The largest hotel company in the world doesn’t own a single bed. The largest taxi company in the world does not own a fleet of vehicles. And, the largest content provider in the world does not make content. AirBnB, Uber, and YouTube have all become the leaders in their industry by creating platforms for a much wider group of people to utilize their assets in new ways, whether that is their property, their vehicle, or their presence, knowledge, and time. In recent years, a similar business model is emerging for the office real estate sector, promising explosive gains through the use of technology to leverage the sharing economy and unlock value in underutilized assets.
“The fracking conversation is powerful because it’s looking at how to unlock the value in all the underutilized down or dark time in real estate. I like to use the analogy of Zipcar. It’s 17 years old and well ahead of Uber. Zipcar’s model is where you actually own the asset. The company realized that the utilization of cars for single-car owners is between 5% and 10%; it goes up to 85% with Uber. But what if you could double or triple that time?” says MIT’s Dennis Frenchman who coined the term real estate fracking.
“Meeting rooms are a great example. Take a company like LiquidSpace. Before this company came along, we didn’t know what meeting-room utilization was. Now, we know how often a meeting room is being used. But what if we could sell that time to someone else? Like Uber or Airbnb, now I can drive my car around and make money on it or earn money renting out an extra bedroom. Now, you can rent to offset the cost, so the real estate is more valuable.”
Real estate fracking is the use of technology to effectively or physically divide a real estate asset into smaller pieces, then reconfigure it into higher-value combinations, and the concept goes far beyond meeting rooms. Perhaps the most famous, or infamous, example in the office real estate space is flexible workspace rental company WeWork, who surged to a $47 billion valuation before collapsing under the disruptive leadership of, now former, CEO Adam Neumann.
WeWork divides entire buildings into smaller pieces and then reconfigures it into higher-value combinations, their early success proved the demand for their fracked offering and their failures were not a result of the market. Given more conservative growth, and more stable leadership, office rental companies such as Regus, IWG, and CBRE have all created more flexible offerings and seen steady growth despite COVID-19. The pandemic makes the future more uncertain but that just makes flexibility more important to building occupants, tenants, and therefore to real estate companies and innovative startups.
“Early on in this discussion about real estate technology - 48 months ago when we started studying it - we didn’t have as many startups. But now that we’re seeing hundreds of these startups, maybe it’s not revolutionary, but we need to help real estate owners to better manage their properties. Maybe it’s not disruptive, but we need to help them to improve,” says Weikal. “Maybe it will be disruptive to people who want to continue to operate in the same old ways, but a lot of companies are out there on the leading edge with this stuff: Brookfield and Boston Properties, for example, are very forward-thinking; they’re doing trials on this stuff.”
Every year new tools and technologies emerge in the workplace market to improve health and safety, enhance the management of offices, optimize occupancy and space utilization, and improve the overall workplace experience. Our recent report on the Global Digital Workplace market estimates a $3.70 Billion market in 2021, that will rise to $9.21 Billion by 2026, growing at a rate of 20% CAGR. The research found a 30% increase in the number of digital workplace companies in the last two years alone and identified key growth drivers from the pandemic, which have accelerated flexible, digital real estate trends that facilitate fracking models.
“The conversation around this is so rich, fun and interesting. I have to appreciate the founders of these types of companies, who are doing things like selling restaurant time during off hours for meetings or Spacious selling hotel space by the hour or minute for resting and rejuvenating, similar to Breather,” continues Weikal. “CRE brings some consistency. If I go into a Hines building in Boston and there’s co-working, I know it will look and feel the same way as a Hines building in London or Hong Kong. With LiquidSpace, the parameters for a boardroom or meeting room hold a general expectation of the experience: how I book and get in will be consistent. Or a Convene facility will be consistent even if the building owner isn’t the same.”
While a fracked office real estate market would be dominated by these types of platforms, it would be open to all buildings to find ways to monetize their unused assets. When a building begins renting meeting space to external groups it will naturally lead to providing and monetizing the facilities to go with that, such as communications, AV, catering, or a workspace. Workspaces become co-working spaces, which leads to subscriptions and desk or space rental.
To support the growth of these revenue channels, buildings continue to improve their space with better lighting, air quality, and design, and provide new features such as fitness and wellness rooms, event space, and so on. And all this is tied together through our smart building infrastructure.