A new dawn: creating a digital interface for a data-driven approach

As we discuss in our report co-authored with Nuveen Real Estate, The New Age of Data in Real Estate, a shift in incentives is causing the real estate sector to think differently about its use of data. The factors driving this shift are bringing the historically siloed interests of the different stakeholders in the industry into closer alignment. Many challenges remain before the real estate sector will develop a mature data ecosystem, some of which are inherent in the characteristics of the sector. Overall, the sector needs to develop its “data consciousness” – being alert across all activities to its potential to boost outcomes. “Structural trends are disrupting traditional approaches to real estate, almost all of which are elevating the importance of data.” In this first article, we look at some of the drivers that are moving the real estate sector towards a more data-centric approach, as well as the hurdles created by the sector’s characteristics. Tenant insight Shorter lease terms are aligning the interests of investors and tenants. Investors are incentivised to better understand tenants’ needs in order to attract and keep them. Whereas investors used to enjoy stable, steady revenue streams from long lease terms, tenants are increasingly looking for more flexible arrangements. Investors need to understand with much more granularity what their tenants want from their built spaces – and in particular what they are prepared to pay for. For example, in the run-up to a leasehold break, data showing that parts of a floorplate are not much used by the occupants might alert the landlord to a risk that the tenant is considering terminating. But the usage data suggests that the floorplate might not be configured in a way that best meets that tenant’s needs. The cost and disruption of losing the tenant might be avoided by offering support such as a capital contribution to enable the tenant to reconfigure the space. Asset classes including flexible office/co-working, senior living, student accommodation and the BTR sector are undoubtedly leading the way in gathering and analysing data about activity in their spaces. Data on how spaces are actually used can be analysed to optimise the design and allocation of current space, and can feed into future design. Data can also be used to assess the wellbeing of occupants, or to shape desirable new services for residents. “The conversation is shifting from what is needed to keep the building running, to how data can enhance the experience of tenants and end users to generate additional value.” Delivering sustainability Interests are undoubtedly aligning around the issue of sustainability. This is creating both universal and bottom-up pressure for change. Universally, all want to be associated with buildings that align with their corporate values and commitments. From the bottom up, tenants and users want to occupy sustainable buildings; investors want to offer them; and developers need to deliver them. Corporate commitments to tackling the net zero challenge may be powered by shareholder and consumer pressure or, in some cases, required by regulation (including, for example, residential building regulations). But, increasingly, we see our clients making this shift because it is necessary in itself. The difficulty as regards sustainability data is not achieving consensus around whether, for example, to measure the carbon footprint of a building. It is the huge proliferation of “standards” and benchmarks, which creates confusion. A building may have a sustainability rating, but it may be difficult to compare it with another building because there are so many different measures. The lack of conformity undermines the value from this data. If it is not clear which buildings perform better than others, the potential value boost from a high sustainability rating is lost. Many stakeholder layers The complications of the digital transformation of real estate are not solely a reflection of the early stage of its data ecosystem; some are inherent in the nature of the built environment. For example, there are typically a number of layers of tenure between the investor/owner and the actual occupants or users of the premises. There may also be contractors, customers, employees or guests present in the building. Various of those parties may hold data about the building, potentially siloed. This diversity of interests can make it difficult for an investor to gather data about how its estate is used in practice, and so to understand the additional services that its tenants, the tenants’ employees or other users of the building might value. The lack of a direct relationship with end users can also make it difficult to provide comprehensive privacy notices or secure consents where, for example, personal data about them is being collected. We have come across various approaches to addressing this challenge. Some investors oblige tenants to share point-of-sale data. Others bypass the ownership structure altogether, engaging directly with shoppers. An offer of free Wi-Fi from the retail centre owner can enable it to track shoppers’ movements. Or the landlord may offer a shoppers’ app or loyalty platform whose use is incentivised by discounts or providing a convenient way to book parking spaces. The landlord can then gather sales data directly and has a direct relationship, facilitating privacy notices or obtaining consent for processing personal data. At the other end of the scale, many collect nothing at all. Digitalising physical space The retail example highlights the structural challenge of adding a digital interface to a physical space in order to collect data. For office buildings, tenant engagement apps may be offered; however, without any way to require use of the app by the tenant’s employees or contractors, it is likely to generate only patchy data. It can be difficult to design incentives to encourage use of the app, particularly in contrast to the retail environment. Internet of things (IoT) technologies can bridge the gap between the digital and the physical. Connected sensors may be integrated into building design or retrofitted. There is a vast array of options around this technology, from access systems and temperature or air quality monitoring to movement sensors and monitoring individuals’ activity. IoT systems can collect data, react to data, or both. They can be used simply to collect data or they can automate the operation of a building. The recent UK launch of Amazon’s cashierless shop concept in Ealing, west London, demonstrates the extent to which a physical space can become digitally enabled. And the government is taking a keen interest, as demonstrated by its sponsoring of projects such as the National Digital Twin programme, aimed at encouraging the creation of fully featured digital replicas of buildings and other infrastructure. The extent of flexibility in structuring IoT systems means that legal and compliance risks around data collection and analysis can typically be managed, or even designed out of the system. Old buildings, new tech A further challenge is the mismatch between the life cycles of real estate and technology. Even where a building is delivered with state-of-the-art technology, it must have the ability to be upgraded designed into it. This may be an area where performance expectations appear in both development contracts and leases, making sure that expectations around technology are not just met on delivery of the building or day one of the tenancy. “Flexibility, adaptability and interoperability are important considerations, as this will be an iterative process with the underlying technology and infrastructure likely to shift over time.” In the future, our expectation is that M&A activity will create platforms offering portfolios of fully integrated real estate technology. As proptech matures, choices may well reduce and simplify as leading suppliers emerge, potentially with a community of independent developers offering applications designed to bolt on to the main platform. This may also simplify keeping a building up to date if there are a smaller number of suppliers of technology in the building. Powering value As our report notes, the challenges around data collection and creating data-driven products, services and value for real estate assets are numerous but not prohibitive. The first challenge can be knowing where to start. Time and expense can be wasted amassing lakes of data in the hope that a revenue stream may be generated from it at some future point in time. The most effective approach is typically to shape data projects around delivering defined objectives, in line with wider strategy. Using data and technology within the business for its own benefit and that of its customers will ensure that they deliver tangible value. “Data will power better, more sustainable and convivial environments in our buildings, new and valuable related services for occupants and greater insight for investors to drive value and returns.” Read the report >> Next time… In part two we will consider the lessons that can be learnt from sectors that are more advanced in their use of data. The final article will discuss the challenge of creating the legal framework for a collaborative, data-driven real estate industry. Conrad Davies is head of urban dynamics and Catherine Hammon is digital transformation knowledge lawyer at Osborne Clarke Image by Gerd Altmann/Pixabay