Custom vs Off the Shelf

In reference to my last article about value, I came across this article in the WSJ about how fitness buffs are automating their gym experience rather than accepting the workout regimen they have always been offered.

Lawyers are seeing it from LegalZoom, stock brokers are seeing it from any number of online trading platforms, and accounts are seeing it from Quickbooks, there are low cost off-the-shelf solutions available for people that don’t require customization.

But complex problems demand skilled practitioners that know how to customize solutions for demanding clients. These folks can demand higher fees because no off-the-shelf solution is available. In the case of the gym, they need to find ways of creating a bespoke experience that people will pay for.

In the case of real estate, I predict that smaller deals will eventually become automated as complicated transactions demand high intensity solutions. And the fee structures will follow this divide.

Price is what you pay, value is what you get

One of the things I’ve been struggling with in my business lately is the fact that to our tenant clients, brokers are seen as “free.” Yes, we earn a fee when the deal closes, and yes, those fees are considered part of the transaction expenses that are baked into the lease rate, but our clients never actually write us a check. This system is entrenched in the market and everybody understands how it works.

The system has worked as expected up until recently because tenants were always acting as brokers, helping their tenant client acquire an asset in an opaque market. But as the market has become more transparent, brokers evolved from deal makers to consultants. The level of expertise now has to extend beyond market knowledge to touch everything from accounting standards to workplace innovations, to construction costs.

Brokers now have to guide the process and deploy their intellectual capital on behalf of their tenant clients while operating with an at-risk compensation model. Tenants want all of these services, but they are unwilling to pay for them. This perpetuates bad behavior within the brokerage industry, with deals getting poached, corners getting cut, and deals getting slammed home rather than executed thoughtfully.

There was an academic paper written the same year I was born titled “On the Folly of Rewarding A While Hoping for B” that takes 14 pages to lay out the case for why the structure of the reward system matters.

I predict that over the long term, tenants are going to recognize that they are rewarding their brokers incorrectly and shift to a compensation model that aligns with their needs. It will allow Tenants access to even more resources to make their facilities more efficient and productive.

P.S. Its worth thinking about every relationship in your life, whether it’s your children, your subordinates, vendors, or clients. Is your reward system aligned with your desired objective?

Why I care more about the inside than the outside

The biggest piece of feedback that we are getting from clients is the importance of recruiting and retention. As the knowledge economy continues to grow, companies are trying all kinds of strategies to ensure that they have the best people on the payroll. Everything from compensation packages to work environment is being considered and experiments abound. I have a friend that just rolled out unlimited vacation as a recruiting tool at his company and a client that eliminated perimeter offices to create a more egalitarian environment.

It’s critical to consider the intersection between the physical environment and culture whether you are in an trophy property or class C building. The inside of the space has infinitely more impact on the employee’s work experience than whether the building has a cutting edge design or is a converted warehouse. Employees see the building as they enter in the morning and then don’t give it another thought. But their work environment impacts every moment of their day.

Some questions to consider:

* How does your space enhance the company culture?
* Who are employees you trying to attract?
* What tone does senior management want to set?
* What features allow the employees to create their own work experience?
* Where do they work and live now?
* Where will they live in the future?
* When do they want to work? Traditional 9-5 or non-traditional hours?
* Why do they all need to be in the office?

It’s easy to start with the product (office buildings) and then shoe-horn in a strategy to fit the final property. Yes, this is all “soft stuff” and difficult to quantify. But starting with the tough questions will keep the process on task and minimize regrets that can’t be fixed until the lease expires.

Planning for the future

We had the opportunity to introduce Colliers’ Workplace Innovation folks to one of our clients the other day. The discussion included a few exceptional insights that will inform anybody who is thinking about the future of work. We talked about about how real estate decisions had been made historically and how the dynamics of the population are dictating a change in the status quo. There were a number of data points that are worth exploring including age demographics, workplace utilization, automation and collaboration.

By 2018, 50% of the workforce is going to be made up of millennials. These folks have been unfairly labeled as whiny and entitled by older generations. As a group, they want to engage in meaningful and fulfilling work. They aren’t interesting in paying their dues. What’s interesting is that the market suggests that they don’t have to. The demand for skilled knowledge workers will continue and there aren’t enough millennials to replace all of the retiring baby boomers.

Automation will absorb some of these jobs and we should anticipate the need to ensure that younger workers are well trained as fewer menial jobs will be available in the future. Anything that requires assembly or delivery will probably be automated as manufacturing, shipping, and logistics all become fully robotic in the next fifteen years.

People still need to collaborate and there is a need for interaction in the workplace. As knowledge work evolves it will require fungible teams that can be brought together quickly and dispersed just as rapidly. Facilities will need to offer this flexibility in work environments, technology, and accessibility. Companies have become more reliant on contract employees and need to offer flexibility as staffing needs change.

Every one of these items impacts real estate. Companies must look at their facilities as recruiting and retention tools. They have to offer environments that make work fulfilling  engaging, and rewarding while also controlling costs and planning for a rapidly evolving future.

Emotions, risk, and executing a deal

We all like to pretend that we’re cold, rational business people that make decisions based on what’s best for the organization and it’s shareholders. But after almost twenty years of brokering real estate deals, I can count on one hand the number of actual decisions I’ve seen that were completely devoid of emotion.

Most of the decisions I see have the veneer of rationality, but they are usually driven in part by fear or desire. Some people are afraid of over-extending their obligations while others are excited by the possibilities in the new. Some are afraid that stakeholders won’t approve while others are looking for shorter commutes. People don’t like to be led around by their emotions and will resist them when they have an honest moment with themselves. This can wreak havoc on a deal as principals ask to change terms mid-stream or completely scrap a negotiated deal in favor of another option.

Part of my job is challenging these desires to ensure that decisions aren’t being made at the expense of the organization. And part of my job is to address these emotional reactions and help my clients get what they actually want. It’s okay to make decisions based on some level of emotional response, but its better to be honest with yourself up front. If you’re the CEO and want to move the company closer to your home, say so. If you’re nervous about revenue certainty over the next five years and want to do a short-term deal, say so. Don’t lie to yourself, your employees, or your partners. It leaves everyone frustrated and erodes your credibility.

Confirmation bias

(n) the tendency to search for, interpret, favor, and recall information in a way that confirms one’s preexisting beliefs or hypotheses, while giving disproportionately less consideration to alternative possibilities.”

Confirmation bias is rampant across the corporate real estate industry. Tenants believe that the conditions in their building reflect the broader market. Landlords believe their buildings are better than anything else available in the market. Lenders believe they are offering the best terms. This is all exacerbated by the law of small numbers.

As a broker, part of our job is to see through these biases and help the principals agree on terms. This requires patience, data, and empathy. If you can understand what’s motivating the principals, you can help them see through their bias and understand what it will take to get a deal done.