Smart Buildings

Market Fragmentation & the “Uber-ization” of Facilities Management – Charles Reed Anderson

The world of proptech, smart buildings, and the Internet of Things (IoT) is a dynamic place as these overlapping technologies find their feet in this 4th industrial revolution. It pays to know someone “in the know,” so this week Memoori spoke to IoT & proptech industry thought leader Charles Reed Anderson. Charles’ Singapore-based company, CRA & Associates, provides technology advice to governments, enterprises, and vendors on how to successfully navigate the technology solution ecosystem. Charles is a senior advisor to McKinsey & Co, sits on the advisory board of the Global Organisation of Smart Cities, and is the host of the TechBurst Asia podcast. This week we sat down with him to explore a few key issues facing the sector today. The proptech industry is highly fragmented causing issues where a single building may face a complex tech-ecosystem made up of numerous vendors. How do you view this fragmentation and what does an unfragmented proptech […]

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The world of proptech, smart buildings, and the Internet of Things (IoT) is a dynamic place as these overlapping technologies find their feet in this 4th industrial revolution. It pays to know someone “in the know,” so this week Memoori spoke to IoT & proptech industry thought leader Charles Reed Anderson.

Charles’ Singapore-based company, CRA & Associates, provides technology advice to governments, enterprises, and vendors on how to successfully navigate the technology solution ecosystem. Charles is a senior advisor to McKinsey & Co, sits on the advisory board of the Global Organisation of Smart Cities, and is the host of the TechBurst Asia podcast. This week we sat down with him to explore a few key issues facing the sector today.

The proptech industry is highly fragmented causing issues where a single building may face a complex tech-ecosystem made up of numerous vendors. How do you view this fragmentation and what does an unfragmented proptech market look like to you?

There are no unfragmented markets. The way it's set up, it's meant to be fragmented. If I do an elevator management system, as Kone or ThyssenKrupp, for example, they’ll only support their type of elevators. However, if I'm doing HVAC, it'll be a different set of vendors, say a Honeywell or a GE, and for lighting, you could be using Philips or somebody else. So, all these things run on different platforms, and those vendors don't want to support the competition because they only want you to buy their products.

This isn't a problem for a very small building because you may only use a couple of vendors. However, if you run a large building, a mixed-use facility, or you own multiple buildings around a city, this becomes very complicated because you could have a dozen or more different elevator or HVAC manufacturers. In order to manage this and get a holistic view, you are going to have to connect your data from dozens of different platforms and make sense of it. So, these buildings are capturing data but that data isn't giving them much actionable intelligence right now.

Do you see a case for the Uber-ization of facilities management, where one expert may manage a specific type of system in multiple properties?

JLL invested in a company a few years ago that did something like that, but I haven't heard anything about it since. If you think about it conceptually, it makes a lot of sense because facilities management is a very low margin business, so anything you can do to drive efficiency makes sense.

Why have somebody who is average at supporting a bunch of different things when you can find somebody who's good at one thing, say HVAC, and let them support HVAC better in multiple buildings? You have them cover an area of downtown for instance, at multiple buildings, and you can use things like indoor mapping to help them find their way. That could be an interesting model because we're saying “do what you're best at and will support you from there.”

Do you envision that kind of shift happening quickly, like Uber, or slowly, like buildings?

It is the building's industry, so I'd expect it to be slow. When I first heard about the JLL investment it must have been close to 3 years ago and it's gone really quiet since, so I don't know what happened with that. However, it is one of those things, it makes complete sense for the industry.

One approach, from proptech, is to invest a lot of money and do something better. Another way is to say “I actually have this existing process and these existing people,” then you try to use that Uber-type model to improve it. We already see that model working in rural Africa for tractors and veterinary activities, so you’ve got to imagine that the properties and buildings industry should be able to sort this out eventually.

You’ve spoken about WeWork in the past. Now the dust is settling, how do you now assess the incredible valuation the company reached?

I’m old enough to have lived through and gotten burnt during the dot-com boom and bust. So, for me, this is the same thing, the valuation just didn't make sense. Regus is bigger and profitable but had a tiny valuation compared to WeWork. I heard once in a presentation that “WeWork is basically Regus with bean-bag chairs.”

The valuation didn't make sense, it was built on hype, and you suddenly had this management team that was doing... I don't want to say “flaky tech things” but it wasn’t all focused on the business. It was built on the marketing of the brand and people were investing in an idea more than solid business fundamentals.

This has been the big joke between a lot of my contacts over the last couple of years. We were waiting for this to happen and I’m actually happy it did. That doesn't mean I don't like WeWork, but I don't like it when the market gets overhyped and we build up things to the point of crazy valuations. The company I joined during the dot-com era was valued at $4 billion and they eventually sold for $13 million, so I know what it’s like.

I prefer it when we focus on the business fundamentals; does this make sense, is it scalable, how profitable will it be eventually? There are certain multiples you should apply against it but with WeWork they were applying some crazy multiple and nobody could figure out how it was justified.

What can we read into it that hype, and what does it mean for the future of co-working, short-term office rental, and data-driven workplaces in general?

I am still very bullish on those spaces. I think it's the way forward; people like it, it's better for flexibility, and better for the type of workers that we have now. It's going to take some time but it doesn't mean you should have crazy valuations like WeWork. There's no reason that WeWork should be bigger than a CBRE, a Cushman & Wakefield, or a JLL, especially because of how young it is and that it’s never been through a downturn. They have a lot of long-term leases, so if there is an economic downturn I want to see what is going to happen then.

The whole idea of co-working makes a lot of sense to me, improving offices and making them a nice place to be. That's all great. That's what people want, but it doesn't mean they should justify that kind of multiple on their earnings, as we saw with WeWork.

Have you seen any sign that WeWork’s competitors are swooping in to take advantage of the situation?

I've spoken to a couple of Asian regional competitors and they are still very bullish but they were not trying to become a WeWork-type price model. They are growing at a steady pace, they’re trying to find the right deals, they’re still filling up with tenants, and they’re not running the kind of losses that WeWork was.

WeWork was kind of like a land grab. It was trying to see how big it could become and how fast. Whereas the others have a lot more strategic growth, so they are not as worried about it. I think when you talk to people at the big CRE firms, they are not making fun of WeWork but a lot of them are saying “I told you so” and “it's about time,” they expected this to happen. However, they also know that their future is going to be reliant on their ability to move into that space.

How do you think the IPO would have unfolded without Adam Neumann’s antics?

Some of the things that happened with Adam Newman were absolutely bizarre and that raises red flags. However, the market has been quite cautious against IPOs, in general, this year, especially on big valuations. Everyone is going to blame Neumann on this, but you also have to blame Softbank for putting that much money into it and letting it go on with this incredible valuation, with minimal oversight. To put that much money in and not watch it more closely; it’s as if they were riding the hype as well. Everyone thought, “well, if Softbank is doing it, it must be perfect,” and that’s going to be a tough one for everyone to bear the brunt of.

I want to see what’s going to happen next with WeWork. They’ll obviously bring in a new CEO but can they retain their good people? How many people are they going to have to let go? It’s going to be a different company going forward. A lot of the people they employ would have gone there because it was the big boom, growing so fast, and maybe they don’t want to be in this new environment.

Now I think they have to transition into a much more structured company that can deliver sustainable growth. Maybe not astronomical growth but sustainable, and move towards profitability instead of just constantly ringing up massive losses.

Acquisitions like Meetup, Teem, and Elucid suggest WeWork could follow a workplace data-analytics provider business model, do you see potential in that?

That makes sense but there is also a significant risk with that model. The big problem I have with proptech is that it’s still very siloed. You have the investment set-up on the side, whether it’s for a building, shopping mall, residential, or you name it. Then you’ve got the build team who goes out there and builds the product. Then you’ve got facilities management (that’s where you would start leveraging the analytics to understand what people really want). Then you have sales and leasing, of course.

How do all those groups work together, which area owns that data and how do you share it? How do you make sure that people on the investment side actually understand the analytics of what people are looking for? Those groups operate as silos and often not under one roof. You’re going to get the large investment funds investing in real estate but they don’t have access to that stuff. So, it is very difficult on that point.

We have seen an increasing trend of hardware-light models gaining more popularity in the smart buildings space, how do you see this unfolding?

This is a very difficult one but on the hardware side, I think people are very cautious against it. They have already invested a lot of CAPEX to have sensors that are in their building. If you’re going to add another sensor that captures more information, most likely that is going to sit on your own platform, it might run on a different kind of network, so it’s one more thing to support. The key question is, are you going to get that much value out of the additional sensors?

So, what you’re seeing is a lot of the people who control the proptech space trying to extend this trend but people aren’t investing in things that are capital intensive. People are trying to cut back on their real estate spend, so they won’t add extra sensors unless they can really guarantee and ROI on it. It’s difficult but I think what people like is software only type solutions, leveraging existing data, and turning it into actionable intelligence.

That’s not just for proptech, it’s for a lot of things, and allows you to get over the whole CAPEX discussion. It is difficult to get the money upfront, so if it is a shared risk model or an as-a-Service model it is a lot less risky for the customer, meaning they are more willing to experiment. Let’s say you have to spend $200 dollars on 20, 50, or even 1000 sensors, suddenly you have to get money upfront and it’s a bit of a risk. So, I think hardware-light eases the model.

I did an acquisition strategy for a large MNC last year and they didn’t want too much of the model to come from hardware. If you have the hardware, you have to have some valuable analytics in the back of it because it’s really a data game. I also mentor a few startups around the world, for the ones that are hardware-based I stress that “hardware is great but I can get your product copied in China in a few weeks. You better be focusing on the AI side and proving that your value differentiates. That your analytics and data differentiates from your competition.”

So, do you see us moving away from this obsession with collecting data and towards a focus on generating actionable intelligence?

I think it is still very early days on this. I wish we were further along but it’s not that easy to take take a data lake and turn it into actionable intelligence. That’s because it’s a lot of work, there aren’t that many data scientists that really get it, that have that specific industry expertise. So, it is not as easy as it sounds.

I think we’re still in that situation where we are accumulating more data and I’m surprised that the shift hasn’t taken off-faster because there is an opportunity for companies who can come in and do it. Unfortunately, the way the existing ecosystem operates makes it very difficult for those companies to operate.

I’m a big fan of UK firm Demand Logic because they have a platform of platforms that will aggregate from multiple different building management systems into a common platform. It’s also got a collaboration tool and allows you to assign tasks to make sure that something has been completed. What it really shows you, very visually, is that this one is going to breakdown, this one is running too hot, then you can prove these are all closed — it’s super simple. They are able to grab that data out of platforms from a Schneider Electric, Johnson Controls, GE or a Honeywell.

That works well in the UK but if you come into Asia, it’s very difficult because the same vendors want to charge you to access your own data. So, they have really stalled the market in Asia, I know a couple of companies in China and one in Singapore that have tried that, and they want to charge you an extra fee to access data. So, what you then need is those clients to actually go and pressure the BMS providers, and say “listen, I already pay you, I own the data, let me get access to it.”

Before we finish, we’d also like to access your regional expertise. What is the world of proptech bringing to SE Asia and what is SE Asia bringing to the world of proptech?

It is very early days for SE Asia. When I did the research for the JLL whitepaper, the view of many in the investment side of the industry is that if you go to Western Europe or North America they place a premium on things that make buildings smarter, greener, or more energy-efficient, largely through regulations. Even in Australia, for instance, they regulate building efficiency and sustainability very tightly, Europe does that as well. There’s already a premium put on there. You have to do it, so people invest in it.

That hasn’t happened yet in SE Asia yet. I am waiting for Singapore to take the lead, as they would be the ones to do so. That doesn’t mean we don’t have nice buildings in Singapore, but there’s a lot of room for improvement in the rest of the region.

I talked to a vendor in the US that makes glass that automatically blocks sunlight coming in during the day. I told them, “honestly, I love this solution but you’re going to have to have a hard time in SE Asia because right now it’s seen as an extra cost because the investment side won’t see the premium immediately. Therefore, they’re never going to want to invest in a more expensive version of something if they can’t get that money back. So, it’s still very early days and what I’m hoping is that this year, Singapore will put in some pretty strict targets on it and I think that would set an example for the region.

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