Disruption in the industry is a great opportunity

People need space to live, work and play. These fundamentals create a market for the real estate industry to exist. Over time, the market has become sophisticated with capital and asset segmentation. These assets create returns by either increasing their value due to the built improvements which make the land usable, or with the collection of rent that converts the asset into a source of income. The real estate industry has always sought to find product market fit in every transaction. The term “product market fit” was defined by the venture capital pioneer Marc Andreessen as “being in a good market with a product that can satisfy that market”. One has to question what qualifies as a “good market” for the industry when customer behaviour and use of space has fundamentally evolved. Location, location, location? In 2021, the investment popularity of industry-specific assets such as industrial, data centres, cold storage and life sciences spaces is a clear indicator of the immediate impact of the specialised needs of certain industries. These niche assets are focused on the specific requirements of their customer’s industry. On the other hand, office and residential markets continue to be treated as asset classes without any customer focus. Traditional landlords still focus on the value of location which no longer has the same relevance to their customers. The old adage of “location, location, location” is now a war cry for the history books. To understand what the customer needs, it is critical to gather field intelligence to create a product that can generate value for the customer. Data from Adam’s Labs at Travtus clearly indicates these trends in the multifamily asset class. In 2018, residents spoke to Adam about 300 unique needs, but in 2021 that has expanded to 1,600 goals. To understand your customer, it is becoming critical to focus on customer success. Finding a market fit In many ways, the real estate industry is now a start-up. It has reverted to finding its product market fit. The structural changes within the market are driven mostly by society and technological changes. This means that the industry needs to create a product that someone is willing to value. And like any start-up, the industry must now turn its sales funnel upside down to find its niche by putting customers at the forefront. In his book The Membership Economy, Robbie Baxter explains how traditional industries such as entertainment went from an ownership model to a membership one. Companies like Netflix created companies structured around optimising the customer experience instead of traditional selling. The search for a recurring transaction like rent resulted in a sales funnel that was inverted. The businesses needed to think of customers as members. People who belong in the network of your business because of a shared understanding of the customer’s needs. The result is a product that is always evolving to provide value for the customer while using the asset as shared commodity. The real estate industry has been asset focused for an eternity. But adding a customer focus requires an investment in skills and tools which have, so far, been considered non-essential. Technology is not a fringe requirement for efficiency but a mission critical skill at the stage of product discovery. It is also essential to maintain a product fit for the industry. In the multifamily asset class, Adam gathered a sharp rise in its customers asking for printing services in 2021. The product the customer wants has nothing to do with the asset, and everything to do with the value they assign to engaging with it. Inflation-hedge or asset class The old model of industry was driven by capital, land and labour. But the new role of real estate must be driven by experience, technology and service. After three years of record funding in real estate private equity, the industry is on track to have its worst year for fund raising in a decade in 2021. The property industry has long presented itself as an inflation hedge which would attract more investment in the new inflationary era. But properties that simply lose income over time become functionally and physically obsolete and are then unable to keep up with the consumer price index. The real returns from the asset class need to maintain and protect income and only then can the value of the underlying asset maintain its elasticity for inflation. The disruption of the industry is a wonderful opportunity. The pandemic has offered a natural point to break and build again while focusing on the customers instead of the asset. Tripty Arya is founder of Travtus