For decades, the commercial property sector has operated in essentially the same way. However major disruption is on the way, as business models that re-imagine property operations to meet changing consumer expectations deliver new structures for ownership, leasing and service.
Business is under increasing pressure to be more responsive to rapidly changing markets; so finance chiefs may find it more effective to enter into short-term leases, rather than purchase commercial sites for ownership or negotiate long-term leases for property.
Changing business models in property have been influenced by the operations of new-wave platform-based organisations such as US retailer Amazon which began its Australian operations in Dec 2017.
Greg Dickason, Chief Technology Officer of property information group RP Data CoreLogic, says CFOs would do well to watch the impact of Amazon's arrival in the local commercial property space.
“We work a lot with Amazon in the crowd computing space,” Dickason says. He says that many businesses are closely following Amazon's rapid growth and taking note of its techniques to drive change through highly efficient point-to-point commerce strategies, which engage machine learning and automation to speed up order processing.
“Businesses will become much more efficient at inventory management. They will more easily be able to move inventory around, make predictions and better coordinate the workforce,” he says.
Changing use of space
Dickason says one example of this shift is in the way that fast-growing meal delivery services such as Uber Eats are driving consumer behaviour changes – and as a result, some businesses are changing their use of space. “We're starting to see industrial kitchens emerge that do not have a physical retail presence,” he says.
“There are now restaurants that sell through Uber Eats that don't have a floor. These businesses also don't have the overheads of waiters and a front-of-house.”
He says changes of this nature are just beginning; and predicts that coming years will see such strategies used, not just by restaurants, but across many other industries.
More businesses will see advantage in adopting the model whereby they deliver goods and services to customers, rather than hosting customers in-house.
The emergence of self-driving vehicles in the US has initially focused on how these might be used to deliver food. “Vehicles that only deliver food are essentially hotplates on wheels – when one arrives at your place, just enter a PIN and it will give you your meal,” he says.
Taking the driver out of the car will allow changes to its shape and purpose, which will prompt heightened demand for industrial real estate and also property where vehicles can be garaged and serviced, he predicts.
Dickason says as the burgeoning peer-to-peer economy matures, the dynamics of the commercial property market will change so that property, and associated services, will increasingly be used on a pay-per-use basis – which also opens up a market for property-as-service scenarios.
Such scenarios could drive further efficiencies in the delivery of property services – such as electricity, he says.
“Smart meters will allow energy businesses to measure and manage how the air conditioners are used, for example,” he says. Service level agreements could ensure that suppliers can vary service delivery to take advantage of market changes.
“If the energy grid is nearing peak load, energy companies will be able to turn down customers' air conditioners, rather than producing more energy for the grid.”
Platform-based service delivery models could change the way that many businesses use and own commercial property and associated infrastructure in future, he says.
“In this case, it may be that the energy company owns the air conditioners and provides it to customers as a service,” he says.
Increasingly, costs are becoming operational, and capital expenditure is dropping – a trend which could prompt many CFOs to think in new ways about the cost structure of their business.
Dickason says that the software-as-a-service model now prevalent in technology will increasingly extend to many other areas, and commercial real estate is one of these. Finance chiefs may see that traditional five-year property leases, with options to renew, will start to change in the future as short-term leases become the norm.
Blockchain and 'tokenising' will fundamentally change leasing
“Technologies such as blockchain are fundamentally breaking up or tokenising assets, regardless of what the asset is,” Dickason says – and he believes property is well suited for such arrangements.
One business that is already tokenising property is BRICKX, an investment platform that gives its customers the opportunity to acquire an interest in a property for as little as $100. While this concept applies to property ownership, it could also be applied to commercial property leases.
“Demand for office space is likely to become a lot more variable. Companies will have an existing floor plan and know how many staff it can accommodate. But that's likely to shift dramatically in the future,” Dickason says.
For instance, a service provider may wish to lease one room for a week, and businesses could progressively be set up to accommodate that.
“As technology improves, the way employees work, where they need to be and how they communicate with each other is changing. That also changes the way CFOs think about commercial property,” Dickason says.
He says that finance chiefs may start to consider whether their business needs to own assets like warehouses and huge offices, or if there are better ways to manage property.
“If you do own office space, are you maximising the asset, which is the interaction between employees? If you're not maximising it, finance chiefs need to think about whether they may be better off outsourcing, for example by encouraging people to work from home or remotely, and then use the office differently,” he explains.
Before making any changes, Dickason says it's essential to measure how the business presently uses the real estate assets it owns or leases, to find out if it is being optimised.
Once the business has a picture of how its office, industrial and retail premises are being used, it can consider how a property-as-a-service model may work – and whether it makes sense to divest some property assets.
Says Dickason: “The future for property is exciting, and we're just at the start of it.”
CFOs may find that there needs to be major changes in how they think about property, so that their business is in the best place to take advantage of the emerging dynamics in the property sector.
- Businesses are increasingly likely to rent property for specific purposes and short-term periods, rather than own real estate.
- Property-as-a-service business models are likely to revolutionise the property sector
- Blockchain and 'tokenising' are set to change leasing and ownership – and CFOs would be wise to keep an eye on the emerging dynamics in the commercial property sector.