Five Drivers of Change in the Real Estate Business
Why Is It Changing and What Can We Expect?
November 27, 2017, Mikko Östring, Erkki Aalto, Tuomo Kuosa
Arguably the most significant driver of change in real estate is the tidal wave of urbanisation. The speed and significance of the change are clearly visible in the fact that around 200,000 people move to urban areas every single day. In other words, every six weeks the cities of the world see an increase in population that equals the number of citizens in New York City, and they all need housing and appropriate services. This new wave of urbanisation is linked with many major changes, such as digitalisation, development of science and technology, changes in values and customer needs, sharing economy, experience economy, and innovation economy. Due to this change, cities and the real estate business face a variety of new opportunities and challenges that need to be acted upon quickly.
So urbanisation is the biggest change driver in the real estate business. But what are the other 4?
The following presents four sets of changes affecting the real estate business, which have been identified and chosen from a larger set of changes in three workshops organised by RAKLI, The Finnish Association of Building Owners and Construction Clients. The workshop participants included a significant number of important professionals from the real estate and construction businesses from a variety of organisations. The workshops, background analyses, and the prioritisation process made good use of the foresight tool developed by Futures Platform.
(If you want to learn more about the Futures Platform tool, you can read more here.)
Digitalisation and Development of Science and Technology
The real estate business and buildings are turning digital to an increasing degree. Information and data that have been so far kept in silos are becoming more and more usable as information systems and linked to one another. Automation and other types digital technology are continuously enhancing services and providing improved cost efficiency.
For example, in building information models (BIM), maintenance and upkeep, specialists are now able to guide on-site personnel from afar and thus assist in tests, repairs, or other operations. The Internet of things (IoT) is helping us forward towards a smart and interactive built environment. Later on, IoT will start to combine buildings, people, processes, information, and equipment, meaning that we face a transformation into the Internet of everything (IoE).
Then we have new technologies, such as AR/VR, speech recognition, robotisation, and artificial intelligence that enable new services and continuous improvements in UX. Measuring and managing user experience are paramount in the industry as competition tightens. And at the same time, information and data regarding the activities undertaken in a specific area create a great opportunity to create significant amounts of new value.
Evolution of Customer Needs and Demand
As the pace of changes in organisations and their business accelerates, the need for flexibility in the use of spaces and buildings becomes ever more important. The length of commitments is expected to shorten in employment contracts, leases, and service agreements. User and customer expectations are constantly becoming more challenging as life and the everyday turn digital. More and more of work and customer activity is becoming unrestricted by time or location, which should translate into improved utilisation rates and overbookings. These have a direct impact on the demand for physical spaces and their qualities.
As technology, work methods, and organisational activities change, and as the competition to attract the best competences tightens, it is necessary to continuously develop work environments and to improve the management and working culture. Ceaseless evolution, agile organisations, and a culture of experimentation become increasingly important tools for fulfilling rapidly changing customer needs.
Servicification, New Concepts and Business Opportunities
The growing importance of user experience and rapidly changing user needs, accompanied by digitalisation and new technologies, is turning spaces and their use into services. The sharing economy, for instance, is indicative of this, and one of the growing trends countering the underuse of real estate assets.
The combination of these two changes, both increasing demands in user experience and the advent of the sharing economy, means that the real estate business has the possibility to develop at an accelerating pace into a mix of ownership and rental that finds flexible solutions in the platform economy. One company taking advantage of this, for example, is Liquidspace. These changes bring forth new, flexible service-based business models that redefine who pays, what is paid for, and who finances them. The operations and roles of stakeholders change.
New Competition and New Actors
“Waste” in existing real estate and operational models, combined with the opportunities brought along by new technologies, mean that there is great potential for the emergence of new actors and services. The key words here are platform- and sharing-economy, IoT, VR/AR, and AI, which are being increasingly explored not only by bigger players but also by a range of start-ups trying to disrupt the space.
Soon, the real estate field will see an influx of new actors, competences, and resources. One example of this change is the well-known Slush event, originated in Finland, which made a side event dedicated on bringing together real estate and construction industry leaders, start-ups, and investors. This side event called ReCoTech has already been able to attract significant funding for several companies.
Therefore, the traditional value chains of the real estate business are being broken down. The new value creation will originate in synergies with other fields and as part of wider business ecosystems. It is not only possible to build scalable businesses in narrow market segments, such as Airbnb, which synchronised lease markets in and across multiple nations, but also in many other segments.
It is very likely that future built environments will contain such a massive global business potential that it will start to attract even more multi-national tech giants, beyond Alphabet and Amazon.
This article was written by Mikko Östring, Erkki Aalto and Tuomo Kuosa. Mikko Östring is the Director of Commercial and Public Properties of RAKLI, Erkki Aalto is the Development Director of RAKLI, and Dr. Tuomo Kuosa is Content Director at Futures Platform.