I recently gave a talk in Sydney (well, it's almost two months ago now…), and the organization (the Australian Green Building Council) asked me to "think out of the box" and to come up with "provocative statements". In other words, they wanted me to change my slide deck. That was easily resolved, using the services of my friends at Mr Prezident (the most amazing Prezi's you've ever seen…). But the "new next" took some more effort. Ultimately, I came up with the following picture:
In the traditional real estate value chain, there has been a drive towards segmentation, with specialization in every layer. The ultimate building owner (on paper) is just that -- detached from his investments. He no longer has a direct portfolio of properties, but invests via external managers, be it listed property companies or private fund managers. Alignment between owner and manager can be achieved through co-investment, but mostly happens through performance-based compensation. But, as we well know, performance fees are not perfect remedies for principal-agent problems. And owners have to resort to focusing on quarterly performance results, which leads to short-terminism among both managers and owners (ultimately, the employees of owners are also paid based on performance relative to peers). The typical fund manager (or property company) acquires and disposes of assets, but leaves property management (including, most of the times, maintenance and capex planning) to external companies. Enter disconnect two. External property managers might be better at achieving economies of scale for systematic tasks, such as cleaning, and they might have a better network to attract tenants. But the fund manager loses direct control of the property, no longer has a good feel for the satisfaction of the tenant and the technical state of the building. And again, the objectives of the external property manager are not necessarily aligned with the objectives of the fund manager, or, the owner. Then, there is the tenant. After all, real estate should be about the tenant. But the tenant is not really the person that occupies the property, it's a "tenant rep," who is usually not directly connected to, let alone in, the C-suite. The tenant rep has to find space that satisfies a number of parameters: location, quality and price. (Service costs are usually not part of this equation.) The ultimate satisfaction of the employee with the space is assumed to be positively related to these parameters. But…maybe there are other factors that make the employee happy -- and ultimately more productive. Light, space, (lack of) noise, vertical integration. Etc.
I think the disintegration of the real estate value chain brings many benefits, as specialization usually does. But it also has many disadvantages and a backlash is on the way. There is a trend towards reintegration of the value chain. Build-to-own. In-house property management. And closer control of the ultimate owner, through club deals and JVs. Most importantly, smart building owners put the pyramid upside down: the employee on top. Or the consumer in the shopping centre. Or the patient in the hospital. Real estate to serve the purpose of: increasing employee productivity, creating a shopping experience, enhancing patient recovery. That requires a better integration of tenant representatives in the average organization. Actually, real estate can play a much more fundamental role for business than is currently realized -- buildings should become more central to the business of the modern corporation, and they can be exploited to execute part of the corporate strategy. (Better buildings may assist in: attracting and retaining human capital, establishing and reaffirming a brand in the marketplace, and decreasing operational costs.) The upside-down pyramid also requires in-house property management, or better alignment between property managers and fund managers. And, fund managers should be compensated on a longer-term basis (not unlike the current discussion on compensation of executives in general corporations). That also requires paying analysts on a longer-term basis. Because the typical focus is a quarter, if not shorter.
There was a great article recently in the NY Times on "new office designs" and the impact on employees. (In New Office Designs, Room to Roam and to Think.) It talks about the modern office, and how employees perceive such offices. Thinking back of Sydney: you can see the move towards activity-based working happening in real time. Putting tenant satisfaction first will have many benefits. It will also result in more employees on the same floor plate. Something that should be in the equation of a tenant rep as well.