Video interview from CREtech NY 2022: Why now?
Here is a short (~7min) video interview I gave at CREtech NY 2022* covering two “Why now?” questions:
- What are the key factors that contribute to today’s unique investment landscape and why now is a golden opportunity corporate venture
- How startups can answer “Why now?”and why that question is crucial for VC and angel investors.
* this time the delay in posting is not my fault. They just published the clip on Jan 3
Reports of the Demise of the Office are Greatly Exaggerated
Note: This article was previously published in Propmodo on January 18, 2021.
Many (self-proclaimed) visionaries have been spending the year shouting, “The office is dead!” Meanwhile, old-school commercial real estate players, the ones that own most of the building stock, see the pandemic as a painful, protracted episode that will ultimately pass. These owners have resigned to minimizing the damage while they weather the storm and wait for the world to return to normal.
They’re both wrong.
Stripping away sensationalism and wishful thinking, here is what we know. Face to face is the most robust communication. We can try to replicate it with video calls and maybe even VR one day but it will never create the same connection that we get with talking to someone else in person. True, meaningful collaboration needs high bandwidth, being in the same room with someone is the best way to avoid distractions. Human beings have evolved to prefer group interactions and most big projects need multiple people working together in order to be completed well.
At the same time, on the real estate side work schedules will shift to a different mix of in-office and remote work. If and when hybrid work (part in-office, part work from home) and desk sharing arrangements (“hotdesking”) become more popular, real estate needs will change.
The office state of mind
Would you rather have a bad commute or pay high rent? Who wouldn’t want to choose “neither?” Ever since the invention of the telephone, futurists have predicted the rise of remote work and the demise of the city. They made similar predictions when faxes came along and again with email. Somehow, this prediction still hasn’t come true. With widespread adoption of video conferencing, those prophets are at it again.
Anyone who has been on a four plus person Zoom conference is painfully aware of the limitations of video conferencing. Focusing on multiple participants, confined to small windows on a laptop screen, strains the eyes, and muddles the conversation. You miss the non-verbal cues, the body language. Participants zone out, get distracted, turn off their cameras. In short, they aren’t as present as when they are physically present.
One-on-one video calls are less taxing and do convey more nuance than phone calls. For most routine communication, video isn’t much better than audio alone but for newer relationships and/or complex discussions, they are an improvement, albeit still not as good as meeting in person.
To borrow a term from computing, the problem with remote working arrangements is bandwidth. Bandwidth is the maximum rate of data transfer across a given path. You get more information across in a 100 word phone call than in a 100 word email and even more via videoconference. But you get the most data in the least time face to face. It’s simply the highest bandwidth form of communication.
Some tasks, like working on a spreadsheet (or writing this article) don’t require that much bandwidth. For the occasional input from a colleague, a quick Slack or call is fine.
Other tasks like new product development involve cross functional teams and rapid iteration where the high bandwidth of face to face makes a big difference. To be clear, it’s not that you cannot do high bandwidth tasks remotely, they’re just harder and slower that way.
People in jobs with a lot of low bandwidth work can work remotely for a long time without major losses in efficiency but there are limits even there, especially when it comes to establishing new relationships like hiring senior people or investing in a startup or infusing new hires with your company culture. These are tough even under normal conditions, try doing them entirely remotely. Doable, but again, it takes longer to get to that same level of comfort and camaraderie.
Every job from Starbucks barista to investment banker consists of high and low bandwidth tasks. The “optimal” mix of remote vs in person varies from role to role but it is almost never anywhere near 100 percent remote.
Historically, employers have underestimated how much work could be efficiently done remotely. In part this was a trust issue. Also, in the past organizations lacked collaboration software, data security capabilities, and proper training. For many, it simply wasn’t necessary to build these out.
COVID changed that. It suddenly became critical to remove those roadblocks in order to survive. Having built those capabilities (and trust!), employers won’t just turn them off later. If an employee asks to work remotely a few days a week, an employer is now likely to consider that request against a more accurate assessment of what elements of that role can efficiently be done remotely.
But while employers are likely to be more flexible about work arrangements, the (vast?) majority of work will still get done in the office.
Another point that the prophets of remote work missed is that most people find extended remote work isolating and disheartening. Some anthropologists, like Yuval Noah Harari wrote in Sapiens, argue that it is precisely our ability to collaborate that made homo sapiens successful. And the more that collaboration made us successful, the more successful effective collaborators were at passing on their genes and behaviors. Quite simply, we evolved to be happier when working in a group.
That said, working remotely isn’t synonymous with working from home. To satisfy this social need and as an added convenience, an employer could set up a string of satellite offices where their employees can be comfortable and professional. WeWork reintroduced no-commitment daily and hourly desk rentals and several startups are already pitching large employers on purchasing blocks of desk-days for employees to use on demand. As satellite offices are likely in lower rent locations, the cost savings may be meaningful.
How employers adapt
Still, if on average everyone worked remotely one day a week, doesn’t that equate to a 20 percent reduction in central space needed? Wouldn’t that be a huge win? Well, you can’t cut 20 percent of a desk. You need to remove 1 desk in 5… and that means sharing desks.
We’ve tried hot desking before and it wasn’t fun. Even as a consultant in the 90s, at client-site four days a week, we all came back to our own desks on Fridays. Why? For one thing, it was no use coming in to find that the colleague we needed to meet chose that day to work remotely. Also, we had files. Actual, paper files.
Fortunately, calendaring and coordination software have come a long way so that issue is solvable. Plus, paper is passe. In my last office, I had WeWork take the file cabinet out. I needed the legroom more.
So will hot desking succeed this time? Only time will tell. And with commercial lease terms of 3, 5, 7, or more years, even with perfect hot desking it would be a while before tenants could realize savings.
Manhattan isn’t cheap but it is a good compromise location if you have employees commuting from surrounding boroughs and suburbs. Geography doesn’t change when employees work remotely. You have to get very deep into remote work before a prospective employee thinks, “It’s a really long commute but it is only one day a week…”
With years left on most leases, employers have time to implement flexible work policies, set up satellite locations, and get hot desking software in place before making renewal decisions. They can afford to wait and see how occupancy patterns change, gradually taking desks out of “inventory,” to find the new equilibria before deciding if they can shed square footage and/or if they want to move to a different location.
The impact of COVID is playing out on top of other long term trends. Businesses have been moving lower complexity or value added functions out of the traditional high rent urban headquarters to lower rent offices in the suburbs or from expensive first tier cities to more moderately priced second tier cities for decades. While there may be some interaction on the margins (e.g., satellite offices in suburban coworking space may substitute somewhat for the backoffices in the suburbs), in general these trends should continue to play out in parallel with the repercussions of the pandemic.
How offices adapt
Here is the most likely scenario I see playing out.
Employers give employees latitude about how quickly they return to the office. Smart landlords and property managers will want to speed the return to work by helping employers reassure employees by clearly communicating the processes they have put in place to prevent and contain COVID outbreaks and by being as transparent as possible (within the constraints of privacy rights) about exposures. Until we have a vaccine, lower occupancy equates to higher comfort, so to the extent that the BIS can provide data around overall building and floor occupancy rates, elevator usage patterns, etc., that data should be exposed to the tenants. The landlord may even want to make rapid testing available to all employees as a service to their tenants. Landlords who have vacant space in their buildings, like coworking tenants who have defaulted on their rent obligations, may want to repurpose that as flexible overflow space that any tenant can use at no charge if any of their returning employees are uncomfortable with the occupancy rate they encounter on any given day that they are in the office.
These informal understandings during the return to work phase gradually morph into guidelines baked into job descriptions by HR. Human Resources and Corporate Real Estate departments coordinate to set up satellite locations in co-working spaces and build processes and software (and sensors?) to support this network. If a landlord owns office space outside the urban core, this is an opportunity to bundle HQ and satellite office leases and capture this new demand. If not, the landlord can contract with outlying coworking spaces and offer packages of “coworking credits” as retention sweeteners. It might even make sense for the landlord to source the hot desking software and offer it to tenants for free so that it seamlessly connects with the flexible overflow space that they have created—and to give the landlord visibility into usage trends in advance of lease renewals.
Over months or years, excess desk capacity becomes apparent to all and hot desking is gradually rolled out. Excess space is sublet (if possible) or reconfigured as conference rooms or common areas. As leases approach renewal, central office space needs will likely be moderately smaller. Uptake in remote work will likely happen roughly evenly across the employee pool so the geographic center of gravity won’t shift much. All this means that central offices will shrink but won’t shift much. This excess capacity will hurt owners in general but smart landlords will want to get ahead of this trend and try to find tenants for the extra space in advance of lease expiration. With a new tenant in hand for excess space, landlords might even be able to increase revenue and/or lock in the existing tenants for longer terms by letting them shed the excess space in exchange for exit fees and/or early lease renewals.
In short, the office isn’t going anywhere. Even though it doesn’t make for snappy headlines, the office of tomorrow looks a lot like yesterday’s, just a little smaller and a little more diffuse. Nimble and adaptive real estate players will thrive on the new opportunities but the dinosaurs will suffer. But, then again, this has always been the case. The wheel continues to turn and those not prepared for it will always inevitably get steamrolled by it.
Blueprint 2021 Predictions: The Office is Not Dead
Note: This post was part of a collection of predictions made by proptech investors and entrepreneurs compiled by Blueprint in late 2020.
For any job, some tasks (e.g., financial modeling) require relatively little interaction with colleagues; others (e.g., launching new products) require a lot of communication across many functions.
For these latter tasks, face-to-face is still the “highest bandwidth” communication form. Anyone on a multi-person Zoom conference knows how hard it is to focus and how you lose nuance and non-verbal cues, especially as participants zone out, turn off cameras, et cetera. One-on-one zoom calls are better but try hiring someone for a senior position or getting comfortable with a startup investment. It’s doable, but harder and slower.
While in-person work isn’t going away, employers now have the comfort and capability (e.g. collaboration software, data security, training) to be more flexible — so incrementally more work will be remote.
But most people find extended remote work unsatisfying. Millions of years of evolution have
honed humanity’s collaboration skills. We evolved to work in groups. Fortunately, working remotely isn’t synonymous with working from home. Employers may set up satellite offices for employees to work remotely without the sense of isolation.
The most likely scenario I see playing out is:
- Employers give employees latitude about when they return to the office.
- Informal understandings gradually morph into formal HR guidelines.
- Corporate Real Estate departments set up satellite locations in coworking spaces and build processes to support this network.
- Over months or years, excess capacity becomes apparent and hot desking is rolled out. Excess space is sublet or reconfigured.
- As leases approach renewal, central office space needs will likely be moderately smaller.
- Remote work is roughly evenly distributed across the employee pool so the geographic center of gravity doesn’t shift much.
- Central offices shrink somewhat but don’t shift much.
Want to see all the predictions? Click here
How Family Offices & Real Estate Firms Can Source Great Proptech Opportunities
Note: This article first appeared the Fall 2020 edition of Family Office Real Estate Magazine.
Publisher’s Insight: For years now, I have been a big supporter of property technology or “proptech.” It is an area that will change and disrupt the industry, mainly because the industry is so fragmented and because it is one of the sectors that typically lag other sectors due to the nature of the business. This article is insightful and helpful in identifying some of these opportunities, primarily because this is the future of real estate.
Many family offices that invest in real estate property startups (“proptech”) are real estate operators with reasons for investing from strategic insights to benefit their assets. For the family office that is heavily invested in real estate, the case for investing in proptech startups or Venture Capital funds is doubly strong.
But it is much easier said than done. This scenario is quite typical:
- A family office with real estate roots decides to find great startups to invest in or partner with.
- Someone, usually from the younger generation of the family, with a fair amount of real estate knowledge, but virtually no startup experience is tapped to lead the charge.
- Once the word gets out of the interest in investing in proptech companies, they are bombarded with startup and fund pitches, not to mention a host of investment advisors.
- Many of these investments are not even proptech, but enough are that he or she spends tons of time wading through pitch decks.
- A few of these startups look pretty good, so the family office decides to invest and/or set up pilot projects with the operating company.
- These fail miserably.
- The family office decides that engaging with startups is a waste of time.
There is, however, a better way to go about this.
HOW TO IDENTIFY GREAT STARTUPS TO PARTNER WITH AND/OR INVEST IN
As the Cheshire Cat told Alice, “If you don’t know where you are going, any road can take you there.”
If the goal is to partner with a proptech startup to get a leg up competitively or even if the operating company vets the startup’s solution, you need to be looking at startups at the right level of maturity. This means looking for startups raising Seed ($1M-$2M) or, to be safer, Series A ($4M- $8M+) rounds.** Earlier stage startups are still cocktail napkins and science projects; the later stage isn’t cutting edge. The founders are also less experienced, and the product is still a bit raw, so while it’s tempting to want to get in earlier (and you can write smaller checks and still be a player), you probably want to start with the slightly more mature guys. This filter, by itself, will weed out many startups and save tons of time.
* * Important note: you would not be investing this amount in the startups. The lead investor will generally fund half or more of the total investment round. A family office participating in the round would likely invest 10-25% of the whole round. An investment of this size would equal roughly $100K-$500K+, depending on the round’s size.
MAKE SURE YOU PICK THE RIGHT PARTNER
In-depth domain knowledge isn’t enough. You wouldn’t let someone with no development experience pick real estate assets to invest in, so why would you let someone with no startup investment experience pick startups? You need to pair up the industry experience with the VC skills. Fortunately, it’s possible to find people with 5+ years of venture experience and at least some proptech investment experience. It is those investors who will ultimately want to raise their venture funds. If approached with this kind of opportunity, they will look to invest in 10-20 startups over the next year or two with the expectation that, if all goes well, you would jointly look to bring in outside money to turn this into a formal VC fund. To give you a sense of what this translates into financially, assume that you are focusing on (relatively) more mature startups raising Series A rounds (average $5M) where you are committing to 10% of the round (average $500K check size), so for 10-20 investments, this comes to a $5M-$10M commitment.
As an alternative, some family offices invest in a proptech VC fund to get early access to a range of portfolio companies. Depending on the size of the fund. It will generally want a $1M-$5M investment (technically, a “commitment”) to be called over 4-6 years. With a smaller investment, an investor would not necessarily have access to as many proptech startups. The exception would be if an investment were made into multiple funds.) A downside would be you would most likely not receive the same insights into the rapidly evolving real estate world you would otherwise get from investing directly.
Often you need someone with more than just a proptech VC experience. Many investors with real estate operating companies use the business line to help assess how well a startup’s product or service fits the market; in some cases, their entire purpose of investing in proptech startups is to find innovation for their own real estate business. If piloting with the parent company is vital to your strategy, then having your business units work with the startup for some time (viz., a “pilot” or trial project) is critical. It would help if you had someone who can work internal politics. You can’t pilot with startups if you don’t know who in the line is genuinely interested in innovation instead of just paying lip service to it: you need someone who can work internal politics. This is not part of the typical VC experience, so you have to look at the candidates’ backgrounds for other indications. Prior experience at large companies (including consulting), business development work, a stint at an accelerator, etc. are all some clues that a candidate might have the right political antenna.
THE TRUTH ABOUT INVESTMENT ADVISORS
Having third parties bring you deals in exchange for a commission is entirely normal in the real estate world. This could translate into a kiss of death in the venture world; the best startups are never represented by an investment advisor.
VCs are the most networked people on the face of the earth. VC professionals present at panels or judge pitch events all the time. They meet dozens of entrepreneurs every week and know – and have often co-invested with – virtually every other VC in the same space. If a founder can’t network into a warm introduction to a VC, how will he find customers? Plus, the very fact that the founder thinks he can wave his hand and have someone else take on something this crucial to his business for him is a huge red flag. Those startups are invariably hairy, old, over-shopped deals that every halfway serious investor has already turned down.
DON’T GO TOO DEEP INTO TOO MANY STARTUPS
When you get a startup’s pitch deck, the temptation is to read it all, think about the business as a whole, and come to a holistic, well-reasoned thesis. That kind of deep-dive takes much time, and there are many startups to review. The startup needs to earn that much of your time. Your first pass review should be much quicker, just a few minutes, to filter out startups that can’t make the cut. It takes time, domain expertise, and much deal flow to build the kind of pattern recognition that lets you immediately filter out the proptech startups that are too early or too fatally flawed to be worth the extra time.
SETTING UP SUCCESSFUL PILOTS
There’s a saying in business: You get what you measure.
Do you measure the number of startup pilots a division undertakes? Is this a factor in whether a manager gets promoted? If you do track pilots, how do you track them?
One of the more subtle mistakes companies makes a focus on success. In most cases, a failed project is a black mark that can cost a manager their bonus and promotions. If a project isn’t performing, the manager will often throw more resources at it until they can claim some victory, delaying resolution, and wasting time and money.
Instead, the focus needs to be on learning quickly. Pilots should explicitly be for 3-6 months, and the questions should telegraph that even negative results are a win, as long as they get there quickly, and the results are actionable. To make this a bit more concrete, here are a few examples:
THE RIGHT QUESTIONS TO ASK:
- “It’s been three months; what have we learned so far? What actions should we take?”
- “Have we learned enough, or do we need another three months?” What specifically would we learn if we extended?”
- “What would teach us more and generate more actionable results: extending this pilot or moving on to the next one?”
THE ANSWERS YOU WANT TO HEAR
- “We’ve tried syndicating XYZ deal on a real estate blockchain exchange but didn’t get any qualified investors.” (Close this pilot and try something new.)
- “We proved that we could charge an $$$ per month premium for smart apartments, but the product itself was buggy.” (Is it fixable, or should we ditch this startup and pilot with a competitor?)
- “Our tenants love the amenity portal, and the software seamlessly coordinates access for the dog walkers, fitness pros, cleaners, etc. with the front desk. Plus, the founders are a pleasure to work with.” (Stop the pilot and roll out more broadly.)
For the family office with significant real estate assets, investing in proptech startups is not just a financial opportunity; it is also a strategic opportunity in many cases. But it is much easier said than done, and how you do it and whom you pick to do it for you to make a huge difference.