As digitalization moves out into the built environment, and as the real estate and urban sector absorbs technology, the following question is not sufficiently asked: what does real estate actually do?
It's a historical gap in economic and business theory that the role of real estate is not better described or understood. And that gap is now dangerous because real estate needs to be fundamentally reimagined at least as fast as the world changes in response to digital changes.
The economic question as to what kind of thing real estate is goes deep. Economic rent was invented to describe value accrued from things that were needed for production and in short supply—but not transformed in production, unlike other inputs. This historically refers to land and property–and it's the first sign that real estate is not like other things in the economic.
Practically, it's not so obvious either. Are buildings products? They're produced from material resources, and sit on the ground like any other product of the economy: so it sure seems like they are. But economics hasn't really given a formal, reliable distinction between what products and services are. And property seems to sit at this boundary.
For a builder and buyer of property, it seems obvious that property is a thing: you make it, you get it, you fix it, you sell it. But users of property are usually in a more complex relationship with property. If you lease or rent property, what you are actually paying for? It's not the same as timeshare.
Instead when you pay for access to property you're buying a stream of spatial services. The physical object is not your priority. The building needs to stand up and keep the elements out, but in practice when we go home or to the office, we are going for personal or work experiences, not to visit the bricks and mortar.
Elsewhere, we can explore more deeply the strange boundary between services vs products, but for now, we can use this stream of services insight as a starting point for our analysis.
The momentum in real estate is already in this direction. Antony Slumbers, a world-leading property analyst, has pioneered a narrative of #spaceasaservice. This means various things, but mainly two
- treat real estate as a service: think of real estate as a flow of services, not a physical object containing space.
- deliver real estate as a service: sell real estate as a service proposition, packaging into the offer features and functions that deliver outcomes, not just physical space.
The baseline service of real estate seems simple enough, then. Residential owners and managers offer living experiences, commercial owners offer work experiences and retail experiences, industrial owners offer the background stuff.
It sounds simple. Slumbers describes the evolution like this: 'From rent collector to service provider'. What does this mean in practical terms, and how do we plan and innovate around it?
To simplify we can say the basic service of providing a functioning building is now being supplemented by additional layers of services, all of which leveraging in various ways the physical space and the functions it supplies.
So we can state with some clarity an updated definition what real estate does: the physical building is an underlying asset supporting layers of services to its users, starting with the basic service of building use for living, working and other functions.
And in turn the question for modern real estate actors gets a bit clearer:
Which additional service layers, above the classic basic service, should real estate developers, owners, managers offer; and how?
This is a new and unfolding domain, and so the question cannot be answered completely or accurately, even if you wanted to. But we can shape a few primary considerations.
Bringing the platform lens in here adds the first clarification. Rather than only considering how they should add new services to a property stock, real estate actors can think more holistically which service layers they can add themselves, and which layers can be added by others.
This is to say: the servicization of real estate is subset of the platformization of real estate. Real estate actors can see add services as the same strategic challenge and opportunity of converting their core assets into a platform opportunity, through a stack platform, pool platform, or networked platform model.
In this way, real estate starts to understand that while the real estate experience is one of many service layers, the real estate business may not necessarily become more complex than managing and monetizing the asset and the relationships around it.
Put more plainly, real estate owners and managers don't have to be come hotels in order to add more service layers: they can choose partners and technical tools that bring them and manage those additional service experiences.
The platform integrators are the category of actors who bring additional platformization value to the asset—and one category within that is service integration. Actors who help real estate choose, manage, monetize, optimize, and swap out service partnerships and experience are service integrators.
What is happening right now is, as real estate is waking up to servicization and platformization, they are also realizing their unique opportunity not to do too much innovation and strategic change themselves.
Just as consumers didn't have to change very much for their data to be valuable to Facebook, and they won't have to change much for that data to still be valuable but be better protected, so real estate doesn't have to do too much to make their assets useful to service providers, on their own or via platforms, to support their users with new services.
So, let's keep the focus on the service opportunity for real estate clear:
- adding new services as layers on top of the physical asset is a natural evolution of the basic service layer that has always been offered
- new layers of services is part of the overall platformization of real estate
- real estate doesn't have to do everything for itself - it can focus on the asset and basic service layer, as always, and introduce new services layers as direct partners or through service integrators.