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Exploring the black box of real estate

  • Harvard University Explores Disruptive Innovation in Real Estate

    By amlocke
    Jan 8, '15 5:44 PM EST

    At the fringe of innovation, the architect transforms vague market demands into tangible, meaningful interventions. But of these interventions, few take shape into critical market shifts. Lately, however, there has been an increase in the number of trends brooding the status quo. A recent Harvard University conference gathered top industry leaders to talk about “Disruptive Innovation” and how it is changing the face of the real estate industry. I had a chance to attend and write an article for the GSD Real Estate program. Here it is in its entirety below.

    An idea largely reserved for more probationary enterprises, disruptive innovation and real estate may initially sound paradoxical. However, in an industry that values stability and rewards risk mitigation, the risk inherent in dissenting against the market norm ultimately inhibit innovation. At the second annual Harvard Real Estate Conference Disruptive Innovation in Real Estate, organized by the MDes Real Estate and the Built Environment, a panel of five distinguished experts examined and evaluated trends of disruptive innovation in the realms of real estate finance, building typologies, and development.

    The panel was moderated by Professor Bing Wang, Director of MDes Real Estate, and Professor Ray Torto, the former Global Chief Economist for CBRE. Panelists included Edward Siskind, founder and CEO of Cale Street Partners and former Global Head of Real Estate at Goldman Sachs, covering a backdrop of the preceding 30 years of innovation in the industry. Sheila S. Botting, Partner at Deloitte, provided a pervasive assessment of the future of office space. Matthew Lynch, Managing Director, Head of Global Real Estate—the US investment management business of UBS—brought us “back to the future” with internet retailing and Millennial housing. Donald J. Chiofaro, founder of The Chiofaro Company, contributed an exclusive introspection on the risk of innovation in development. Finally, Sven Andersen, Head of Real Estate M&A and Co-head of Real Estate at KPMG in Germany, presented an engaging audit of crowd funding.

    Edward Siskind began with an archival lecture of how disruption has shaped the US and UK financial and real estate investment industries for the past 30 years. “Investment structures have evolved” he said, “each time attempting to address the last crisis.” Due to the events of the 1980s, investors were forced to develop the private equity model because of a misalignment of interest from fund managers who were paid fixed fees regardless of performance. Siskind further explained the development of the commercial mortgage-backed security (CMBS) post-1990 for diversification and distribution needs. He ended with two major developing trends. First, a desire for diversification must be understood in the context of liquidity, and second, the success of private equity has led to enormous base fees, potentially driving investor’s decision making.

    Sheila Botting presented next, exclaiming that the “[Digital Revolution] is completely changing the way the business works! We don’t need the physical spaces that we have.” As global organizations change, people can behave more like consultants as corporate structures flatten out. “The cube isn’t working!” Botting added, an internal study by Deloitte found that according to the Bums and Seats analysis, only 30-35% of office space was actually occupied during the course of the day. The solution is to decrease private office space and document storage while increasing collaborative and social spaces. Notable special desires include encouraging interactions, driving productivity, and fostering connection to the environment, mobility, agility, and sustainability. When asked about cost increases from technology and versatility, Botting responded with the term “cost avoidance,” referring to the tenants flattening out the cost structure to reduce it over time.

    Matthew Lynch began with a quote from Mark Andreessen: “Software eats retail.” Largely in agreement, Lynch continued by pointing out the e-commerce growth rate from 1999 to 2012 was 24.1% annually. However, even with this rapid growth, today only 7% of total retail sales are online. What is next? Referencing Amazon’s new physical store, Lynch explained omni-channel retail is the new trend as the synergy between brick and mortar and e-commerce becomes more imperative.

    On the topic of micro units, Lynch explained the Millennials’ desire for urban living and the demand for affordable housing alternatives. The reaction was the micro apartment, a blend of design in an efficient and integrated space averaging 300 sf. However, Lynch goes on to say that we shouldn’t “confuse Millennials’ patterns of necessity for preferences. It’s very place dependent… It’s not clear that it will work everywhere.”

    In 1980, Don Chiofaro was an iconoclast when he developed his first project, International Place at the edge of the Boston Financial District. The 1.8 million square foot, class A office building replaced 15 separate sites along Boston’s famed central artery. As competitors claimed the site incurred unsolicited amounts of brain damage, Don was the contrarian. The project was a great success and has become an icon in the Boston skyline.

    Chiofaro has continued the creative development to which Boston is known in a market hot for the Innovation District. PayPal was the game changer for Chiofaro, as accounting and legal tenants in the financial district shrank by almost half from 2008 to 2014. By repositioning and redesigning tenant spaces to be more conducive to tech company demands, Chiofaro was able to build a diverse tenant base in Boston’s Financial District. Now, International Place is home to Trip Advisor, Brightcove, and Start Tank, a startup incubator of 100 companies and sponsored by Paypal. Don is creating a legacy of disruptive innovation in Boston.

    Sven Andersen astutely pointed out that crowdsourcing is not a novel idea – in fact, this is how the base of the Statue of Liberty was financed. Its recent surge in popularity can be attributed to the internet. With companies like Realty Mogul able to raise $18 million comprised of individual investments as small as $500, crowdsourcing does have its benefits. It allows the community to invest in itself, offers diversity, utilizes local knowledge, is time-efficient, and greatly reduces fees from middlemen. Andersen points out that it is largely unregulated at the moment, both in the United States and in Europe, but regulation will likely increase in the future. Moderator Ray Torto asked, “How do I get my money out?” That’s the question - a secondary market has been attempted, but it’s not really working well just yet.

    From capital markets to product types, it is clear that disruptive innovation permeates the sectors of real estate. But as Matthew Lynch suggested, the ratio between fads and true change is about 10 to 1. As cycles bring crisis, innovation drives recovery, but this trend of innovation perseveres. Siskind’s review clearly reflected this notion while Chiofaro’s “35 years of disruptive innovation” a testament to its persistence. Bing Wang closed noting that the real estate industry is comprised of a vast number of elements including investment, development, design, product delivery, marketing, urban economics etc. to which at times lead to difficulty in fostering disruptive innovation. She then left the audience with two questions: How, in the industry of real estate, can we foster this notion of disruptive innovation, and how can we teach innovation and foster creativity in an academic setting?

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Greener Grass documents the lessons and experiences learned as a former architecture student studying real estate at the Harvard Graduate School of Design. It seeks to share real-time insight into the industry, forging a better understanding for architects about what makes the project tick.

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