Technology redefines the value of location, visibility, and accessibility. It begins in retail but will impact all real estate assets.
Location, Location, Location. The value of a real estate asset is determined first and foremost by its location. A good location is easy to access, hard to miss, and imparts symbolic value on those who occupy it. The relative importance of visibility, accessibility, and symbolic value varies between assets but it always boils down to one thing: Making money.
The value of retail, office, residential, and industrial assets is a function of their ability to generate revenue for their tenants. This revenue can be immediate (driving customers into your store) or projected far into the future (living next to a great school for your kids). It can be based on obvious factors (running the only gas station or hotel next to a highway or airport ), or abstract ones (occupying the top floor in the tallest building in town).
As long as a location can generate revenue for its occupiers, it will remain valuable. But what happens when it doesn’t?
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Under the Influence(r)
Let’s take a little detour. Last week, Lighspeed Ventures led a Series A investment in Brandable, a “Consumer Packaged Goods Studio”. The company “creates, manufactures, and sells relevant, modern consumer focused brands across toys, wellness and food.” Why would a venture capital fund invest in a company that manufactures toys, creams, and snacks? Well, what makes Brandable interesting is not what it sells, but how it decides what to sell.
The company “launches its brands in association with hyper-relevant social media influencers with massive reach”. In English, this means Brandable finds people who have lots of followers on Instagram, Youtube, and/or Snapchat and then develops products that can be sold to those followers. Once the products are validated through online channels, Brandable distributes them through traditional channels such as Walmart, Target, and 7-Eleven.
Note the order of events: First comes the online “influencer” channel, then the product is developed to fit that channel, then they start to sell online, and finally — traditional distribution through physical stores. It is no longer about product companies seeking channels. It’s about channel companies seeking products. The role of physical retail in this new cycle of value-creation feels almost like an afterthought.
The Channel is the Product
Previously, Walmart had the power to determine what gets bought. With 600m monthly visitors, it still has plenty of power — but significantly less than before. By the time they reach a physical store, Brandable’s products are already validated and (allegedly) have a solid customer base. If Walmart doesn’t want them, someone else would. Compare this to the traditional world of packaged goods, where new products would live or die based on their ability to secure shelf space.
Real estate companies know the value of monopolizing a channel very well. Every piece of land is a monopoly of sorts — God ain’t making any more of it, and you have to cross it to get from A to B. But monopolies don’t last forever.
In Mobile is Eating the World, Ben Evans points out that ”if you change how things are bought, you change what gets bought”. If demand is generated online, the power to decide what gets bought is also shifting online — away from traditional owners and operators of physical space. The taxi industry offers a case in point: If consumers start “buying” rides on an easy-to-use app, the app has the power to decide which cars are used — even if it means taking on a government-mandated monopoly.
OK. So online marketers can launch their own products and disrupt physical retail. What else is new? That these dynamics are making their way to other types of assets.
The Best Thing since Sliced Office
Retailers are not the only ones who need to make money. People who work in offices also have something to sell. Demand for professional and financial services, too, is increasingly reliant on online marketing. And these services are not only marketed online, they are are also increasingly delivered online.
This means that office occupiers are less dependent on the location of their building to generate sales. They are less dependent on the quality of the building to position themselves as the best. And their clients care less about easy access, since more and more services are not delivered on-premise. Service providers work online, use video conferencing, or take an Uber to meet clients where they are or in a coffee shop.
And if your office can move a little, so can your home. If Uber is a viable option, living next door to a subway stop becomes a little less important. If (some) basic and enrichment classes are moving online, living next to the best school becomes a little less important. Not unimportant, less important. Not a 50-mile difference, and maybe not even a 2-mile difference — but half a mile, or a quarter: Enough to push your office from Lexington Avenue to 49th Street or from Liverpool Street to Old Street; enough to move East Village to Bushwick or from Belsize Park to Wembley Park.
Location alone is not as critical as it once was. But it gets worse. Non-retail landlords are not competing against “online offices” or “online homes”, but they are becoming increasingly dependent on online channels in other ways. It began with online listings: sites like Zillow, Zoopla, and Loopnet aggregated demand for residential and commercial space. But these sites only care about advertising and commissions revenue, they are not promoting any particular space. They threaten the brokers, not the landlords.
But new types of operators are rising to control demand and offer inventory that competes with traditional landlords: Wework has a strong brand that allows it to lease space online and attract blue chip tenants to “creative” spaces that were previously off limits; Breather has an Uber-like app that channels customers to meeting and temporary workspaces in underused buildings across the city; Common and Starcity’s online storytelling and digital leasing procedures draw residents to neighborhoods or buildings they haven’t considered.
Money Talks, but Real Estate can’t Walk
Owning their own channels is not the only reason the above companies are successful. They also offer unique spaces, superior design, and are attuned to specific needs of specific users. But the physical characteristics of their products are also a digital phenomenon: Online marketing provides unique insights into what customers want and, in turn, make it cost-effective to market unique products to narrowly-defined customer segments. Remember the order of events from online retail: the product is developed to fit the marketing channel.
Online channels drive profitability and product choice in a growing number of industries. The smart money already knows this. But while money can flow towards the next big thing, real estate assets remain in place. All of a sudden, tying your value to something that can’t move seems like the least conservative thing to do. By all means, buy land. But don’t stop there.
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