Retail, hospitality, and office are converging to create new competitors for traditional real estate operators.
Earlier this week, WeWork, the world’s highest-valued operator of flexible workspaces, announced that it will no longer serve meat in its offices and corporate events. The company will also no longer reimburse its 6,000 employees for outside meals that include red meat, poultry, and pork.
We will leave it to others to discuss whether this makes WeWork a cynical cost-cutter, a cult, or simply a company that puts its money where its mouth is — or isn’t, in this case. What’s interesting is what this move says about being a landlord in the 21st Century, and what it takes to create value with real estate assets.
Micky Mouse Real Estate
Let’s put animal products on the back burner for a minute and look at a couple of other things that happened this week: Disney removed the scaffolding from the massive new Star Wars-themed section of its World Disney World in Orlando, and Japanese retailer MUJI opened its second hotel in Beijing, and announced plans to open a third one in Tokyo.
MUJI’s core business is selling household goods and stationary; Disney’s original business was making Mickey Mouse cartoons. But what business are they in now? As Richie Siegel points out, both Disney and MUJI are in the business of “immersive branded experiences”. And both are taking advantage of the “transferability of their products and services to other industries”.
In Disney’s case, “transferability” means getting fans of its animated movies to visit theme parks and resorts; in MUJI’s case, it means getting those who appreciate its design aesthetic to stay at its hotels. In both cases, it means using a customer relationship to draw people to a specific physical location: A sandy lot outside Orlando is worth nothing without Disney; A small hotel in Beijing is just another listing on Expedia or Agoda without MUJI.
Disney and MUJI leverage their brands to differentiate real assets. This is par for the course in the hospitality industry. But MUJI and Disney are not hospitality companies. Well, they are now. Suddenly, powerful brands from a variety of industries are in a position to become real estate operators. Meaning: The value of the asset is dependent on the brand and experience offered by the operator.
Office, well done
This provides food for thought for lodging REITs and other owners of hospitality assets. But it doesn’t end there. Office and multifamily operation are also becoming hospitality businesses. Back to Wework’s War on Meat: Have you ever seen an office operator that uses culinary preferences to differentiate itself and signal its values to potential customers?
Wework is not alone. Convene and The Office Group, two of WeWork’s main competitors, explicitly describe themselves as hospitality companies. Breather, another operator of flexible workspaces, emphasizes design and the experience of getting in and out its spaces. Convene even employs “on-site chefs” that are “ready to surprise and delight your team”. All three of them leverage meaningful brands, a recognizable aesthetic, superior service, and even food to differentiate office buildings and attract tenants.
These type of hospitality office operators (HOOPs?) are still relatively small, but they are growing fast, backed by some of the largest real estate investors in the world — including Brookfield Blackstone, Temsaek, and CDPQ.
The experience is the asset
Being an office operator is no longer just about keeping the air cool and the elevators running. It’s about hospitality and, more importantly, it’s about symbolic meaning. When Wework bans meat, it’s not just trying to cut costs; it is telling its customers what its value are, and it is inviting those customers to identify and define themselves through these values.
When was the last time you identified with your landlord’s values? And even if Wework’s ban on meat is just a cynical ploy to cut costs — their brand gives them the power to do so: Can Vornado or LandSec tell their employees and the employees of their tenants what to eat? Do the employees of their tenants even know who the landlord is? Soon they will, and if landlords don’t decide what their brands stand for, the tenants will force their own values on them (through social media outrage, but we’ll keep that for a different article).
Real estate is no longer about working, living, or spending the night. It’s a platform for brands to deliver immersive experiences. The good news is that most brands need real estate in order to offer such experiences. The bad news is that many of them are becoming direct competitors of traditional real estate companies. It turns our that in the 21st Century, the worst way to make money from real estate is to be a real estate company. I’ll leave you to chew on that.
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