Due For Disruption: The Changing Face Of The Real Estate Industry
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This article was co-written with Indy Johar, co-founder and Chief Strategic Designer of Radicle.
Most countries in the MENA region are asset-based economies, rather than outcome-based ones, with real estate being a significant portion of their GDP. For many, this often illiquid asset is also seen as the safest one. However, it is also a sector that is at a global tipping point of significant and fundamental change– driven by a confluence of innovations and disruptions. And as regional real estate plays gather “steam,” and exponential technologies become an inevitably increasing part of our physical and social infrastructure, entrepreneurs and investors would be hard pressed not to consider these as either opportunities for (or threats to) their businesses or sectors. Here are a few key trends to keep an eye on in the real estate space:
1. New institutional infrastructures, such as the digitization of land registries, smart contracts, and ICOs– open up the effective trading of novel real estate assets, instruments and tools, in ways as yet unimagined, but also unleashing new decentralized, distributed, and real-time models of value creation and pricing. For example, what if economic departments don’t charge license fees based on a fixed square footage of area (as is the case in the UAE), but rather on the value generated by a tokenized real estate lease?
2. Digital regulation and compliance, such as shifting planning policy from regulating use classes to regulating cross contamination of pollution and impact using distributed sensors- real-time planning based on impact, not use-class proxies. This fundamentally creates the capacity for unleashing the medieval organic city that transcends industrial zoning logics, and drives planning from focusing on likely outputs to outcomes, setting up new compliance mechanisms at all levels of the real estate value chain, changing the role of regulatory entities such as RERA from being regulators to enablers.
3. Hybrid financial models & instruments, such as impact derivatives that seek to fuse place-based social outcomes & liabilities to real estate acting as hybrids of social impact bonds with traditional real-estate financing, or more novel synthetic financing instruments that seek to capture the value of investing in commons goods through social smart convents on adjacent private housing- all of this will redefine incentive structures for future builds. What if construction finance is linked to not just the project feasibilities, but to how well you build from a sustainability perspective? Or which areas in the city you build, so as to enable better traffic and air quality?
4. New typologies of space use, such as the rise of co-working and co-living from Impact Hubs, WeWork to Roam, are fundamentally giving rise to new constructs, and in many cases, these are just the beginning, and they are systemically shifting the business model of real estate from product and asset to service– driven by data, outcomes, and continuous optimization. This is an emerging future of real estate not focused on optimizing its mere utilization and mere efficiency of space, but directly aligned to the efficacy and outcome contribution of the built environment to the production of value. What if how well you build is construed not just for its aesthetic and architectural brilliance, but how well you impact specific desired outcomes in your community and/or economy? Also, we are seeing how technology continues to impact real estate. While e-commerce has slowed in-store shopping, resulting in retail store closures, at the same time, new technologies such as AR, VR, and AI could transform physical stores into experiential showrooms, highlighting the continued need for retail real estate. Finally, with many societies, particularly in the West but also in Japan and China, facing rapidly aging populations, their real estate preferences and needs will change.
5. Race for talent With slowing population growth, the baby boomer retirement wave, and talent demands from competing industries -particularly health care, community services, and science, technology, engineering, and mathematics clusters- are likely to result in an even bigger race for talent in the next decade. That gives new meaning to workplace preferences of millennials and Gen X, who tend toward freedom and flexibility. Their work-life barriers are porous, with many preferring to work from home or freelance. As such, the per-employee office space requirement is likely to shrink from the current 250 sq. ft. per person to less than 80 sq. ft. The upshot may be a demand for mixed-use spaces that include office, residence, and recreation options with many tenants even demanding small offices in their apartments- the co-working and co-living movement referenced above.
6. 3D printing, manufacturing and automation Organizations such as wikihouse are challenging the means of production of real estate, by both decentralizing and distributing the means of production, and also distributing innovation, creativity, and care. This is a future that challenges not only the current capacity and capability of our construction industry, but also most fundamentally the nature of our workplace environments to respond to automation by unlocking the capacity to care, create, collaborate, and utilize the collective intelligence of their workforce. With Dubai having set the stage through the world’s 1st 3D printed office in 2016, and promulgating regulation through its 3D Printing Strategy that would have every new building in Dubai 25% 3D printed by 2025, there would be no dearth of incentives to engage in new construction platforms– the more important question is how this new “hardware” will be backed up by new “software” in the ways individuals and organizations collaborate to co-create the future of work.
7. The rebirth of Universal Policy, such as universal basic income, which sets up the capacity to challenge the existing and dominant economic geography of our current real-estate model, or equality policy, which recognizes the impact of epigenetics and the effects of the environment on the issues of social and spatial justice. Individually, these trends and others such as place-based systems change, collective impact and data-driven environment and their directions of travel are already starting to disrupt real estate as we know it. Together, they form the basis of a new model of place making.
In sum, these drivers will challenge the orthodoxy of our current economic geography, spatial typologies, business models, design practices, models of ownership, and governance as we know them. And when amplified by the labor, value, and demand shocks likely to be delivered by the protectionist-centered political changes underway across the world, these disruptions are likely to fundamentally and dramatically change the future of real estate.
We know many major real-estate organizations across the world are beginning a process of strategic review– recognizing the need to realign to a shifting “market.” These reviews have an urgency to addressing the disruptions hurtling towards the industry. They need to drive meaningful transformation of their capacities and capabilities– reimagining what functions can be outsourced, and what functions need to be in-sourced in this future, alongside driving a systematic transformation of their products as services and revising their current and future portfolios. With the UAE and Saudi Arabia being the centers of construction across the Gulf region, it remains to be seen how the vanguards of real estate –across the value chain– will respond to these cataclysmic changes.