Real Estate and PropTech: Matthew Boukall
Rhys Phillips chats with Matthew Boukall, vice president, Product Management, Data Solutions at Altus Group, about the wide-ranging effects PropTech is having on real estate development.
Given its wide reach, what do you believe are the core elements of a working definition of PropTech for CRE and the real estate sector more broadly?
PropTech at its core is all about enabling the digital workflow from a property management perspective, about automating or at least streamlining the existing paperwork flow. It is doing two things. First, it is just making work flows much more efficient; but, second it is allowing data to be captured and used in a way it becomes a support tool that enables property managers to be more efficient in their day-to-day work while also enabling investors and other participants in the market to gain more knowledge.
In addition, one of the core outcomes that enables and supports tech adoption is its ability to make the end user, [that is] the client, the tenant, that much more efficient, that much happier. Ultimately, everything driving PropTech adoption is about impacting the bottom line. This impact in today’s competitive environment is about making tenants happier, making their space more functional while enabling automation such that their work environment becomes more seamless. This includes interaction with other technologies.
What about ConTech, particularly such as 3d printing, drones, site sensors, etc., is it part of PropTech? Also, would you distinguish PropTech from Fintech crowdfunded investment models?
The construction sector is very much still evolving. I see it as distinguished certainly when it comes down to the application of the technology. The FinTech crowdfunding component is solving one aspect of CRE by enabling more participation in theory. PropTech is a little bit broader. The elements that come out of the Fintech crowdfund model, such as the data that is generated, can feed into other elements of broader PropTech.
PropTech is really about enabling the digitalization of the real estate property management model. Crowdfunding is enabling the financing of construction, enabling getting more efficient access to a CRE investment tool. Construction technology is also a similar thing. It can help improve construction, the ability to build new real estate faster and more efficiently. It can also generate lots of data which can be used in PropTeck, but it is solving a very specific point which is construction efficiencies through its ability to grab more information about the site. So when you are making more decisions about building on site you can do so more efficiently. I would argue, however, that such things as sensors feed more into PropTech than simply construction.
When I was talking to Scott Addison at Colliers, he talked about sensors placed into poured concrete that used Wi-Fi to indicate when the concrete had set. This meant knowing it had cured in 10-15 days rather than a sector standard of 25. As a broker, he indicated, this could be important as it impacts completion schedules.
That is a great example of a crossover of the two because essentially those sensors will help you manage the property. The PropTech element of this is that we would have to make sure the work flow, that is how such information from sensors is shared seamlessly between other construction technologies and into the asset or property management component. And that is where the need is to make sure that when we move data and information, we do it seamlessly and that it is integrated with other software.
Is Altus, at least in part, a PropTech company?
From some respects yes. I have to be careful about this because perceptions may differ depending how people perceive Altus Group. There are certain elements of our company that are evolving. Altus software is a valuation software; it helps asset owners and property managers keep their property valuation [up-to-date]; but, it also integrates with other PropTech software to start auditing that process. So there integration with the RD and other applications that help make that data move seamless. From that perspective, we are a Proptech firm and in addition, we have other investments in related companies. We [do so] to remain out ahead in terms of pushing the benefits of PropTech as a technology for data integration.
Some, and I would include Altus Group’s report titled The Innovation Opportunity in Commercial in Commercial Real Estate: Shift in PropTech Adoption and Investment, include the concept of the impact on CRE of digital changes not directly related to CRE such as the implications of electric/autonomous vehicles, e-commerce or millennial’s shifting cultural values on future practices and models. Examples include parking facility conversions, brick and mortar stores or the design of urban housing. How can or do CRE actors integrate these trends into their strategic thinking or how can or do start-ups monetarize “futurism?”
You ask the question later on about adoption being a challenge. I think what you have laid out here [in this question] is that some of the impacts will not necessarily be PropTech related but the will be solved by solutions that help enable the analysis of data more efficiently. You will integrate with other data sets that have not been looked at before.
I will give you one example. You talked about parking facilities. Right now we are seeing some PropTech helping owners to automate and improve the efficiencies of parking facilities This means not only tracking the utilization factor, who is using it, when they are using it and how they are using it. Additionally, other data is being generated that lets you know how many of your tenants are coming in through car-share and how people are parking. You can identntify how many people are coming into your buildings and when the HVAC systems need to be turned up or down. You may actually change how you operate your parking facilities to make it more efficient for people to get into and out of your building using alternatives like car-share. You can start gathering more information about elevator usage. A lot more data can be spun out on behaviour that is outside the Proptech world per se. That is where we are going to see the convergence of managing and integrating multiple data sets into how you are operate more efficiently, not only what is happening within the four walls of your building but also what is happening around your building.
Co-Working space is another area. It starts with the concept of people having more flexibility in where they work, how they work and when they work. Your more traditional model where people show up at eight and leave at 5:00 has changed. You have different people coming into the spaces at different times. There may be higher intensity usage so the HVAC system, the elevators and everything else is going to have different utilization components at different times. You have to analyze how that specific tenant rather than those in the entire building. This is going to help you stay ahead of the trends and be more strategic about how you are tenanting your building, how you are attracting tenants, what tenants you are attracting, and what are some of the amenities you want to provide those tenants as well as how and when you provide them It is about bringing more data together.
That is just a couple of examples where it’s not directly related to CRE [as defined at the start]. It is more about millennial behaviours, where they live, how they commute and everything else that is going to impact on how they work and use a building.
These are dealing with data on existing and/or emerging situations. Let’s look at parking where going down in the ground to provide floors of parking is a major costs. With the arrival of autonomous cars, perhaps within ten years, there would be a drastic drop in the need for parking. In Calgary there is a garage being built in East Village so that it can be adapted for other uses as parking requirements decline. How can or does CRE keep ahead of such future trends?
In terms of the office market but also to a degree the residential sector, there is a direct interest in how these trends will impact. One of the challenges within the condominium sector is that the developer is often there for the short term. Basically the developer is responsible for designing a building and turning it over to the condominium board after construction. Their interest from a parking perspective is making sure they have sufficient parking and amenities in the current time frame because they are building for today’s demand.
What you may start to see when you get purposeful rentals or assets that are owned and managed by the same group for a longer period of time, is a potential design shift such as creating, for example, more shared parking structures. I’ll take as an example the Calgary parking garage you mentioned. The car sharing model here in Calgary has been very successful and more and more parking structures include share stalls. They’re doing so because first, there’s demand, but second, they also want their parking structure to be used by people for other uses. If you know that you can find a car-share within a Calgary parkade, you may gravitate to those spaces because you know you need a car and that’s where they are easy to find.
We are also seeing parkades increasingly built a little bit differently as in your Calgary example. I was at a conference earlier this year talking to some developers from the US. Historically, parkades have been built on a slope so you can maximize your efficiency, but the problem with the sloped parkade deck is it’s very difficult to convert to another use after the fact. They are also built with a lower clear height because all you need to do is get a vehicle down there. They are looking now at building their parking structures with flat decks with higher nine or ten foot clear heights so they can, in the future, convert the space more easily, be it into an office space or into an another alternate use down the road.
They are looking at how you structure and build the space in order to “future proof.” If and when automated cars or other transportation technologies mean the standard one person per car model goes away we will be into a different, high intensity parking structure usage.
I would say retail design is very much in the same situation where you are seeing a lot of old, large-format retailers being converted and not into other large format retailers. They are being converted to take advantage of the current exponential approach, which is smaller retail spaces which are all about “experiencing the goods” while also integrating with online delivery. You are getting more seamless interaction between the bricks and mortar retail and the online shopping model.
If you look at the East Village in Calgary, they must manage retail in some of these new condominium buildings where today demand is not yet sufficient for the hundreds of thousands of square feet allotted in the building for retail. They have designed the space so that it can be used internally for amenity space or for office uses. Eventually, it can be converted back to retail when the population density supports it. The approach is to avoid designing single-use spaces. The retail can start as an office, for example a co-working space. It can be a residential amenity. It can assume multiple different uses. It’s more about evolving the space as demand shifts.
Blake Liggio and Jonathon York for Goodwin Proctor (April 2019) state that real estate companies typically slow adoption of technological innovation can be explained in part by the fact technology is not often viewed as a key business driver and there is a lack of expertise to effectively evaluate the many new concepts behind emerging real estate technologies. Others argue real estate is low margin, risk averse and resistant to disrupting well established practices and models. Your report seems to agree in part but also suggests we have passed the tipping point. Have we reached or passed a tipping point in the Canadian commercial real estate sector?
As the report indicated, we are a laggard to a degree. One of the ways that Canada has been a bit more forward-looking has been within the residential sector where condominium buildings – and we’ve been going through a condominium boom with Toronto being the epicenter – where technology and PropTech adoption by condominium developers has been strong. They are doing so [in order to] differentiate their buildings and their units from the existing market and to make their end users happier. But that is an area that tends not to get reported on as much because the buildings are ultimately turned over to the condo boards or owners. It is not the type of PropTech adoption that necessarily makes the building easier to manage by the condominium board.
We are right now in a wave of substantial office construction, specifically in Toronto, but also in Vancouver. While in Calgary there is almost too much construction given the current vacancy rates, we are starting to see a fight for quality from a tenant perspective and this is having an impact on how asset and project managers are managing their spaces. And I certainly am seeing more PropTech adoption in response. We are seeing renovations and improvements to buildings to make the buildings either more attractive to the existing tenants or to ensure that tenants are not moving to the emerging new spaces.
I think we are to a degree at the tipping point where we are going to see greater adoption. My expectation is, as we do these [PropTech} reports on an annual basis, we will see more and more adoption moving forward.
The second key trend is, while we may have seen less adoption in the Canadian market, a lot of Canadian CRE firms are heavily adopting prop tech in other markets. So Brookfield or Oxford, for example, are making huge investments as they develop out their US portfolios in New York and other areas. There certainly is investment going on although I think Canada has been a bit behind the ball, perhaps because the need wasn’t considered necessary or we were doing it in ways that weren’t as apparent. Now we are starting to see CRE participants leveraging the benefit and are now making more and more investments to ensure benefits continue to grow.
One PropTech prediction out of the April 2019 Real Estate Capital Markets Conference in Vancouver was “in the near term, we are going to see the bulk of the innovation taking place with artificial intelligence, machine learning and predictive analytics.” Yet despite Canada’s claim to some leadership in these areas, your study finds Canadian CRE firms come dead last when it comes to investing in this area? Why do you think this is so?
One of the challenges with AI and ML [machine learning] is you need good data going in in order to produce good analysis. One of the challenges in Canada with selling real estate data – that is the actual business unit that I am part of – is Canada is a laggard in getting organized and clean data to help facilitate the adoption of machine learning. So Canada is a real estate data starved market, if you look in comparison to the US or other parts of the world. As PropTech adoption improves, we are going to create more data, which will then enable faster adoption of AI and ML. Thus, I think we’re behind in getting the type of innovation that’s generated from predictive analytics because we’ve been behind in adopting the technology that enables generation of the data required to build a model to do the predictive analytics.
In reading your report and certainly in talking with CRE management firms like Colliers and others that the real story is about enabling. It is not so much about destroying legacy models and companies etc., it is more about enabling those companies to progress, to develop and become more efficient. Do you feel that is the case?
Absolutely, it is an enablement process. I’ll chose my words carefully here, because some of its initial benefits were just about automating workflows to make things more efficient. But now it’s evolving to being able to do much more with the data workflow automation is creating. Now we are into asset enablement where there’s a bigger pay back to adopting such things as smart HVAC systems. It means that you have to maintain the system less and your tenants are happier.
It is also about the enabling data that comes out of that process such as how your tenants are using the space, when the building needs to be heated and when it needs to be cooled. You can start to be predictive When is heating and cooled where you can start being more predictive on top of that so the information, the data allows you to improve your bottom line by making your building more efficient. But you also improve the tenant experience by making sure that the building is heated and cooled when it needs to be. You can use the that data to help predict how improvements in other assets you own and in new developments lower operating costs while making your building more efficient and more attractive. It is enabling because it is that single solution technology that starts to spin-off additional in-house innovation and automation that can really start to make you enable that whole digital Revolution within your organization.
Alternatively, are there sectors or legacy operators in commercial real estate who are simply at risk through what I think your report terms “disintermediation: cutting out the middle?” For example, will Blockchain make the conveyancing sector obsolete? Are there other sectors within commercial real estate that may, if not disappear, will be profoundly impacted like Kodak, for example, or Blockbuster?
After reading your question, I struggled to find examples such as Kodak and Blockbuster who are kind of the poster childs for the disruptive impact where an entire business model shifts away from what they’re providing. What we are seeing certainly have impacts, but they are both subtle and profound at the same time. We identify in the report the three sharing economy models. Airbnb has had an impact on the hotel industry. But you are also finding the hotel industry fighting back by redefining what a hotel experience is all about. It is about the service element, the benefit components that Airbnb cannot provide. But we are seeing a resurgence of purposeful rental construction and if you want to go back to the disruptors, the condo investor was for a while the disruptor to the purpose-built rental. You could go use an online to a rental portal, you could get in touch with a landlord, you could rent your space. There is a paper process, but you were getting, for similar dollars, all the condominium benefits such as new construction, the right location, building amenities. You could kind of cut out the property manager.
You are now seeing investments in new purpose built rental, putting the effort back into designing more modern suites, but also providing amenities and programming to make the purpose built rental a more attractive place to live. This reflects a reaction in part all the issues that come with condominium renting such as noise, condo boards, landlords who don’t really know what they’re doing. You are seeing a kind of similar reaction in to Airbnb and hotels where the luxury hotels space is doing pretty well. The business traveller want the free breakfast, the quick turnaround, the fact you check in online with your phone and get everything processed, all those things you can’t do with Airbnb as easily.
Co-working, has certainly been disruptive to the commercial real estate space, but the impact on more traditional leases may be a bit overstated. As it settles down, we are certainly seeing major companies take part in co-working. They are buying memberships for their employees, but they still have the core staff working in a more traditional office space. Traditional leases are still happening. So it is helping broaden the leasing options for tenants, but it’s not shifting to the point where we are seeing millions of square feet converting over to co-working because tenants want to work there. Ultimately there still is a large scale core business.
E-Commerce, is having an influence on property and portfolios because it’s enabling a shift in how retail spending is occurring. But ultimately, it is also changing how people spend their money, changing where people spend their money and influencing the bricks and mortar strategy. This means changes from both a back house perspective – warehousing and distribution for the online shopping – but also how the front-of-house – the bricks and mortar retail – is showcasing and supporting how consumers shops.
I would almost argue that the food hall resurgence is a bit of a disruptive force. Where what used to be a banal, even depressing environment, a change in tenant mix is also changing how people are enjoying the total space. When they enjoy the food court space, you are taking its use away from just a noon surge including trying to get more of a later night crowd. This in turn is disrupting the restaurant space because you don’t need huge infrastructure. You can start a restaurant by leasing a space within the food hall and building a following. This means you can be a little more nimble and you can respond more quickly to how your tenants or your consumers are eating food. It is all about making it “Instagramable, making it an experience. While the traditional restaurant business is shifting as well, it doesn’t mean that restaurants have completely disappeared. People talked about how food trucks were going to completely disrupt the restaurant business, but they did and they didn’t because people still like to sit down. We are still seeing restaurant spending happening. They are just changing how they buy the food at lunch or if they can get quick service dinners out of a truck as opposed to going to a restaurant.
I’m drawing a blank on the online ordering system in Toronto.
Skip the Dishes?
No, Ritual, where it is just a local app but you can order from a bunch of restaurants. What it really did is, if you’re on a lunch break and you can got a fast lunch you can quickly order food from a restaurant that is ready when you pick it up. It’s a shift in how you serve the lunchtime crowd market that doesn’t have 45 minutes to sit down but still wants good food over lunch.
What do you see as the impact of government as a “disrupter” both in terms of a slowness in changing legacy regulations to fit new technology and in introducing new demands such as environmental standards that will require significant adaption of advanced technologies? For example, if you live in Copenhagen every house, every building has to meet a standard well above LEAD-Platinum.
Government is going to be both potentially an enabler of disruptive technology adoption but also a potential impediment. We didn’t talk about blockchain much in the report but what the biggest challenges for blockchain adoption will be the government itself. The purchase or acquisition process of real estate to a large degree is an inefficient legal process that blockchain can certainly automate and streamline. But there is still the registry and the government’s role in documenting real estate, both from a legal and from a taxation standpoint. If there is no driver of adaption by government in that space then the benefits of blockchain technology will be lost.
A big part of the potential of automation is streamlining [to overcome] inefficient government registration processes. Some governments globally are adopting blockchain and in those jurisdictions you will likely see some of the benefits in terms of speed and automation as well as just the ability to make everything more seamless. But the government now the big hold up. As an example, in Ontario, where a lot of new condominiums have been and are being built, when they are completed the registration documentation is not ready. Therefore, the owners enter into a tenancy at will which means that there are some disadvantages for the owners, but also disadvantages for the tax authorities because they can’t tax an asset until it’s been registered. Blockchain can go a long way to speeding up that entire process. But in order to make that happen, you need to get three levels of government with probably six different departments within each of those levels all working together to create that synergy.
You asked about environmental standards. One of the challenges in terms of LEAD adoption has been the requirement for a lot of documentation work in order to prove that you are meeting the LEAD -Standard or above. You see some companies invest and make decisions to put better environmental standards into construction or during retrofits [but they do] not spend the time necessary in terms of documentation to obtain LEAD-certification. That is where I think PropTech – going back to the construction technology – can more easily prove through automation that standards were met and you will get further adoption because it is just more seamless and less work. So I think there is an ability for technology to be a disruptor by streamlining, by making the workflow that much easier to implement and document.
Robert J Gordon, an American Economist, in his book The Rise and Fall of American Growth, basically, argues that the market is very inefficient and slow and it took significant government intervention between 1930 to 1970 to achieve the promise of the second industrial revolution. One wonders if we ever reach a “war footing” to combat global climate change whether we might see, over a very short period of time, more rapid change.
Your point is relevant; and, that is where governments can play a role in identifying the solution that the industry needs to go chase, be it environmental or other standards. Then industry will come up with the technology. PropTech is a great example of what can help make that transition more seamless and make it more efficient. And that’s where, to your earlier point, industry has probably been a bit of a laggard. But it is not necessarily because the standards weren’t there to follow, it’s because there wasn’t the technology or the automation or the workflow tool that enabled adoption of the standards from a reporting standpoint, from an operating cost standpoint or from other factors.
The number of CRE firms investing in PropTech firms in your report seems very high when direct and indirect investment are combined. Do you see this as an accurate reflection of how things are changing?
Yes we do; and, one of the key reasons we think we’re seeing that high level of investment is responding to internal adoption needs. Companies investing in prop tech are solving internal problems.
But it is also an integration. I was at a conference called Real Com in the US where they were talking about PropTtech all day long. There has been an explosion in PropTech companies, tracking well over 3,000 top tech companies. But a lot of these companies are single solution companies where they are solving one specific pain point or one specific issue. Building the integration between that specific PropTech provider and your accounting system, your property management systems, and your other systems becomes challenging. That is why we are seeing investment. Companies believe these smart building systems that are solving specific pain points but they also want to ensure they are going to be integrated in a very efficient way.
A great example has been Brookfields and a number of other large firm’s investment in Honest Buildings [BH provides a cloud-based enterprise computing platform that allows landlords to track repair projects and vendors across an entire portfolio of properties and cut costs] in the US, a PropTech firm that has enabled better analysis and insight into operating expenses, understanding how contracts are tendered and assessing everything else. They are making this investment because it can see both the benefit of the technology but also the benefit of integration within their internal workflows know how they are managing assets and properties.
That was the point from my interview with Colliers. They promote and are involved with an accelerator that graduates about eight or nine PropTech start-ups each year, but they are also doing their own work internally as well.
We have been very active on that front. We have been investing in key PropTech businesses to help them to grow, either as a strategic investment for ourselves to ensure that we’re staying on top of the trends or to help support integration within our Artus enterprise software. We invest in companies that can help integrate with Artus so that our Artus users are getting the benefits of PropTech adoption from an industry standpoint while also able to do more with the data.
In your list of key areas, e.g. Smart Building Systems, etc., where would you place customer service (e.g. improving the customer’s experience), big data, the internet-of-things and sales and marketing?
Ultimately, the driver of any technology adoption, of any data integration or any process adoption is about making the customer who pays the bills or occupies the space happier, more efficient or more cost-effective. With a lot of Smart Building systems that is one of the outcomes where we are able look at more data and undertake more technology adoption. It’s a bit of chicken and egg issue to a degree. I think ultimately every company is in business to make their customer happier and Smart Building technologies and Smart Building systems and their adoption will, as a net result, make tenants happier.
HVAC or smart elevators are a good example. Tenants are unhappy when elevators are down or inefficient. So smart elevator technology can make the building more efficient. It can move more people between floors. It can make sure that the elevators are on the floor when they are expected to be there through Predictive Analytics. It can also forecast if you have seen the IBM commercial [on the elevator monitor] or it can forecast when the elevators are going to go down. Ultimately, the outcome is going to be happier tenants. They’re not going to be waiting for elevators, they are not going to be complaining about elevator outages because you can do preventive maintenance. The building’s going to be that much more efficient.
Finally, do you see Sidewalk Labs/Toronto Waterfront as a potential game changer in terms of smart cities and how governments and CRE interact?
I do. The biggest challenge that that is going on right now is leveraging the PropTtech within the Waterfront project [in such a way as] to be enable technology to gather more data and share data between government and private sector around consumers so that it really creates a smart city. As you are probably well aware, the biggest challenge has been data rights and concerns over privacy. So the game changer as I see is it – if and when the project is in the ground – will be that the rules created for sharing that data could enable industry and technology to do much more. If, however, they decide all consumer data is 100% confidential and cannot be shared, it will really limit the impact for the industry. That in itself will be a game changer because it will set the tone for what future developments can adopt in terms of data sharing, data analysis and the technology built on top of it.
Conversely, if they are accept, which I’m hoping and rooting for, a mechanism to share critical information about building usage and activities, consumer activities, and everything else in a way that enables a Smart City to be a benefit and to actualize it to the point where people living in Waterfront see a direct benefit to their day-to-day, be it the ability to have more uses in a single space without having conflict, to manage transit and transportation more efficiently, to manage electricity usage more efficiently, or to be more reactive to changes in how the spaces adopt so that ultimately everyone, the tenants, the residents, the retailers, restaurants have a better experience when you combine all the sum of the parts. That is the kind of a Shangri-La goal, perhaps a bad word, but it is the altruistic goal that I think is completely achievable and reasonable. It is just a function of getting the data issue sorted out front.
The unique aspect about Harbour Lands as well as Calgary’s East Village and Edmonton’s Blatchford, is that they are publicly owned. Developers may either see Alphabet get involved as a development firm or the CRE sector – both brokers and developers – may have to deal with a very powerful operator with a very intrenched interest in the data.
Dubai UAE has been quite aggressive in their adoption prop tech because ultimately the Emirate owns all the land and can dictate a lot of the rules more easily. Hong Kong in a similar way where most of the land is owned by the government that provides it for development uses. In Canada, unfortunately or fortunately, depending on which side of the argument you are on, we do have private ownership of land with government overlays and in the Harbour Front example. It is really the government’s purview potentially to argue what data can be freely shared or distributed which could hold us back from some of the innovation. I think we will get around the issue from again a consumer benefit.
One of the funny things with consumers is that we are irrational/rational animals. So we tend to do the exact opposite until we can see a completely rational benefit and then we rush to do something that we have been irrationally blocking before. Social media is a good example where everyone will tweet all day about everything they’re doing but somebody will freak out if they know Twitter is starting to track their location when they make the tweets but only until they see a benefit from activity. If cell phone companies can manage where the cell phone signals are coming from and how much data is being used by social media apps based on activity, they can start to ensure there is adequate cell phone reception in those areas. Smart
Meters were a bit of an issue in terms of adoption because some people had to pay more. But as the benefits of how you can manage your usage of electricity and pay less became evident, things changed. This is a government goal, use electricity more efficiently [and with Smart Meters], people accept some of these technologies. So I think part of this is ensuring from a purely residential consumer standpoint that consumers see and rationalize their benefit based on sharing the data. Then, generally speaking, consumers are a bit more open to sharing data provided personal information isn’t used against them. The ability to manage and hide your personally identifiable data from the mix of all the other data generated must be part of a Smart City. And there are ways to do that.