President of Craftwork, a hospitality brand that is reimagining the lobby and amenity experience in Multifamily real estate.
A mental model is a framework that helps us more easily understand concepts. It is an imperfect filter to process complex ideas and make connections. Achieving this type of clarity is critical to the quality of our decision-making. For this reason, renowned investor Charlie Munger recommends that we collect mental models that serve us across multiple disciplines. Accordingly to Munger, we should work to have a “latticework of models” in our heads.
In the discipline of real estate investing and ownership, a model we must add to our latticework is one that helps us understand the impact of technology on the real estate asset class. The following model is crafted for this reason: It categorizes technology’s impact into three simple categories and prompts considerations for owners and investors to consider for each.
Disruptive Proptech Companies
The first category is new tech companies that make the business of buying, selling and operating real estate more efficient. Think of companies like Opendoor and Orchard, pure tech platforms that create a more efficient and fluid marketplace for residential home sales. In this category, owners should consider which of these emerging proptech companies will impact their asset class. If the disruption is a threat and the competency cannot be developed in-house, an owner may consider partnering or becoming a client of the company to differentiate or protect their portfolio.
Tech-Enabled Business Models
A second grouping is technologies that, in their application, reimagine an existing real estate business model. Think Airbnb, which has transformed and created a whole new portion of the hospitality industry through its tech-enabled platform. These businesses are not pure technology companies, but their business model would not be able to function without technology. An owner or investor should carefully vet emerging business models in this category and then position assets and investment strategies accordingly.
Macro Secular Trends
The final category consists of macro secular trends of technology that change the relative demand or supply for real estate. In this category, an owner will want to consider which trends created by technology are headwinds and tailwinds to the demand of each asset class. As an example, think of the acceleration of e-commerce as a percentage of total retail sales. This significantly shapes the investment thesis for retail and industrial real estate. The more successful retailers are becoming channel-agnostic, selling to their end user online and in-store more seamlessly. This omnichannel approach of retailers means greater demand for smaller warehouses located closer to denser populations in order to function as last-mile distribution centers.
Putting The Model To Work
Now, let’s test this model to gain some clarity on technology’s influence on a specific asset class. We’ll look at three technological impacts on multifamily, categorize them and try to draw a connection that may be helpful for decision-making.
One macro secular trend is the adoption of remote work, which accelerated dramatically during 2020. While there will be a return to the office for most employees, many companies will now consider remote working as part of their real estate strategy. This will lead to a net increase of days employees will be working remotely. This trend has the potential to make the amenity spaces in multifamily all the more valuable if they are designed and operated to be good “third places” for resident remote work.
Hello Alfred and Spruce are tech-enabled business models that deliver in-home support and local experiences to multifamily residents. They’re part of an increasing number of models aimed at delivering hospitality experiences residents are demanding. Similar models that were not feasible before their tech enablement are becoming more widespread to meet user demand.
Common is a potentially disruptive company that had its start as the leading coliving operator. The company is utilizing its learnings and its venture capital to create an entirely new residential building operation platform with the potential to be more efficient and more effective. If Common is successful, it could be a major disrupter in the traditional way apartments have been managed and operated.
One connection between each of these categories is the “hotelification” of multifamily. This is the reinvention of apartment operations and branding based on inspiration from the hospitality industry, and it’s my company’s bread and butter. Put another way, it is the increased emphasis on end-user experience as the driver for demand. If remote work leads to an increased demand for serviced common areas, hotel-like services can be provided by new tech-enabled platforms and a new operating model creates efficiencies that allow for hospitality staffing, then the hotelification trend may accelerate. Multifamily owners who draw this conclusion could have more clarity to position their assets accordingly.
And there you have it: a simple way to categorize a broad question like: “How will technology impact my real estate?” Pretty cool right? I hope this model helps owners and investors think a little more clearly. I also hope you add many more mental models to your latticework. If we do this, we can hopefully follow Munger’s guidance to “spend each day trying to be a little wiser than you were when you woke up.” May wisdom and good decisions compound for you in the years ahead.
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