, 71 Didi Chuxing, 180 Digital, 7, 16, 21, 26, 27, 29–34, 37–40, 52–54, 59, 60, 79, 81, 84, 86, 92, 96, 98, 99, 125, 132, 142, 149–152, 157, 164, 187, 190, 209, 217 Digitally native vertical brand (DNVB), 25–27, 40 Digital marketing, 32, 80, 85 Digital media, 95, 133n1 Digital nomad, 82 Direct to consumer (DTC), 137 Dirty Lemon, 51 Disneyland, ix Disruption, x, xii, 1, 74, 75, 105, 143, 144, 206 Disruptive innovation, 74–77, 144, 153 Distribution, 3, 42, 46, 55, 93, 94, 105, 106, 125, 137, 149–152, 160, 164, 170, 176–178, 181–185, 187, 201, 209

295

DJ Marshmello, 32 Dollar Shave Club (DSC), 27, 76 DoorDash, 7, 27, 180, 194 Dot-com, 7, 181, 188 DoubleTree, 81 Dreamery, 37 See also Casper Driverless car, 195 Driverless truck, 196, 200 Drone, 32, 178, 184, 192–194, 200 See also Unmanned aerial vehicles (UAVs) Dropit, 52 Dry powder, 6 Dubuisson, Paul, 11 Dunn, Andy, 25, 26 Durst Organization, 100 DWS Group, 161 E

eBay, 136, 183 E-commerce (ecommerce), 23, 26, 34, 38, 40, 52, 170, 172, 177, 183, 199 Economics of tech, 41–43, 53, 88, 130–131 EFFEKT, 155 Egypt, 1, 65 Eisenhower, Dwight D., 173, 174 Electricity, 13, 64, 66, 113, 174, 197 Elevator, 13, 66, 67, 75, 110, 163 Endowment, 4 EQ Office, 101, 104 Equinox, 50, 51, 81 Equity, xiv, 4–6, 51, 70–72, 100, 153, 154, 160, 165, 207 Equity Residential, 157 Escalator, 13 E-sports, 217 Etsy, 183 Euclid, Ohio, 176, 177

296 Index

Europe, 14, 15, 41, 77, 84, 99, 127, 153, 174 Everlane, 27, 183 Expedia, 47, 129, 130, 137, 140, 141, 144, 164 Experiential, 34, 73, 74, 190, 203, 204, 209 F

FabFitFun, 51 Facebook, 30, 32, 93, 138, 181 Farmland, 1, 6 See also Agriculture Fast Company, 84, 188, 189 Fast Retailing (company), 179 Federal Aviation Authority, 184, 192 Federal Home Loan Mortgage Corporation (Freddie Mac), 158, 160 Federal Reserve, 116 Fee, 19, 21, 29, 44, 45, 78, 81, 102, 103, 117, 119, 149, 152, 159, 210 Feng, Eric, 87 Fifth Avenue, ix, 71, 98, 99 Fifth-generation (5G) mobile network, 184 Fifth Wall Ventures, 8, 137 Fischel, William A., 175 Flex building, 170 Flexe, 27, 181 Flexible operator, 71, 100–103 Flexport, 194 Florence, 65 Ford, Henry, 127, 175 Fortnite, 32, 216 Foursquare, 51 Franchise, 22, 45, 71, 103, 117, 120, 122–123, 130, 137, 139, 164, 186, 201 Franchisor, 117–121, 129, 140–141, 149 Freddie Mac, 158, 160

French flats/Parisian buildings, 112 Friction, 21–23, 25, 33–34, 36, 54, 133 Fuku, 50 Fulfillment, 15, 39, 50–52, 171, 177, 178, 180, 181, 189, 192, 196, 199–201 Fülhaus, 133 Fund management, 44, 50, 51, 103 Future-proof, x, 185 G

G7 (company), 186 Gallup, 96 Gebbia, Joe, 126 Gecina, 8 Gender-neutral, 94 General Atlantic, 160 General Motors (GM), 175, 180, 194, 195 Generation X (Gen X), 94, 111 Generation Z (Gen Z), 94 Germany, 14, 116, 184 GGP, 13, 51, 52 Gillette, 76 Glass, 13, 31, 61, 99 Glossier, 25, 27, 34 GLP, 171, 177, 185–186 Goldman Sachs, 89, 217 Gonzalez, Melissa, 37 Google, 30, 32, 34, 60, 74, 78, 82, 87, 93–95, 134, 143, 180, 181, 193, 194 See also Alphabet Googleplex, 60, 61 GPS, 62 Grab (company), 7, 29 Greenfield Partners, 50 Greenoaks Capital, 137 Greylock Partners, 8, 137 GrubHub, 27 Guideshop, 26

 Index 

297

H

I

Haight House, 111 H&M, 13, 46, 183 Hargreaves, Brad, 150, 151 Harvard Business Review, 65, 73 Healthcare, 5 Heathrow Airport, 178 Hedge fund, 4 Henry Wood House, 80, 81 HHM Hotels, 118 Highgate, 118 High street, 13–15 Highway, 49, 128, 173, 176, 177, 196, 200 Hilton, 46, 120, 128, 130 Hines, 8 Hobbes, Thomas, 132 Holiday Inn, 117, 128 Hollywood model, 91 HomeAway, 137, 140 Home Insurance Company, 66 Home-sharing, ix, 126, 131–133, 136–145, 164, 205 Host Hotels & Resorts, 118, 137 HostMaker, 141 Hotel, ix, 14, 28, 44–47, 51, 63, 64, 71, 80, 81, 97, 103–106, 109, 111–123, 126–133, 136–145, 148, 149, 163–165, 171, 186, 189, 201, 203–206, 208n2, 209 Hotel Chelsea, 111 Hotelization, 147–149 HotelTonight, 140 Howard Johnson, 120, 128 HubSpot, 93 Hudson Yards, 35, 49–51 HVAC, 75 HVS, 130 Hyatt Hotels, 117, 141 Hyundai, 194, 196

IBM, 59, 134–136 iBuyer, 159, 160, 165 IHG Hotels, 45 IKEA, 13, 15, 155 Incentive (incentivization), 4, 30, 43–45, 87, 114, 212, 215 Income inequality, 17 stream, 5, 105, 106 See also Net operating income (NOI) Incumbent, 76, 77, 87, 151, 153, 195 Independent hotel, 117, 118, 130, 140, 164 Index Ventures, 25 India, 83, 114, 138, 139 Indiegogo, 27 Inditex, 13 Industrial revolution, 203 Fourth Industrial Revolution (see Industry 4.0) Second Industrial Revolution, 12 Industrious, 28, 29, 71, 82 Industry 4.0, 183 Inflation, 4, 5 Ingka Centres, 15 Initial public offering (IPO), 70, 71, 86–88, 126, 186, 189 Innosight, 85 Innovation, xi, xii, 4, 8, 13, 14, 16, 22, 23, 28, 41–47, 52, 65–68, 74–77, 88, 90, 112, 115, 126, 127, 144, 153, 170, 178, 184, 187, 189, 194, 199, 201, 212 Instagram, 25, 129, 181, 183 Institutional investor, ix, 4–6, 15, 62–64, 103, 115, 116, 119, 156, 158, 171, 172, 204 Insula, 112 Insurance company (insurance companies), 4, 63

298 Index

Integration, 30, 36, 38–40, 52, 82, 119, 133–136, 179, 201 Internal Revenue Service (IRS), 1 Internet of Things (IoT), 183, 187 InTime, 39 Intu, 52 Investor, ix–xi, 4–8, 15, 16, 22, 25, 27, 28, 36, 43–45, 50, 51, 62–64, 87, 88, 100, 102–105, 115, 116, 119, 119n1, 120, 122, 123, 125, 137–139, 153–156, 158, 160, 161, 164, 165, 171, 180–182, 186, 188, 189, 193, 195, 199–201, 205–207, 211–213, 215, 216 InVision, 95 Invitation Homes, x, 156–158 iPad, 83 iPhone, 59, 62, 133n1, 134 Israel, 116, 196 iTunes, 20, 21, 182 Ivanhoe Cambridge, xi, 8, 100, 102

Keller, Kevin L., 73 Keycafe, 132 Keynes, John Maynard, 12 Khosla Ventures, 8, 158 Khosrowshahi, Dara, 130 Kickstarter, 27 Kilpi, Esko, 92 Kimco Realty, 35 Kin, 152, 153 Kitchen United, 27 Kiva, 178 Kleiner Perkins, 87 Klinenberg, Eric, 110 Knoll, 77 Knotel, 100, 209 Kosmix, 180 KPMG, 70 Krim, Philip, 37 Kroger, 13, 180 Krueger, Alan, 93 Kübler-Ross, Elisabeth, 141

J

L

JD/JD.com, 39, 40, 180, 186 Jewish, 14, 128 Jobs, Steve, 20, 21, 59, 60, 62, 96 Jobs to be done (theory), 213 Joint venture, 142, 152, 186 Jones Lang LaSalle (JLL), xi, 8, 27, 71, 82 Joyce, Steve, 129 J.P. Morgan, 5, 78 JUUL Labs, 7

Labor, 2, 90, 91n1, 92, 112, 114, 135, 178, 179, 183, 188, 196, 199, 201 Land, ix, x, xiv, 1–3, 15, 77, 84, 98, 100–103, 112, 114, 174, 175, 177, 178, 184, 185, 191, 192, 194–196, 200, 206 Landlord, ix–xi, 1–4, 14–16, 26, 32, 34–36, 40–47, 49–52, 54, 61, 62, 64, 65, 68–74, 78, 80–86, 93, 95, 97–104, 106, 110, 116, 117, 120, 133, 137, 142, 148, 151, 152, 157, 164, 170, 172, 177, 179, 184–190, 201, 205, 207, 209, 210, 213, 214 Land Securities Group, xi, 99 Layout, 67, 77, 96, 122, 150 Le Bon Marché, 13

K

Kalanick, Travis, 28, 126 Katerra, 8 Katz, Lawrence, 93 KĀWI, 50 Kazaa, 21

 Index 

Lease/leases/leasing, 3, 5, 17, 25, 35, 36, 61, 63, 64, 70, 71, 77, 78, 81, 83, 88, 99–102, 113, 118, 122, 137, 147–149, 151, 153, 154, 156, 157, 160, 172, 177, 199, 201, 204, 205, 207, 208, 210, 214 lease arbitrage, 100, 101 Lender, x, 36, 43, 87, 115, 122, 123, 149, 154, 156, 158, 205 See also Loan Lennar Corporation, 159, 160 Lerer Hippeau, 25 Levchin, Max, 158 Lidar, 188 Lightspeed Venture Partners, 139 Lineage Logistics (company), 188–189, 210 LinkedIn, 94 Lionesque, 37 LiquidSpace, 78 Liu, Richard, 180 Livible, 185 Loan, 122, 149 Location, ix, 3, 14, 17, 23, 25–29, 31–33, 35–37, 39, 40, 45, 46, 50–52, 54, 61, 63–65, 67, 72, 73, 77–83, 85, 90, 92, 95, 98, 99, 102, 106, 117, 120, 128–131, 164, 165, 170, 175, 177, 185, 187, 196, 200, 201, 204, 204n1, 209, 213 Lodging, ix, x, 16, 44, 45, 46n4, 47, 79, 104, 106, 109–123, 125–145, 163–165, 186, 189, 201, 202, 204, 206, 208, 213 Loggi, 187 Logistics, ix, xii, 7, 8, 16, 26, 27, 39, 40, 50, 52, 55, 64, 135, 165, 169–172, 174, 177–180, 185–187, 189–190, 193–196, 199–202, 213

299

London, ix, xiv, 5, 11–13, 46, 65, 79, 80, 83, 95, 114, 141, 150, 193, 209 Long tail, x, 92, 181, 200 Los Angeles Times, 60 LVMH, 33 Lyft, 7, 87 Lyric, 100, 137, 143, 165 M

Macerich, 13, 28, 35, 51, 82 Machine learning, 189 Macy’s, 13, 82 Made by We, 28 See also We Company/We Co., WeWork Magento, 27 Maker Movement, 182 Mall, 13–15, 17, 23, 29, 35, 39, 49–52, 55, 64, 82, 97, 177, 206 Manchester, 29 Manhattan, 49, 99, 102, 110, 148, 196 Manufacturing, 5, 13, 21, 53, 55, 92, 135, 164, 170, 174, 175, 179, 182–184, 200 Marginal cost, 42, 53, 86, 88, 129, 130, 177 Marketing, 27, 29, 32, 42, 45, 46, 53, 54, 64, 71, 73, 80, 82, 85, 86, 117, 119, 121, 130, 135, 150, 172, 207, 208, 210 Marriage (married), 110, 113, 150 Marriott International (Marriott), 80, 81, 117–120, 128, 130, 136–138, 141, 144 Marx, Karl, 2, 3 Massachusetts Institute of Technology (MIT), 184 Matsuzakaya, 13 McDonald’s, 15 McKinsey & Co., 89, 90, 195

300 Index

McLuhan, Marshall, 67, 79, 91 Medici Living, 149, 153 Merideth, William, 192 MetaProp, xi, 8 MeUndies, 51 Micromobility, 195, 200 Microsoft, 7, 86, 92 Microsoft Azure, 28, 86 Middle class, 14, 23, 38, 112, 114, 153, 157 Military, 173, 174, 191, 193, 212 Millennial, 94, 96, 110, 111 Ming, Mei, 185 Mirror.co, 31 Mitsui Fudosan, 8 Mixed reality/blended reality/ augmented reality, 19, 184 Mobile app, 85, 91, 96, 152, 209 See also App Mobility, xii, 105, 126–127, 172, 173, 176, 180, 192–196, 199, 206 Model T, 127, 175 Modularity, 133–136 Monadnock Development, 148 Monopoly, ix, 2 Moore, Jonathan, 142 Morgan Stanley, 144, 145, 193 Mortgage, 4, 43, 63, 113, 119, 156–159 MUJI, 28 Multifamily, 6, 63, 64, 105, 111, 112, 120–122, 142, 147–149, 152, 153, 156, 157, 160, 161, 171, 172, 179, 189, 199, 201, 204, 205, 207, 213 Munger, Mike, 20 Music, 7, 20–22, 32, 36, 39, 91, 93, 94, 133n1, 182 Myo, 99 N

NAIOP, 88 Napoleon, Bonaparte, 203 Napster, 21

nARCHITECTS, 148 Nauto, 194 Navigable airspace, 192 NCREIF Property Index (NPI), 14, 15, 62, 115, 171 Neiman Marcus, 49 Net operating income (NOI), 44, 63, 64, 149, 151 Netflix, 143, 182 Netscape, 22 Network effects, x, 215 NewDada, 180 New Lab, 182 New Store (company), 28 New York, xiv, 5, 11, 28, 33, 35, 71, 79–81, 83, 95, 109, 111, 112, 114, 126, 142, 144, 147, 148, 150–152, 174 New Yorker, 112 New York Times, 12, 91, 98, 125 NEXT Trucking, 186 Nielsen, 34 Niido, 142 19th Century, 14, 23, 36, 41, 65–67, 91, 110–112, 126, 127, 163, 164, 174, 184, 203 Nobel Prize, 12, 19 Non-binary, 94 Nordstrom, 82 North America, 14, 15, 126 Nuro.ai, 180 Nuveen, xi O

Oasis Collection, 140, 141 Obama, Barack, 125, 126 Office, ix, x, xii, 4–6, 14–16, 28, 29, 36, 49, 52, 53, 59–106, 114–117, 120–123, 142, 156, 160, 170–172, 187, 189, 196, 199–202, 204–206, 209, 213–215 Ofo, 195

 Index 

Ollie, 147–153, 164, 209, 210 On-demand, 20, 21, 27, 28, 36, 62, 75, 91, 113, 127, 132, 150, 157, 165, 170, 177, 181, 182, 185, 194, 195 OneFineStay, 140 OneMarket, 41 Online travel agent (OTA), 129–132, 137, 139–141, 144, 164 OpCo, 45, 53 Opendoor, x, 8, 158–161 Operational effectiveness, 206–208, 211, 212 Operator, ix, x, 3, 4, 7, 16, 19, 28–30, 32–34, 36, 39, 40, 42, 45, 46n4, 50, 52, 53, 64, 66, 71, 73, 80–84, 97, 98, 100–103, 105, 106, 118, 120, 149, 152, 153, 160, 164, 165, 171, 184, 185, 189, 199, 201, 204–212, 215, 217 Opportunistic, 5, 6 Ori Systems, 165 Orwell, George, 59 Otis, Elijah, 66, 110 OUE Hospitality Trust, 118 Owner, x, 1, 3, 4, 16, 19, 23, 35, 39, 40, 45, 52, 54, 80, 82, 83, 98, 100, 101, 110, 115–118, 120–123, 129, 131–133, 137, 139, 142, 149, 152–155, 159, 164, 170, 179, 185, 192, 199–201, 205, 206, 208, 210, 215 OYO Rooms, 139 P

Paris, 11, 33, 80, 141, 144 Parking, 23, 49, 75, 83, 84, 114, 128, 195, 196, 200 Peloton, 31, 188 Pension fund, 4, 6 PepsiCo, 183, 189

301

Perrow, Charles, 66 PGIM, 8, 71 Pharaoh, 1, 65 Philadelphia, 174 Physical retail, 14, 16, 17, 19–40, 50, 52–55, 189, 199 Picard, Lisa, 101 Pink, Daniel, 90 Pitchbook, 178 PivotDesk, 78, 79 Plaza Hotel, 111 Plug and Play Tech Center, 186 Pontis, Victor, 83 Porter, Michael, 133, 134, 136, 207–210 Portfolio, 5, 6, 14, 15, 35, 41, 43, 44, 50–52, 62, 63, 80, 99, 100, 106, 115, 130, 151, 157, 158, 165, 171, 177, 199, 201, 205, 206, 212 Postmates, 27, 28, 169 Powered by We, see We Company/We Co., WeWork Price/pricing, 2, 3, 5, 6, 20, 22, 23, 25, 30, 33, 34, 38, 63, 75–79, 97, 113, 120, 121, 127, 129, 133, 135, 140, 151, 153, 155, 156, 159, 164, 207–209, 208n2, 211 Princeton University, 93 Print, 72, 79, 92 Privacy, 60, 61, 165, 215 Private equity, xiv, 4, 6, 43, 44, 51, 71, 72, 100, 154 Private market, 87 Prologis, 8, 177, 186–188, 196 PropCo, 45 Properly (company), 133 Property improvement plan (PIP), 122 Public market, 41, 87, 118 Public transport, 46, 82, 173, 174, 194, 201, 204n1 PwC, 89, 95, 184

302 Index Q

Quiet Logistics, 50, 51, 189 R

Radio, 13, 79, 81, 92, 182 Railroad, 65, 66, 175 Railway, 66, 126, 170, 174, 184 Rakowich, Walt, 188 Real estate investment trust (REIT), 15, 16, 35, 41, 43, 44, 51, 52, 62, 69–72, 103, 104, 115, 116, 118, 119, 157, 171, 188, 189, 215, 217 Redfin, 159 Redpoint Ventures, 181 Regent Street, 15 Related Properties, 35 Related Fund Management, 50 Remote work/working remotely, 60, 86, 94–96, 172 Renault-Nissan, 194, 196 Renmin University, 116 Rent, 2, 5, 17, 28, 29, 37, 45, 63, 64, 70, 78, 79, 83, 89, 116, 117, 142, 147, 149–151, 157, 200, 209 Reposition, 71, 80 Research Institute for Housing America (RIHA), 195 Residential, ix, x, 15, 16, 50, 109, 112, 114–117, 123, 133, 137, 141–143, 145, 148, 149, 152–158, 160, 164, 165, 170, 171, 174–176, 196, 202, 208, 209 Residential hotel/apartment hotel, 109, 113, 114 Resource Furniture, 148 Restaurant, ix, 11, 15, 27–29, 49, 50, 82, 83, 91, 97, 109, 120, 122, 142, 154, 206 Resy, 50

Retail, ix, x, xii, 11–17, 19, 22–29, 31–32, 34–47, 49–55, 62–64, 66, 82, 84, 88, 89, 92, 104, 105, 110, 114–117, 120, 122, 123, 130, 134, 137, 156, 157, 160, 170–172, 180, 182, 189–190, 193, 196, 199, 201–204, 206, 213 RetailConnect, 52 Retirement, 63, 171 Return, 1, 5–7, 23, 26, 37, 38, 42, 44, 52–54, 63, 64, 110, 120, 142, 171, 184, 205, 207, 211, 215 Rhone Group, 71 Ring (company), 179 Ritual (app), 100 Ritz-Carlton, 118 Robot, 169, 170, 178, 180, 183, 184 See also Autonomous vehicles (AVs, autonomous delivery) Robotic furniture, 165 Rockefeller Center/Rockefeller Plaza, 98, 99, 142 Roman Empire, 65, 191 Rome, 112, 141 Roof, 11, 23, 80, 110, 163, 186, 193 ROOM, 78 Ross, Stephen, 49 RSE, 50 Rudin Properties, 100 RXR Properties, xi, 28, 100, 142, 143 S

Sage Hospitality, 118 Saks, 13 Samsung, 134, 194 Sandoval-Strausz, A.K., 111 S&P, 85, 86 San Francisco, 41, 83, 150, 153, 173 Saval, Nikil, 61 Savills, 116 Scarcity, 3, 4, 25, 97, 206, 214, 215 Schwarzman, Stephen, 156

 Index 

Scientific management, 67, 68, 96 Second Industrial Revolution, 12 Selfridges, 13 Selina, 82 Sensor, 39, 41, 96, 189, 215 Sephora, 31, 33, 34, 46 Sequoia Capital, 8, 25, 139, 161 Sequoia Partnership, 196 Shanghai, ix, 114, 150, 180 Shangri La, 118 Sharing economy, 110 Shinola, 28 ShipBob, 183 Shippo, 183 ShipWell, 187 Shiru Café, 29 Shopify, 27, 183, 188 Shopping mall, 13, 15, 23, 49, 52, 97, 177 Showfields, 35, 36 Siegel, Richie, 50, 189 Silent Generation, 94 Silverstein Properties, 161 Simon Baron Development, 148 Simon Property Group, 35, 51 Simon Ventures, 51 Single family, 111, 156 building, 163 home, ix, 6, 114, 115, 156–157, 160 house, 112, 116, 143, 157, 165 Siteminder, 140 Skyline AI, 161 Skyport, 193 Slack, 96, 196 Slavin, Kevin, 184 Slumbers, Antony, xiv, 68 Smart mirror, 19, 39 Smart shelf, 19 Smith, Adam, 2, 3 Société Générale, 149 Society for Human Resource Management (SHRM), 95 Softbank, 8, 87, 139, 160, 180, 194

303

Software, 7, 28, 36, 40, 42, 52, 60, 62, 77, 78, 82, 94, 95, 97, 99, 105, 130, 134, 135, 140, 150, 156, 157, 176, 177, 179, 180, 182, 184, 189, 200, 207 Software as a service (SaaS), 27, 183 Son, Masayoshi, 7, 8 Sonder, 136–138, 143, 164, 165, 209 South Korea, 76, 184 Space, ix, xiii, 4, 7, 8, 11, 14–16, 19, 23, 25, 27–32, 34–37, 40, 42, 49, 51–54, 60–62, 64–67, 69–102, 105, 106, 122, 137, 139, 148, 152, 154, 165, 170, 176–179, 181–183, 185–188, 193, 195, 196, 199–201, 203, 204, 206, 209, 213–215, 217 Space as a service, 36, 110 Space10, 155, 165 SpaceX, 7 Spacious (company), 29, 82, 83, 137 Spark Capital, 137 Spotify, 21, 22, 93–95, 182 Squarespace, 99, 196 St. Louis, 127 Stakeholder, 4, 211 Standard Oil Inc., 175 Stanford University, 61 Starbucks, 29, 39 Starcity Coliving, 149, 153 Starsky Robotics, 196 Start-up, ix, xi, 29, 31, 35, 51, 52, 71, 86–88, 100, 103–104, 126, 132, 143, 150, 154, 161, 170, 180, 181, 184, 186, 195, 196, 207, 216 Starwood Capital Group, xi, 137 Statler, Ellsworth Milton, 127 Statler Hotel, 127 Steam, 66, 91 Sternlicht, Barry, 137 Stevens House, 111 Stitch Fix, 31 Stockholm, 65, 95

304 Index

Stokes, William E.D., 109, 110 Stone, Brad, 126 Stoppelman, Jeremy, 158 Storage, 15, 39, 53, 62, 80, 132, 165, 170, 171, 179, 184, 199–201 See also Cold storage Storefront (company), 53 Storey (company), 99 Strategy (strategies), xi, xiii, 4–6, 16, 44, 55, 71, 80, 130, 133, 134, 206, 208–216 Streaming, 21, 39, 81, 94, 182 Streetcar, 174–175 Studio, 99 Studio (company), 81, 92, 99 Stuyvesant, The (apartment building), 112 Subscription, 21, 22, 30, 31, 51, 76 Suburb/suburban, 14, 17, 23, 49, 114, 150, 171, 173–176, 200 Supply, xi, 3, 20, 27, 39, 62, 65, 69–84, 97, 105, 112, 114, 115, 123, 125, 131, 138, 148, 150, 151, 171, 173–184, 199, 200, 206, 213 Supply chain, 134, 169, 170, 172, 183, 186, 190, 196, 199, 200 Supreme Court, 176, 177, 191 Sustaining innovation, 74, 75 Swire Properties, 99 Symbolic benefit, 73, 74, 78, 91, 209 T

Tamarisc, 8 Tao Capital Partners, 137 Target, 8, 25, 37, 72, 74, 101, 151, 152, 155, 209 Taxi, 126, 132, 193 Taylor, Frederick W., 67 Taylorism, 67 Technology (technological), ix–xi, xiii, 4, 6–8, 13, 14, 16, 17, 19,

21–24, 27, 32–34, 36, 39–45, 43n1, 47, 50, 51, 53–55, 62, 64–68, 74, 75, 79, 80, 84–90, 92–94, 98, 104, 105, 110, 112, 113, 115, 123, 125, 127–130, 136, 139, 140, 143, 149, 152–157, 160, 161, 163–165, 169, 170, 174, 176, 180–183, 185–189, 193–195, 200–202, 204–206, 208, 212–216 Tel Aviv, 150, 154, 155, 196 Teletype, 128, 164 Television (TV), 13, 20, 59, 79, 81, 92, 126, 182, 192 Tenant, 1, 3–5, 14–17, 35, 36, 40, 49, 50, 63–65, 70, 71, 75, 78–83, 85, 86, 88, 89, 95, 97–102, 105, 106, 109, 114, 117, 122–123, 142, 151, 152, 157, 170, 172, 177, 185, 187–189, 199–201, 204, 205, 207, 209, 210, 213, 214 Tenant in tow, 71 Tencent, 39 The Office Group (TOG) (company), 71, 80, 81, 100, 104, 209 Thinknum Media, 95 Thompson, Ben, 39n1, 42, 160 3D printing/3D printers, 19, 182 Tiger Global Management, 181 Time Magazine, 181 Tishman Speyer, xi, 98–100, 137, 152 Tmall.com, 39 Tokyo, 13, 29, 80, 179 TOMS, 181 Townsend, Anthony M., 197 Toys ‘R’ Us, 13 Traffic, 23, 35, 37, 161, 177 Train, 13, 35, 65, 67, 128, 163, 165, 174, 175, 196 Transaction cost, x, 19–23, 29, 33, 45–47, 54, 92, 120, 121, 129, 132, 133, 156, 157, 194, 213 Transferability, 3

 Index 

Transportation, 7, 8, 13, 28, 66, 115, 123, 127, 128, 132, 150, 165, 171, 174–176, 187, 189, 193, 200, 201, 203 Travel agent, 132, 140, 164 See also Online travel agent (OTA) Treebo, 141 Triangulation, 20, 23, 45–47, 120, 129, 132, 195, 213 TripAdvisor, 129 Truck, 15, 163, 171, 173–178, 186, 189, 196, 197, 200 TrunkTech, 186 Trust, 13, 20, 23, 35, 46, 47, 53, 120, 121, 129, 132, 194, 195, 213, 215 Tumblr, 181 20th Century, 12, 14, 54, 55, 66, 67, 88, 90, 96, 111, 117, 128, 191 21st Century, 4, 12, 38, 55, 62, 68, 92, 97–104, 110, 113, 115, 117, 129, 132, 153, 185–190 Twitter, 84, 181, 216 U

Uber, x, 7, 28, 79, 88, 126, 139, 176, 180, 193–195 UberEats, 27 UBS, 6, 102 Unbundling, 19–22, 33, 54, 91–92, 128, 194, 213 Unibail-Rodamco, 41, 52, 82 Unicorn, 7 Unilever, 76, 183 Uniqlo, 46, 179 Unissu, 8, 216 University of Colorado, 160 University of Oxford, 2, 89 Unmanned aerial vehicles (UAVs), 184 See also Drones Upper-class, 12, 112, 163, 175

305

UPS, 169, 176, 193 Urbanization, 13, 111, 112, 114 Urban.US, 8 URWork, 71 Utility, x, 2, 3, 8, 78, 116, 151 V

Valuation, 3, 7, 64, 86, 87, 104, 122, 159–161, 182, 199 Value activities, x, 135, 137 Value add, x, 5, 101 Value chain, xii, 119, 133–137, 208–211 Value creation, 138, 185 Veblen, Thorstein, 12 Vehicle, 32, 50–52, 104, 128, 180, 181, 188, 194, 195 Venn (company), 154–156, 165 Venture capital, ix–xi, 4, 7–8, 22, 25, 27, 31, 37, 42, 43, 51, 87, 100, 101, 125, 137, 139, 153, 154, 160, 161, 164, 165, 181, 184, 186, 205, 206, 216 Vertical takeoff and landing vehicle (VTOL), 193, 194 Video, 7, 32, 38, 39, 129, 181, 182, 217 Virtual reality, 32, 96 Visibility, ix, 204 Vornado Realty Trust, 180 VTS, 100 W

Waldorf-Astoria Hotel, 111 Walking, 11, 26, 28, 31, 33, 41, 110, 154 Walmart, 13, 15, 26, 39, 40, 50, 180, 189, 193 Walmart Labs, 180 Warby Parker, 27, 31

306 Index

Washington, D.C., 126, 127, 150, 169, 173 Waymo, 196 Weber, Max, 66 We Company/We Co. ARK, 102–104 Headquarters by We, 102 Made by We, 28 Powered by We, 102, 104 WeMRKT, 28 WeWork, x, 7, 8, 28, 36, 61, 62, 69–73, 77, 78, 86–88, 98–104, 100n1, 209 Weiss, Emily, 25 WELL building standard, 187 WePark, 83, 84 West Elm, 28 Westfield Group, xi, 41, 51 White-collar, 67, 89 Whitman, Walt, 111 Whole Foods, 39 WhyHotel, 137, 143 Wi-fi/Wi-Fi, 81–83, 139, 147 Willis Towers Watson, 5 Wing (company), 193 Wired, 60 WooCommerce, 95, 183 World Economic Forum, 89, 182 World’s Fair, 126, 127 World War I, 13, 173

World War II, 13, 67, 114, 128, 151, 173 Wyndham Hotels, 81 X

Xiang, Songzuo, 116 Y

Yahoo!, 7, 143 Yale University, 66, 89 Yield, 1, 4, 6, 161 YimiDida, 186 YouTube, 27, 76, 182, 216 Z

Zara, 46 Zero-sum, ix Zeus Living, 137 Ziferblat, 29 Zillow, 116, 159 Zo, 99 Zola, Émile, 12 Zoning laws, ix, 114, 142, 174–177 ordinances, 176, 206 policies, 150 Zume, 180