Innovate Or Die: Why The Commercial Real Estate Industry Needs To Recognize Its Uber

You don’t need to be an expert to realize the office market is changing. With more Millennials in the workforce and the adoption of technologies that allow businesses to be mobile and grow in nontraditional ways, office needs and leasing standards are changing.

Over the past couple of years, we've seen teams transition from long-term leases to subleasing and co-working in droves. Today, we're seeing another shift. Teams of all sizes are turning to a new form of space called office sharing with terms less binding than a common lease and more flexible than a sublease. Why the shift? First, businesses are finally putting their foot down when it comes to making risky bets on long-term leases; and second, many of them are battening the hatches and becoming more conservative in their commitments in fear of a looming tech bubble pop and the widespread death of the "unicorns."

According to Bisnow partner PivotDesk, the industry’s failure to recognize the market’s needs is very reminiscent of the taxi industry pre-Uber, and—in similar fashion—could lead to traditional services provided by developers, brokers and landlords getting overturned by technology that’s more in tune with the evolving market.

PivotDesk founder and CEO David Mandell (above) says, unlike the taxi industry (which refused to match market demands), commercial real estate still has the opportunity to incorporate new ways of solving for clients. Firms and individuals who respond to the changing landscape will themselves become the Uber of the industry—while those that ignore it risk losing touch with the market and their clients.

We took a deep dive on this with PivotDesk (which partners with commercial real estate firms to expand their solution set) to provide guidance on exactly what it will take to avoid getting Ubered.

To learn more about this Bisnow client, click here.

What is the Uber Phenomenon and how can we learn from it?

Before Uber, taxi companies were a protected monopoly with seemingly unlimited demand. When Uber came, the industry was thrown on its head and taxi companies were left scrambling to reclaim the power they once had.

But what’s important to remember is that Uber didn’t change the taxi industry on a fundamental level. What they did, however, was listen to the demand of the market and return a product that spoke to customers' needs. They injected on-demand functionality and a process for holding drivers accountable for the quality of their service. As a result, the market adopted the app in record time, quickly racking up a valuation of over $68B. The market penetration was so immediate and the behavior of the taxi industry’s customers changed so quickly that countless drivers joined Uber’s ranks, receiving the same flexibility in their employment that riders receive from the service.

The fall of the taxi industry tells us about the true power of tech to disrupt even the most entrenched industries. Those that don’t evolve are asking to be overtaken by a disruptor, and in the present moment, no industry is more primed for disruption than commercial real estate.

Simply put, if the industry doesn’t look at the changing market as an opportunity to capitalize and add flexibility to their businesses, they risk both their potential to expand and their existing customer base.

The Death of Unicorns and Popping of Bubbles

If you're seeing businesses take a more conservative approach to leasing office space, it's safe to say that recent coverage on the Burning Unicorns (a term used for startups valued over $1B that have missed targets and are falling as quickly as they rose) has something to do with it. These days, some are so convinced the tech bubble will pop that it's become more of a question of when it will and then calculating the damage. The most optimistic believe that venture capital firms have invested so much into these companies that they're in too deep to exit now. Some believe the bubble will implode, making new rounds difficult to come by. For commercial real estate, that means less demand for premium space. After all, office space is the second-most-expensive investment for a business after overhead.

The Evolution of Business and Tech

The economic shifts aren't the only change the commercial industry should pay attention to. The most obvious change is the evolution of tech and Software as a Service businesses that grant users flexibility and mobility and eliminate the need for a 9-to-5 workday and long-term leases. The intersection of cloud and mobile services means businesses have restructured teams and processes—and their need for office space is evolving as a result.

With all of this in mind, it’s a wonder how the commercial real estate industry has managed to be so glacial in adopting new tech. Brokers, landlords and businesses who even experiment with shared spaces, digital brokerages or virtual reality property tours find themselves on the technical forefront.

But the industry needs to realize consumers are demanding more and more, and tech can help brokers and other commercial real estate professionals to answer any questions clients may have. This is especially important now, as brokers seek to change their image and relationship with clients to become trustworthy partners worth repeated business. And the best way for brokers or professionals to position themselves as thought leaders is to ally with these tech disruptors.

The Rise of “Nontraditional Office Space”

The most prominent of these disruptors for commercial real estate has been the rise of co-working spaces and shared spaces. In a forecast by the Deloitte Center for Financial Services, office sharing not only taps into the collaborative economy and subleasing’s increasing popularity, but it also allows businesses to have the flexibility for dynamically configurable spaces and unique subleases. It’s no surprise, then, that over 40% of 200 major commercial real estate organizations have considered experimenting in the next few years.

Co-working has dominated the conversation, with the New York Times calling co-working spaces the “office utopia designed for Millennials,” as they take everything—from the changing economy to evolving tech to the small businesses boom—and put it in a flexible, attractive package. It’s no wonder, then, that the market’s leading co-working company, WeWork, has experienced a very Uber-like adoption curve, quickly reaching a valuation of more than $16B as it expands globally.

David believes WeWork and co-working’s quick adoption and massive success is a definitive sign that the market’s in dire need of change and flexible solutions, but insists co-working doesn’t provide the right solution for all businesses. Despite all the sound and fury, WeWork has about 10% of the market share, he points out. There’s still an opportunity for the ultimate solution that, he tells Bisnow, could best come with office sharing.

There are many reasons why office sharing is a perfect fit for many businesses, David explains. While shared spaces provide the essential amenities of leasing your own office, the true difference in sharing space is being able to offset the risk associated with taking a traditional lease. Businesses can choose to avoid a lease altogether, opting for a pay-as-you-grow model (much like the SaaS models we referenced earlier) where you pay only for the space you need today—and add on seats at-will as you grow. Or, businesses can secure a lease with room to grow and offset the cost of the idle space by sharing it until they’re ready to use it.

Office sharing companies, such as PivotDesk, not only help match companies to share their space (after all, finding the right culture match is key!) via an online marketplace, but also provide tools that handle deposit collection, payment processing and in-office relationship management to ensure no business has to feel like it is responsible for the tasks that come with being a landlord or a tenant.

As for brokers and landlords, office sharing gives you the option to expand your services. Working with a company like PivotDesk means having an extended team dedicated to placing growing clients into temporary space or moving more established clients into a lease with enough space for them to expand.

Office sharing may be the commercial real estate industry's disruptor. Developers, landlords and brokers who embrace it will find office sharing allows them to evolve their current services to match a changing market. Those who don’t may have to wonder how long the office market will hold up before it goes the way of taxis or telephone booths.