Building & Facilities Operations

“Plus ça change, plus c’est la même chose.” – French Proverb.

Interesting article in the Wall Street Journal this week about information monopolies, how they grow, how powerful they are and how long they can last.  By way of background, it looks as though we are in the grip of several emerging  monopolies (a single entity dominating an industry, vertical or channel) – think of Microsoft, Facebook, LinkedIn or Google, or oligopolies (a few entities) – Verizon, AT+T, Sprint in the wireless space.  These have grown very rapidly, fueled by the expansion of the Web and wireless networks and developed incredible market dominance.

“Do away with Google? Break up Facebook? We can’t imagine life without them—and that’s the problem.”*

These network monopolies get their traction for a three reasons:

1. They leverage disruptive technology that leapfrogs existing channels;
2. The power of their network increases exponentially as it grows; and
3. Once at critical mass, they are very hard to dislocate.

We have examples of this through history, notably the penny post, launched in 1680 in England, Western Union (The telegraph) and the venerable “Ma Bell” (AT+T), which ran the telephone service in America from 1914 until its breakup in 1984.  Those of us over 50 will remember the simple telephones, originally black, then available in a few non-colors (wow, that’s innovation!) that you rented from the telephone company – you didn’t own them.  Of these, the oldest survive as the government run postal service – 330 years old and still going strong.  Not bad for an old geezer!

These information monopolies can last a very long time and frequently are impediments to innovation.  The Wall Street Journal article notes that:  “In the 1930s, AT+T took the strangely Luddite measure of suppressing its own invention of magnetic recording, for fear it would deter use of the telephone.”
Now think about some of the technology that you work with day to day:1. Operating system on your PC or Laptop – Microsoft has a 92.2% share of this market2. Wireless – Three companies have this market locked up and voice and data rates in North America are some of the highest in the world3. Social networks – Facebook has 500 MM users; if it were a country it would be the third largest in the world (after China and India)4. Your local cable TV provider – I haven’t heard anyone that has anything good to say about it.

The growth of these monopolies has been masked in part by the rapid pace of technological change in the last 20 years. Facebook didn’t exist seven years ago, high speed Internet access, something we now consider essential at home and in the office, really only got going nine years ago and, when I got into business in the late ’80s,  my PC ran off dual floppies, had a bright green screen and was very, very, very slow.

What does this mean for you and me?  Well, in part, you should take what techno pundits say about the glorious benefits that will accrue with technological change with a grain of salt.  Technology and change can be amazing but are best when served in a bed of stiff competition.  Competition may not be the only answer – sometimes government or the courts have to step in and break things up (e.g. AT+T) – but it can help.  It is interesting to see how Microsoft is acting more and more like a utility (a classic, old line monopoly, paying dividends), and is losing ground in its core market (productivity applications) to Google and isn’t sure about how to react to this.

And, let’s hope that, in 10 years, we are not all using Facebook’s version of the old black land line telephone.

*In the Grip of the New Monopolists, Wall Street Journal. N0vember 13, 2010.

One of my colleagues sent me a link to this article about data visualization in Wired Magazine. In it, the author describes how Dan Roam uses simple, compelling illustrations to help management teams think through complex issues and challenges.

What is it about the power of the visual?  We have all seen cool illustrations like the following (in this case some sort of mapping of Beethoven’s 9th Symphony.  I have no idea what it means but it sure is beautiful. We are drawn to elegant designs; all the more so if they are driven by data.

However, the dirty little secret about data visualization is that everyone likes it, very few of us have the time, know how or inclination to take the sea of data we stumble around it and parse it into a structure that will enable this sort of beautiful graphic.

It seems to me that one of the reasons data visualization is so powerful is that a sentient being (a person) has taken a lot of time and effort to think through and filter the target data and carefully consider how to abstract it.

The French polymath Pascal said: “I have only made this letter longer because I have not had the time to make it shorter.” applies here – less is more but it takes a lot of work to get there.

I recently set up a series of dashboards for our sales team in Salesforce.com.  One of the things that struck me was how hard it was to display some simple ideas via the dashboard, that our team would respond to.  Additionally, I wanted to create a dashboard that tracked changes in opportunities for our senior management team: in the end I had to resort to monthly downloads of data to Excel, which I then spend 2 – 4 hours manipulating to make a report that is coherent, rich and easy to figure out.

I wonder too if another part of the challenge isn’t entropy: what we as knowledge workers (Thank you Peter Drucker – I am in a Mao jacket sitting at my desk. Ready for action Comrade!) spend a lot of our time doing is fighting disorder.  If left alone, data, documents, ideas text; we must continually refresh, order realign them or they become less and less intelligible.

So, data visualization is important.  Very important.  It is also hard work.

The future only looks certain in hindsight, so it makes sense that the puzzle of where energy prices – particularly electricity – will head and how real estate owners should plan for them is just that, a puzzle.

The Energy Information Agency (EIA) projects electricity use growth leveling off over the next 30 years: in the early ’60s, electricity consumption grew at 10 -12% annually as our standard of living grew and as manufacturing expanded. Now, with much heavy manufacturing moved offshore and our consumption per capita at high levels, the EIA projects annual growth of less that 1 – 2% through 2035, with prices (national average) in a high economic growth scenario of about 10.2 cents per KWh even though it projects commercial consumption growing about 42% over the period.  That number sounds quite calm, almost mellow and assumes that we add a significant amount of generating capacity in that time period.

A number of events could shift prices significantly higher.

1. Electricity use by computer use could grow much faster than the EIA currently reckons: the rate at which data center continues to grow is staggering, and we do not seem to have reached the limit of our need for power to run computers, servers, printers, laptops and networks.
2. Increasing regulation may make it harder to build new power sources (Hydro, thermal, nuclear).  The owners of the Texas utility TXU canceled 8 of 11 proposed coal fired power plants in 2007 due to increased public pressure and over concerns about possible cap and trade legislation.  While some advocates see nuclear power as the ultimate green energy source, (zero carbon emissions) locating new nukes and getting approval for their construction will not be easy.
3. India and China’s voracious demand for energy will drive up energy prices globally and have a knock on effect here in the U.S.  Even though both countries meet most of their electrical needs using coal – China is commissioning approximately one thermal power station a week -, an increasing proportion of this coal will have to be imported, driving up global coal prices.With the Federal and many state governments running sizable structural deficits, the lure of taxing energy under the guise of being environmentally responsible may be too strong for politicians to resist.

It may make more sense for real estate owners and operators to be anticipating the kinds of electricity rates currently seen in Europe: as high as $0.19 per KWh in Germany.

More for reasons of necessity (working remotely, and working with a number of start-ups for a spell) than intent, I haven’t used Microsoft Outllook for over four years.  I did used Outlook  via an Exchange server and that was truly one of the most painful experiences I have ever had- Slow. Difficult. Stumbling, bumbling searches – Microsoft at its most painful.  I have been using web based e-mail, mostly Gmail, for several years and have adapted to its way of managing email communication; it is light, fast, offering powerful search and adequate formatting capabilities.

Recently, I set up Microsoft Outlook on my laptop and have been reminded about what makes it good and not so good.  It feels firm and solid – the app sits on your computer, formats are clean and complete and attachments attach instantly.  On the other hand, search is limited, managing contacts is painful and, to stay organized, you have to put emails in folders, which I stopped doing years ago.  You cannot synch your calendar with another Outlook user unless you are on a common Microsoft Exchange server.  But the fact is, Outlook is the email platform that most folks in business use: it is the standard, having the weight of most business users behind it.

Once a technology, particularly a communication technology, is adopted by a market, the power of the network effect makes it very difficult to displace, even when superior offerings become available.  Now that Facebook has over 500 MM users, it is highly unlikely that another software provider will come up with a more compelling social media platform that gets traction (witness MySpace’s recent struggles).  The engines we use to power our cars have not changed fundamentally in over 100 years: their installed base, support infrastructure and cultural expertise will make it difficult and expensive to shift the market to other propulsion systems (e.g. electric motors).

Most new technologies – like Building Engines – do best when they can adapt/integrate into existing systems (like Outlook).  Change for an organization in this case is evolutionary, not disruptive.  This mode of change is much easier on organizations, which have to struggle with radical changes in their business environments (witness the financial collapse and recession in the last two years) and typically do not want to self -inflict large amounts of stress voluntarily.  Building Engines has been designed to support this kind of easy, evolutionary change through easy integration into existing tools and processes.

When it was first released in 1997, 13 years ago, Microsoft Outlook was leading edge, very advanced and offered a huge improvement in email communication.  Now it is a little long in the tooth, but we will likely be using it for a while.

As the summer winds down and we begin to brace ourselves for the uptick in activity come September, I came across this piece in R&D.com about scientists at MIT using a virus to assemble more efficient, more green batteries.  The problem with batteries is a vexing one: in order for our economy to move beyond petroleum (particularly for transport), which has incredibly high energy density, is inexpensive and easy to transport, we need to find a more efficient way to store electrons.  Electrons are weightless, but conventional batteries are not; hence the problem.

‘”Using M13 bacteriophage as a template is an example of green chemistry, an environmentally friendly method of producing the battery,” Allen said. “It enables the processing of all materials at room temperature and in water.” And these materials, he said, should be less dangerous than those used in current lithium-ion batteries because they produce less heat, which reduces flammability risks.’

Amazing.  Now I know that technology is not an unalloyed good and that progress should not be embraced without question, but I do find it remarkable that to read about things that researchers are working on today, that may only begin to affect society 10, 20, 30 years hence.  The Internet was conceived of in 1973, rolled out in 1983 and really only began to shake things up in the late ’90s.  The transistor was invented in the Bell Labs in 1947 but it was its minaturization in an integrated circuit in 1959 that really accelerated change. And then powered the personal computer (and the Internet).  The rest, as they say, is history.

I was intrigued to read an article in the New York Times the other day about how law firms are beginning to offshore some of their clerical processes to India in order to drive down costs.  They are doing this largely because their large corporate clients are insisting on cost reductions, not because they are particularly forward thinking.  Why pay for a New York based associate to copy edit a document at $250 per hour when it can be done for 1/5th of that rate by a double graduate in India?

Now, large corporate law firms are pretty darn conservative and not organizations that adapt to change easily, so the fact that this is happening is an indication about how much sectors of our economy are likely to change over the next 5 – 10 years.  We have all gotten used to hearing about manufacturing jobs being shipped overseas; those of us in the technology space know that the same is happening with jobs in our space, but this is an indication that other sectors, previously thought to be immune from the trend, will be affected.

This got me to thinking about property operations.  On the one hand, folks in this sector all provide services that are site dependent, like a hair stylist or plumber – until we figure out teleportation, you are going to have to pay a real live plumber to come and fix your dripping faucet: no way to offshore that service – so it should be largely unaffected by off shoring.  On the other hand, some of the property and asset management teams that I work with spend a lot of time on fairly low level clerical activities: copying, faxing, moving information from one silo to another.  These activities can (and will be) off shored.  Given the relentless downward pressure that owners put on asset and property management fees, this change may be forced on the property operations sector by its customers, as it is in the law profession.

There is a bright spot in all this: property operators that figure out how to streamline clerical processes and focus on providing their clients with higher value services will prosper.  Some of this value-add comes through using technology, like Building Engines‘ web based operations platform, to improve customer service, increase data liquidity and reduce operating costs.  I have run into a few that have made this a differentiator and who tell me that their clients are beginning to see it as a significant benefit.

A number of recent news items have struck me as portents of the increasing pace of technological change that we are seeing.

This news item in the Wall Street Journal yesterday revealed that Amazon’s eBook sales outpaced hardback book sales over the last three months.  Specifically, over the last month, the online retailer sold 180 Kindle books for every 100 hardcovers that it sold.

Meanwhile Tech Crunch notes that Pandora, the online streaming music provider, has surpassed 60 MM users and is  ”…adding users faster than ever.”  Pandora assembles playlists based on a user’s taste and can be played over smart phones, making them like the old transistor radios.  The article points to Pandora capturing 100 MM users sometime next year.

Finally, in “Spending Soars on Internet Plumbing”, the Wall Street Journal notes that IBM’s server sales jumped 30% in Q2, after rising 36% in Q1 of this year and quotes the research firm IDC as saying that it expects capital spending on cloud computing – all the hardware that goes into supporting web based activities, to grow at 27% annually through 2014.

“Any sufficiently advanced technology is indistinguishable from magic.” – Arthur C. Clarke

The commercial real estate is not an industry that adopts new technology aggressively; in fact I think you could say we are late adopters.  As someone who works in the software space, lives in Silicon Valley and serves the real estate community, I am especially aware of this.  However, the industry is changing, even if slowly.

I was reminded of this when I had lunch recently with a friend with whom I had worked on large portfolio acquisitions at the end of the last real estate bust, almost 20 years ago.  Hard to believe but back then a big number was $250 BN (the total cost of the S&L crash to tax payers), which seems like chicken feed now.  Our largest deal was in the $750 MM range and we thought it was huge, absolutely huge – that now seems almost laughably small.

We sent teams of underwriters around the country looking at assets and assessing their value.  Each was given a map of his/her target city, with colored dots locating specific properties.  Local market knowledge was difficult to come by – you had to work the phones hard to find brokers who would talk to you about the market and divulge any of their hard-won information.  Values were calculated on paper work sheets using a pencil and simple cap rates (the underwriter could us a calculator if necessary but the “real men” did the calculations in their heads.)

We had big, clunky cell phones that were so expensive they could only be used when urgent.  Our SWAT team on analysts ran Project and Argus on clunky, green screen computers that seemed to be constantly choking on the data they had to crunch. Talk about illiquid data!

So, things have changed some in our industry.  One of the changes is the radically increased information liquidity.  It is just a lot easier to figure out who has leased what space at what rate or what price a property has traded at now than it was 15 – 20 years ago.  This may be part of the reason that the crash in the CMBS market we were all expecting, didn’t happen.  As this Fortune article details, the market is bumbling its way through the downturn without completely collapsing.

Information is often still stuck in silos, but it is a lot less stuck less often than it used to be.  We may curse email and the fact that our Blackberries have eliminated whatever downtime we used to have but they have radically improved communication.  The use of fax machines is  declining precipitously and, although we still manage a lot of paper, we are learning that scans of documents are much easier to manage.

It is time in this blog post for me to hold forth on what the future will bring, with respect to real estate and technology.  I think the biggest driver of change over the near term will be peoples’ expectations: folks now expect to be able access real time data from multiple properties easily, summarize it and analyze it and be able to view it anywhere. Web-based operations and maintenance management systems are now offering one solution. Interestingly, this expectation is being driven by their experience as consumers – real time data about flights, purchases, shipping and financial transactions is now almost ubiquitous in the consumer world.

The second big driver of change will be a generational shift: the next generation of workers, folks that will take our jobs, is growing up in a data-rich, highly connected environment.  They will be comfortable with and will expect access to highly liquid property data; silos will not be an option.

This is all going to take time- longer than folks like me expect, but faster than you might imagine. And its effects will be profound.

The Internet is changing the way we interact with one another and the way that companies communicate with their customers. In the software world, this brave new frontier is known as Social CRM whose power is described in this white paper by the Altimeter Group.  The idea is new enough that Wikipedia doesn’t have an entry on it.

Simply put, companies selling products and services (e.g. the owner/manager of a property leasing it to tenants) used to manage communication with their customers in a fairly linear, systematic, top down manner.  Back in the day, the building manager would create a form letter about a specific issue and mail it out to tenants.  Then, thinking that regular contact might be a good thing, the manager created a newsletter and mailed it out too.  Along came email: the building manager generated the same documents in electronic format and sent them out to the building tenants.

This is changing: the social and collaborative nature of the web means that companies no longer drive communication and are losing control of conversations with their customers: if I have an problem with a piece of electronic equipment, I no longer call customer service, I Google the issue.  I may end up on a forum with all sorts of candid (and not all positive) comments about the equipment in question; its supplier controls none of this.  Sounds a little anarchic, a little chaotic.  Like the web.

One of our clients owns and manages a major, class A office property in a secondary market.  A while ago when you Googled the property, the first item that popped up in the search was a very negative review of its parking by a consumer on Yelp, the crowdsourced review web site.  Not a good way for someone to find your property.

Owner/managers will have to learn to manage social media and leverage the technology to communicate with their customers (tenants).  Or be overwhelmed by it.