“Real Estate Fracking” panel

CHICAGO—Uber, Airbnb and WeWork have been some of the most notable companies in the sharing economy, but what possibilities do they present real estate entrepreneurs? Look to the technological and cultural shifts, suggests Steve Weikal of the MIT Center for Real Estate. He hosted a panel last week on what he calls “real estate fracking” for the IREM 2017 Global Summit.

As Weikal explains it, real estate fracking involves using technology to break or open up a real estate asset and monetize it in entirely new ways, much like the process of injecting rock formations with high-pressure liquids to release the oil inside. But doing so requires more than creative entrepreneurs. People need to adjust their attitudes as they adopt new ways of doing things. A few years ago, not many people would want to take a ride in a stranger’s car, but now it’s considered the most normal thing in the world.

And for those who say companies like WeWork are a fad, Weikal points out that even large, blue-chip firms have begun joining the freelancers and start-ups that once populated co-working spaces. “This is a wave that will probably continue for quite a while. It’s going to be the new normal.”

Jason Fudin, CEO of Washington, DC-based WhyHotel, said his firm monetizes the unoccupied units of new luxury apartment buildings by turning them into pop-up hotels. And just as some neighbors objected to nearby homes being turned over to Airbnb, some people aren’t comfortable with bringing guests into their new buildings for overnight stays. But done the right way, developers, neighbors and potential customers can get comfortable with this new idea.

An audience member asked whether the possibility that some temporary residents could damage these new units was a concern for developers. Fudin said Airbnb had successfully overcome similar concerns early in its existence, and that from what they’ve seen so far, such instances are quite rare. “You can’t control the world, but the positives definitely outweigh the negatives.”

“We’re institutional real estate guys,” he added. And that means they know the ropes when it comes to securing the proper permits and understanding all of the municipal regulations that may be involved, something which increases everyone’s comfort level. WhyHotel’s first 50-unit pilot ran from January 2017 to May 2017 and attracted more than 1,000 guests who paid for more than 4,000 nights.  

New York City-based Convene began in the aftermath of the recession, as many corporations shed space to lower costs. And even after the economy recovered, many realized much of that shedded space, especially big conference rooms, cost a great deal but went unused most of the time. That opened the door for companies like Convene, which started creating amenity centers for entire buildings, relieving tenants of having to provide meeting rooms, conference centers, cafes and other amenities that tenants increasingly need to attract talent. And their employees can use the spaces as needed, reducing the amount of high-cost space going unused.     

Christopher Kelly, president and co-founder of Convene, said this arrangement also helps landlords avoid the duplication of amenity space throughout their office towers. He estimates that 15% to 20% of a typical building is dedicated to this kind of amenity space.

But it’s not just about efficiency. As top-grade amenities become more common, landlords that want to differentiate themselves and their buildings will need to project an image that can bring in and retain tenants.

“I expect the entire industry will move toward a branded product,” said Kelly. “What talent wants is what tenants need,” and that “is what landlords must build.” That expressed his core belief that in real estate, “the biggest change is that the customer has changed.” Just a few years ago, if a landlord wanted to land a tenant, a top official just took the chief executive officer out for an expensive steak dinner and then inked a 15-year deal. Today, however, “they’ll bring their entire company through the office and get everyone’s opinion on it.”

Convene’s clients are primarily big enterprises. It recently began providing services to Chicago’s Willis Tower, the city’s largest office property, as part of its $500 million makeover. Other firms building the “sharing” model in real estate have likewise garnered an A-list group of clients, a sign of just how mainstream these strategies have become.

Another of last week’s panelists, Justin Stewart, president and co-founder of New York City-based Industrious, a co-working provider, said it focuses on late-stage companies, rather than start-ups. And that means he doesn’t even see WeWork as competition.

“I love it when they’re across the street from us,” he said, as it builds up a vibe that profits an adjacent Industrious location. “There are customers for them, and customers for us.”

The real competition is from landlords that decide they are going to establish their own co-working spaces. But frequently, these owners find out that running such an operation is not for them. Industrious operates its spaces like hotels, and staffs them with hospitality experts that know how to treat users like guests. And Industrious, which started out as just a tenant in its buildings, has now begun forming partnerships with major landlords such as Hines.

“That’s where I think this industry is going,” said Stewart.