Connectivity, Technological Change and Commercial Property in the New Economy: A New Research Agenda Authors: Tim Dixon 1 and Bob Thompson 2 Affiliation: 1 College of Estate Management; 2 RETRI Contact: Tim Dixon Address: College of Estate Management Whiteknights Reading RG6 6AW, UK Tel: 01189 861101 Fax: 01189 755344 Email: [email protected]ABSTRACT The New Economy, founded on Information and Communications Technology (ICT), is a cornerstone of technology-driven frameworks for economic growth, and can not only potentially recombine existing physical spaces to produce new urban forms, but also impact on real estate, in terms of space requirements and speed of turnover. The paper examines some key conceptual frameworks and argues for a 'socio-technical' conceptual framework to aid understanding of ICT in the commercial property sector, focusing on offices. It deconstructs the myths of the 'death of real estate' and 'productivity increase means jobs loss', in relation to offices. Finally, it examines some of the ways in which ICT is impacting on office property through preliminary findings from new research, funded by the British Property Federation and led by The College of Estate Management and RETRI in partnership with PIREC 1 . The paper concludes by highlighting the most important components for a future research agenda in the field of real estate connectivity. NOTE: No part of this paper may be quoted without the permission of the authors. All results are preliminary and are not yet finally confirmed. 1 PIREC (www.pirec.co.uk) is a research and information resource for all participants in the broadband built environment. The three PIREC partners are CoLoAdvisors; College of Estate Management and RETRI. PIREC's focus is the impact of communications and technology on the ownership and occupation of property. Its scope is defined by the real estate and technology sectors and funded research is undertaken for subscription members. ERES 2005 1
Transcript
Connectivity, Technological Change and Commercial Property in the New Economy:
A New Research Agenda Authors: Tim Dixon 1 and Bob Thompson2 Affiliation: 1College of Estate Management; 2RETRI Contact: Tim Dixon Address: College of Estate Management Whiteknights Reading RG6 6AW, UK Tel: 01189 861101 Fax: 01189 755344 Email: [email protected] ABSTRACT The New Economy, founded on Information and Communications Technology (ICT), is a cornerstone of technology-driven frameworks for economic growth, and can not only potentially recombine existing physical spaces to produce new urban forms, but also impact on real estate, in terms of space requirements and speed of turnover. The paper examines some key conceptual frameworks and argues for a 'socio-technical' conceptual framework to aid understanding of ICT in the commercial property sector, focusing on offices. It deconstructs the myths of the 'death of real estate' and 'productivity increase means jobs loss', in relation to offices. Finally, it examines some of the ways in which ICT is impacting on office property through preliminary findings from new research, funded by the British Property Federation and led by The College of Estate Management and RETRI in partnership with PIREC1. The paper concludes by highlighting the most important components for a future research agenda in the field of real estate connectivity.
NOTE: No part of this paper may be quoted without the permission of the authors. All results are preliminary and are not yet finally confirmed.
1 PIREC (www.pirec.co.uk) is a research and information resource for all participants in the broadband built environment. The three PIREC partners are CoLoAdvisors; College of Estate Management and RETRI. PIREC's focus is the impact of communications and technology on the ownership and occupation of property. Its scope is defined by the real estate and technology sectors and funded research is undertaken for subscription members. ERES 2005
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"We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled
into inaction". Bill Gates (1997) 1.0 Introduction During the late 1990s there was increasing debate over the emergence of a 'new economy', built on major structural changes driven by globalisation and Information and Communications Technology (ICT). At the same time, many commentators were starting to forecast the demise of physical assets in the new economy (Boulton et al, 2000). The trend was away from tangible physical assets (such as real estate) towards intangible goods, such as knowledge and information (Coyle and Quah, 2002). The argument was that if ICT pervaded, productivity would increase and space requirements would reduce, thereby reducing the demand for real estate (see, for example, Borsuk, 1999). This thesis was strengthened by the view that real estate outsourcing could increase shareholder value, as property was taken off the balance sheet through financial instruments such as sale and leaseback or synthetic leases (Dixon et al, 2000). However, sceptics questioned the hype and the demise of dot.coms and falls in stock markets strengthened such views. Some (see for example Gordon, 2000) challenged the very nature of ICT and its ability to increase productivity. Nonetheless, although the 'irrational exuberance' (Shiller, 2000) from this period is now clear-cut, it can be argued that the sceptical view of technological impact itself remains a flawed one. ICT has not disappeared, and new evidence now emerging from OECD (2003) research suggests that productivity impact is proven by a number of statistical studies. It can also be argued that the 'new economy'2 is a very real phenomenon, and that increasingly technology is impacting alongside other factors (such as social and economic forces and organisational change) to affect the intensity of use of real estate; its configuration/layout and location; and the amount procured and the duration over which commercial office real estate is procured. This paper will therefore argue3 that:
1. A variety of perspectives have been adopted to conceptualise the impact of
ICT at an economy level, firm level and real estate level. Frequently, however, such frameworks have suffered from a deterministic structure. Instead, we favour what we describe as a 'socio-technical framework' to examine ICT impact. Therefore, ICT is a fundamentally important part of the 'new economy', but must be seen in the context of a number of other social and economic factors.
2. There is a growing body of evidence to suggest that commercial office
property is being, and will increasingly be affected, by ICT impact, but unravelling ICT impact from other factors is a taxing research issue. Statements such as the 'death or real estate' and 'increased productivity means less jobs' are important to deconstruct.
2 In this paper we use following definition which we believe captures the main components of the new economy: 'a knowledge and idea-based economy where the key to job creation and higher standards of living are innovative ideas and technology embedded in services and manufactured products' (Progressive Policy Institute, 1998). This seems to us to capture both the potential impact of ICT and the transformational power of knowledge and information-based industries. 3 A number of the concepts explored here are discussed in further detail in Dixon et al (2005). For book website see: www.cem.ac.uk/neweconomy ERES 2005
3. ICT has a variety of impacts on commercial offices through the characteristic
of 'connectivity'. This impact can be summarised as 'first order' impacts: o Space intensity
o Design and construction
o Productivity
o Location
o Organisational design/culture
These can lead to 'second order' impacts:
o Value
o Lease provision
o Services
4. Future research in real estate and facilities management (FM) must recognise the growing importance of ICT in real estate markets and real estate service provision.
The paper is divided into the following sections:
• Technological change: alternative perspectives; • An example of the 'socio-technical' framework; • The changing role of offices: a critical review of the impact of ICT; • What is 'connectivity' and why is important? • Preliminary findings; and, • Conclusions.
The paper is based on a literature review (see also Dixon et al, 2005) and the authors' continuing research programme in the field4, and in what follows, we focus on commercial offices. 2.0 Technological change: alternative perspectives Many doubt that the new economy really is a new phenomenon. For example, Rowlatt et al (2002) suggest there have always been new economies and that the concept is not tied to time or technology. Over hundreds of years, periods have occurred when technological change has brought about radical changes to market boundaries, increasing the scope to exploit intellectual capital. Examples include printing, steam, power (including electricity), canals, and railways, mass media, and more recently ICT (see also Perez, 2002 and Gordon, 2000)5. But the new economy of the 21st century is different from any other new economy, and Rowlatt et al (2002) highlight three main aspects:
• Infrastructure to assemble, analyse, communicate and manage information within 'computer mediated networks';
• Transactions to purchase goods and services carried out through EDI or over the Internet.
4 See website at: www.pirec.org.uk 5 That is not to argue that such changes occur in a linear, sequential fashion (i.e. television did not replace radio and ICT has not replaced books). ERES 2005
• Interactions transferring information between enterprises or individuals, which add to value.
It is the sheer scale of information processing power that has provided the driving force for the new economy. A key reason is technological advances based around the microprocessor (i.e. Moore's Law)6. There is also growing evidence to suggest that a new economy is developing, driven by technological change in alliance with other forces. An obvious indicator is the trend towards services away from manufacturing, for example, which has occurred more quickly in the UK than in other economies (Coyle and Quah (2002) and Pohjola (2002)).
Frequently the conceptual frameworks to assess these impacts of ICT have pursued a deterministic slant, arguing that ICT acts in a linear fashion and imputing its direct benefits (DTI, 2001). Others adopt what may be termed a 'non-spatial perspective'7, and do not explicitly consider the spatial aspects of technology (i.e. locational and space demand/supply dynamics at a meso/micro level), but nonetheless offer valuable insights. Examples from the 'economy level' include Schumpeter (1939) and Perez (2002), and at a 'firm level' Scarbrough and Corbett (1992). What we can learn from these models is that technology can only be understood within the context of social, political and economic structures and institutions, and that technological determinism (i.e. a simple linear trajectory and cause and effect relationship between technology and desired outcome) is an oversimplification.
Similarly, 'spatial perspectives' have been developed on the impact of technological change on the shape and form of our towns and cities (see for example, Berry (1973) and Castells (1996) and on the real estate occupied and owned by organisations (see for example Gibson and Lizieri, 2001 and Vandell and Green, 2001). Castells (1996) suggests that in fact ICT can lead to both dispersal and concentration and this view has been taken forward by other authors such as Christie and Hepworth (2001) and Gillespie et al (2001)8. Castells (1996) builds on this fundamental concept and refers to the new economy as the informational economy, in which information generation, processing and transmission become the fundamental sources of productivity and power. A 'space of places' has been joined by a 'space of flows'. The latter refers to the technological and organisational possibility of orchestrating social and work practices simultaneously without physical proximity. In other words technological impact can lead to both 'clustering' and 'dispersion' of activities. At the 'real estate level', some argue (see, for example, Lizieri, 2003) that the impact of business reorganisation and new working practices on corporate office real estate is less dramatic than often supposed, because of the importance of 'institutional' barriers. However, recent research (see for example Dixon and Marston, 2002a and Dixon et al, 2002b), has found a growing impact of ICT in both the retail and office sectors. Moreover, the issue is not one of lack of impact of ICT, rather part of the problem with much of the research in this field is that it is cross-sectional in nature, preferring to take snapshots in time rather than tracking trends longitudinally. This suggests we may therefore be missing changes caused by ICT, because in organisational management and business process, the changes are much harder to 6 In the 1960s Gordon Moore (1965), co-founder of Intel Corporation projected that the density (and hence power) of transistors on a silicon chip would double every 18 months. The principles of Moore's law have held fast and today's processors have 256 times the density of those manufactured in 1987 and 65,000 times the density of those manufactured in 1987. 7 For a full discussion see Dixon et al (2005). 8 It was in fact more than 100 years ago that Alfred Marshall (1890) drew attention to the battle between centrifugal forces and centripetal forces in the spatial organisation of the new economy: 'Every cheapening of the means of communication alters the action of forces that tend to localise industries'. ERES 2005
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map. It is inherently more difficult to identify 'step changes' in process if you have only recently become part of the 'revolution' in technology, and part of the issue may also be connected with who is surveyed in these studies, what their role is in the organisation, and how they see technological change as altering their business models. Focusing too narrowly on the institutional barriers to ICT could therefore compound the problems we must resolve in order to measure and identify the precise nature and impact of technological change. New frameworks are therefore needed. 3.0 An example of a socio-technical framework If we accept that ICT operates within the context of other factors, and that a deterministic view is too simplistic, then it is possible to learn from the existing conceptual frameworks outlined above to develop what we term the 'socio-technical' framework (Dixon et al, 2005). This is shown in Figure 1 and is based on the research programme already undertaken by the authors and is a starting point for developing further research in the field. Figure 1 Key new economy drivers in property/real estate ('socio-technical model') (adapted from Dixon et al, 2005)
ICT,Social,
Economic, Political
andOrganisational /
BusinessFactors
InformationSociety
NewEconomy
Business
Consumers
Government
Stakeholders Real Estate
Product /Asset
Services
It can be argued that the socio-technical framework offers a number of advantages over those based either purely on a deterministic view of technology or on a purely supply and demand led model. In particular, the framework is able to link the economy, firm and urban/regional level impacts more closely to the real estate level and sets technology in context. Institutional barriers and market barriers can still be examined but must be seen in the context of broader political, social and economic factors governing the transformation of technology. These ideas bear a degree of synergy with the work of Kling (2000) who was at the forefront of the development of the field of 'social informatics', which examines the design, uses and consequences of ICT in ways that take into account their interaction with institutional and cultural contexts. Arguing that ICT is socially shaped, Kling differentiated between standard (tool) models and socio-technical models (Table 1) to explain ICT impact. This theoretical framework enables us to take a critical view of technology's impact on real estate because it combines technical and social elements within an integrated framework. Much of the real estate literature in the field seems to ignore social, ERES 2005
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political and economic context, and fails to make the link between economy, firm level and property level impacts. However, there is a growing awareness that technological change can only be interpreted in the context of other socio-economic forces. Recent research by CORENET (2004a) highlights that five forces in particular are driving the nature of work and the workplace and therefore the demand for commercial real estate both now and in the future. These comprise: • Demographics, through declining birth rates and increased longevity;
• Technology, through the emergence of the networked enterprise;
• Globalization, through intense competition.
• Sustainability, through the increased emphasis on a 'triple bottom line' model;
• Public policy, through influence on firms' decisions.
This has also been highlighted by recent research from DTZ Pieda (2004) on Working Practices in South East England, where technology is highlighted as a key driver but operating in the context of other factors which include demographics, globalisation and changing management and organisational cultures. Table 1 Conceptions of ICT in organisations / society (adapted from Kling, 2000) Standard (tool) models Socio-technical models ICT is a tool ICT is a socio-technical network A business model is sufficient An ecological view is also needed One-shot ICT implementations are made ICT implementations are an ongoing social
process Technology effects are direct and immediate Technological effects are indirect and involve
different timescales Politics are bad or irrelevant Politics are central and even enabling Incentives to change are unproblematic Incentives may require restructuring (and be
in conflict) Relationships are easily reformed Relationships are complex, negotiated,
multivalent (including trust) Social effects of ICT are big but isolated and benign
Potentially enormous social repercussions of ICT
Contexts are simple Contexts are complex Knowledge and expertise are easily made explicit
Knowledge and expertise are inherently tacit/explicit
ICT infrastructures are fully supportive Additional skill and work are needed to make ICT work
As an example, the impact of ICT on office markets should consider ICT alongside other factors. Research by Dixon et al (2002d)9 on eBusiness and its impact on City of London offices suggests that there are factors in addition to ICT which are driving business change and the demand for real estate in offices (Table 2). These can be categorised according to whether they are 'centripetal' or 'centrifugal'. In practice, ICT may also partly act as a centripetal force if technology maps itself onto existing economic activity and continues to promote 'clustering'. If home working and other ICT-based activities grow then ICT will tend to promote 'dispersion'. Similarly, there is also an argument for saying sustainable development could be promoted by encouraging living and working in the City. Therefore our previous empirical work suggests that adopting a framework based around the factors in Table 1 provides a
9 See also a paper based on the same research in Dixon et al (2002b). ERES 2005
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sound basis for explaining and understanding the importance of technological change alongside other factors in impacting on real estate markets and services.
Table 2 Centripetal and centrifugal drivers in City of London offices (after Dixon et al, 2002d)
3.1 What is connectivity and why is it important? ICT is clearly important in transforming real estate (Dixon et al, 2005). The nature of ICT is also such that it can affect real estate and the services that are provided for owners and occupiers. The physical nature of buildings means they can also act as conduits or objects within which the transforming power of ICT is offered by landlords for tenants or 'customers'. Increasingly therefore buildings are referred to as 'intelligent', 'smart' 'or 'wired'. In this sense they possess a key characteristic which refers to the extent to which they are networked or provide the cabling and infrastructure for businesses to use ICT. This characteristic is referred to as 'connectivity'. This should be compared with CORENET's more general use of the term (CORENET, 2004b), which refers to how a computer connects to a network. If we accept that technology interacts with other factors to shape real estate and related services we can also hypothesise that ICT (and therefore the 'connectivity' of an office building) interacts with these forces to produce particular outcomes. These outcomes fall into two broad categories, first order and second order effects, which are now discussed (Figure 3).
3.1.1 First order effects Productivity and space intensity There is an element of 'fallacy'10 in productivity arguments (Bean, 2003 and Bootle, 2003) and the way in which they are often posited in terms of real estate impact. Technological advance does not automatically reduce jobs. Although technology may lead to job losses in some firms and some sectors by enabling the same output with less labour, it may not necessarily, because the lower cost of production may allow a firm to lower prices and so boost demand for its product. Whether employment rises or falls therefore depends on how much the demand for the product is affected by price (Landmann (2002)). This means that it is simplistic therefore to extend the logic and argue that improved productivity created by ICT automatically leads to job loss and reduced space demand. For example although teleworking is widespread it does not necessarily reduce the demand for office space and may increase the demand for residential office space (Greater London Authority (2002)). Also, although research (Gerald Eve, 2001) has shown that net densities have increased over time and that new working practices (NWP) increase densities (see Table 3), the picture is by no means straightforward, and firm size, length of occupation, and whether a property is leasehold are also important factors to consider. Table 3 Floorspace per worker ratios and new working practices (net floorspace (sq m) per worker) (from Gerald Eve, 2001) Function Offices without NWP Offices with NWP Head office 16.8 15.2 Admin centre 17.2 15.6 Branch office 17.1 14.8 Sales office 17.6 14.8 Sole office 16.8 15.1 What we are likely to see more of is a growing trend towards separation of front and back office operations: back office operations are extremely cost-driven and with recent call centre outsourcing from the UK to India and China, we may be seeing a downsizing shift in back office operations with consequences for real estate demand in that particular sector. As London Property Research / EGi (2003) point out, Bombay can beat London by a factor of at least five on labour and property costs11. However, although the emphasis is shifting in office sub-sectors, and although outsourcing of key operations, such as the management and maintenance of real estate may seem to be an inevitable consequence of the shift towards intangible assets, real estate has not, and will not, 'disappear'. Indeed, what we are also seeing is the mapping of new growth and technological infrastructure onto areas of existing economic activity (Local Futures Group, 2001) in the UK because of the benefits of clustering (Trends Business Research, 2001). Similar findings have emerged from a regional study of South East England (DTZ Pieda, 2004). This research found that although ICT was a major driver for change in
10 This is often referred to as the 'lump of labour fallacy' by economists. For example, in France in 2001 the Government courted controversy by introducing a 35 hour week, not only to promote a better work-life balance, but to effectively share work, because the argument went, if people did not work so long there would be more work to go around. However, this assumes a fixed 'lump' of work, which is not the case, because the level of jobs is dependent on aggregate demand: if one person gets a job it does not necessarily means another loses one. 11 More than 2.8% of the British workforce is a call centre operator and currently is the fastest growing employment sector. The UK has 4,300 call centres (ContactBabel, 2003), and when jobs disappear overseas, it may be difficult to replace them. ERES 2005
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changing work practices and business space, other regional factors, such as economic restructuring through the growth of the service sector and knowledge economy; changing business practices and operations, and internal human resource management and organisational factors were very important. In particular restructuring and rationalisation had led in some instances to an increase in floorspace per worker rather than a decrease (e.g. in growth sectors such as business services, leisure, retail, restaurants and hotels). In the same study other barriers were found to be preventing substantive ICT impact on space use. These included:
• Costs of implementation; • Time and resources; • Environmental considerations; • Organisational culture; and, • Social relationships.
However, in some sectors with intensive ICT use, floorspace per worker requirements had declined. Finally, an interesting perspective on the link between workplace design and productivity was highlighted in recent research from CABE/BCO (2005) Technology as part of the workplace design can impact on the quality of the physical value of a building and its business value rather than simply its asset value. Indeed, wireless technology (or WiFi)12 is seen as an important part of this process (BCO, 2005). Design and construction One of the key driving forces influencing office space has been the managerial changes that occurred at the end of the 19th century, as greater control became exerted over manufacturing and distribution through the accumulation and synthesis of information (Duffy, 1997). Paper-based tasks became more common and greater numbers of workers were needed to process the information. 'Taylorism', or the scientific management of people as units of production, operated first in the factory and then in the office, and encouraged an ordered, hierarchical, supervisory approach to office space that is still seen in the legacy buildings of the last two centuries, and was also strongly underscored by a general decline in manufacturing and a flight to the service economy (Dixon et al, 2005). Partly as a result of the changes brought about by ICT and allied social and economic forces, there has, however, been an increasingly blurred nature to the term 'office use'. New kinds of space have emerged which offer greater flexibility and comfort to users and occupiers. Duffy (1997) in fact recognised this in the 1990s with his seminal work, The New Office. Duffy suggested that, historically, the dominant mode of the conventional office was the 'office as factory', where individuals processed work under supervision at their own desks. In some instances such work has been outsourced overseas, but in general he characterised such processes as giving rise to 'hives'. 'Cells', on the other hand, were characterised by independence and concentrated study (for example, professional and research tasks). In contrast, where group processes were involved this led to more teamworking and interaction, and Duffy therefore termed this type of space, 'dens'. There is also a cyclical dimension to Duffy's typology, because as groups processes and concerted study are transformed through organisational and technological change, they may in some instances converge into 'clubs' or spaces for transactional knowledge. This typology
12 WiFi hotspots are growing in number. A prime example of their use and the way in which building design is linked with ICT is the British Library. WiFi is also common in coffee shops, hotels and airports. GNER, BA and Lufthansa all provide such facilities (Unwired, 2005) ERES 2005
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can apply to parts of a business or a whole business, and Duffy also suggests that differences in work patterns, space layout, and ICT requirements are all closely related to these types of space. A similar, yet distinct, typology of office space has also been developed by Myerson and Ross (2003) who identify four themes in 21st century office development, again largely driven by organisational and technological change:
• Narrative office - here design and layout are used to develop brand differentiation (examples include Toyota's UK headquarters at Epsom Downs and Reebok's Canton, Mass, US headquarters).
• Nodal office - here design is used to encourage new ways of working such as hot desking and hotelling so that fixed points for networking, coaching, training and knowledge sharing are promoted to complement the more mobile work methods (examples include IBM's Santa Monica HQ in USA and McKinsey and Co's Amsterdam Harbour complex in the Netherlands employing 'lounges' and 'cocoons').
• Neighbourly office - this runs against the grain of the 'Taylorist' model and uses design and layout to promote social interaction (examples include the Cellular Operations centre in Swindon in the UK)
• Nomadic office - this is characterised by a series of geographically distributed spaces for work (examples include Workspace, operated by Granada and BT and the Institute of Directors building in London).
On the face of it, the two typologies of office space above perhaps support the view that 'processing space' is a more appropriate term than 'office space'. Flexibility, efficiency and effectiveness in design and use are therefore increasingly powerful mantras, and ICT has played a major role in transforming the shape and form of traditional office use, as business models themselves have changed and adapted to technology and socio-economic factors. Organisational design and location Research by CORENET (2004c) has identified that new business models are evolving as a result of the interaction of ICT and other forces. These 'networked enterprises' are (CORENET, 2004c):
'…flat, fast, flexible, process-driven, globally dispersed, highly interdependent and networked'.
One example of how work paradigms are changing office space requirements alongside technology is shown in Figure 4. Moreover, from a broader perspective, the development of 'telework' can be seen as one of a number of developments in the way in which paid work is organised. The extent to which this flexibility benefits the employer or employee is subject to negotiation. The traditional, post-war work paradigm (ECATT, 2000) is changing from a model which consisted of: • Permanent employment with a contract of employment;
• ‘Life-time’ employment;
• Standardised working hours (‘9 to 5’);
• Full time employment;
• State-provided social security provisions;
• Workplaces co-located in centralised buildings; and
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• Strong intra-organisational co-operation based on face-to-face meetings, with external contacts limited to certain gateways.
Changes in the economic environment, together with shifts in social attitude and the impact of ICT, have led to a 21st century work paradigm, characterised by: • Spatial dislocation;
• Self-employment;
• Greater diversity and flexibility in working time patterns; and
• Stronger external boundary co-operation.
This paradigm shift is shown in Figure 4. The new paradigm is broader than the post-war paradigm as it covers a much wider spectrum of ways of working. Traditional work practices continue to exist and remain at the core of the labour market, but they are likely to be just one of a number of work patterns that exist in the future.
Figure 4 Changing paradigm of work (adapted from ECATT, 2000)
DTZ Pieda (2004) provide a useful classification of new working practices (Table 4).
Post war work paradigm
Time
PlaceCo-operation
Contract
Dislocation Co-location
Employed
Self-employed
IntraOrganisational
TransOrganisational
9 to 5
Flexible
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Table 4 New working practices (adapted from DTZ Pieda, 2004) Type Summary Flexicontracts Contractual arrangements including
agency workers; temporary or fixed term contracts and casual labour/self-employed.
Flexi-time Part-time working; job shares; compressed working weeks.
Flexi-location/workplace Working from home or from telecentres/satellite offices. Includes homeworking, hot-desking and virtual office.
Team working Small number of team members using shared space
Outsourcing Outsourcing of support functions Finally, location dynamics are also being impacted. This is however contingent on the type of process and its information content (Dixon and Marston, 2004). This theme has also been explored by Leamer and Storper (2001) in a spatial context. They categorise processes according to the character of the information needed to use them (Table 5).
Table 5 Messages, transactions and location of standardised and specialised products (adapted from Leamer and Storper, 2001)
Location of production/distribution in relation to markets
Remote Indeterminate
Examples Dispersal: consumer banking and finance
Agglomeration: Design-driven retail
For example, mass-produced, standardised products can be codified and shipped separately form the product in the form of specifications, blueprints, standards and so on. This therefore allows geographical distance between buyer and seller. However, if the product is non-standardised it cannot be so easily expressed in a codifiable form: the principle way is of verifying the product's qualities is then by touching, feeling or knowing the product. This leads to a much more market-centred focus to the product and thus geographic proximity is important. The Internet has the power to shift these relationships and can lead to both increased 'clustering' and increased 'dispersion' through:
• Increases in product variety;
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• Increases in the fineness of division of labour, or 'roundaboutness', which is the number of intermediate steps to produce a final output; and
• the automation of intermediation/coordination tasks (disintermediation).
Leamer and Storper (2001) suggest that the ways in which a new ICT, such as the Internet, interacts with production and its geography will be many and varied, and there will be no single business model that is created, but rather that complex feedbacks to specialisation and divisions of labour in different sectors will occur. The exact geographies of new mass variety sectors such as designer retail, consumer-driven manufacturing and parts, new consumer services (customised take-out food, Internet-ordered home repair) and knowledge inputs to production will be determined by whether the input-output relations are 'conversations' or 'handshakes'. Sectorally, we would therefore expect to see greater changes in businesses associated with the greatest level of ICT adoption, in terms of business/process change, or in terms of the type of product sold (for example, travel, financial services, the ICT sector itself and some retail trades (books, CDs).
The implications of these first order impacts are now explored in terms of second order impacts. 3.1.2 Second order impacts Value We can hypothesise that ICT could, through first order impacts, also lead to secondary value impacts. Such impacts could feed through into the rent agreed where ICT was part of the service provision and was a service through the landlord's offer, or indeed through a premium value over and above comparable rents passing in the market. From the perspective of the occupier, a building represents, amongst other things, economic capacity for the business. The cost efficient use of that capacity is a key determinant of profitability. Traditionally, the provision of utilities like telecommunications to a building has been facilitated by the property owner through the granting of access, usually within a regulated framework. However, in an increasing number of cases the property owner has a stake in the provision of connectivity to his clients in the building – those same occupiers. For the occupier such an arrangement holds the prospect of cheaper telecommunications, richer services and a higher level of service. For the property owner the value of connectivity needs to be demonstrable in conventional measures of property performance. In theoretical terms, a broadband-enabled building would be expected to command a premium with lower yield, faster letting and few voids, higher rent and with occupation charges reflected in the cashflows. Early research by BOMA (2000) found that, generally, tenants were not generally prepared to pay a premium for a connected building. However, more recent research is showing a different picture. For example, in a study of the Singapore office market, Tien Foo (2002) provides an interesting economic analysis of ICT to highlight the impact on the demand function for office space in two main ways. Firstly by the expansion and creation of new firms offering ICT services to other firms; secondly by the new working practices and business reorganisation that may arise leading to structural change. ICT-enabled operations can achieve improvement of efficiency gains in three main areas: business function and configuration, staffing and organisation structure, and locational flexibility. If ICT-induced change therefore impacts on firms occupying larger office space, then aggregate demand for space is also likely to be affected by the increase in ICT investment. This is shown
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diagrammatically in Figure 5. Assuming perfectly elastic supply, new ICT firms would push equilibrium demand from A to B on the new demand curve D1 leading to a rent rise to R2. But when new office supply is increased rent is adjusted downwards to R3 with a new equilibrium point of C. Moreover if ICT-induced effects take place more firms may give up space by downsizing and a new equilibrium point is reached at R4 with a lower amount of occupied space, Q4 (point D). The Singapore survey also showed that those occupying firms that tended to be more positive towards ICT generally also tended to perceive that ICT adoption would lead to a reduction in floorspace per worker. Figure 5 Impact of ICT on office rents (adapted from Tien Foo, 2002)
Quantity of space
R2
R3
R1
R4
Q1 Q4 Q2 Q3
A
D
B
C
Point A= Original market clearing positiona=derived demand from ICT firmsb= demand shift from rental increasec=structural shift from ICT
D
S
S1
D1
a
b
c
Quantity of space
R2
R3
R1
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Q1 Q4 Q2 Q3
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Point A= Original market clearing positiona=derived demand from ICT firmsb= demand shift from rental increasec=structural shift from ICT
D
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Clearing mechanisms in the market will also affect the rental value of office property and it would logically be expected that 'wired buildings' would carry a rental premium over and above other buildings.
Further work by Tien Foo et al (2004) focused on the developer's perceptions of ICT and broadband in office buildings in Singapore and also attempted to measure the value impact of ICT. Building on work by Thompson and Hills (1999), Almond (2001), and Spurge (2002), they studied Suntec City in Singapore and found that in their survey of 24 developers, 71% expected upgrading of buildings to increase marketability and also be able to attract tenants who are willing to pay a premium for ICT and broadband services. The majority of developers also felt that ICT would impact positively on occupancy rate, rent and running/maintenance costs.
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Lease provision and services Real estate service provision has also been transformed through the provision of online listing services, bundled service provision and shorter leases, again driven by technology acting with other forces (Dixon et al, 2005). This has had implications for the way in which real estate managers manage buildings and client relations; and the way in which appraisers, FM specialists, and brokers all offer services. Arthur Andersen (2000), for example, suggest eight possible future business models to unlock the value chain for real estate service provision: • Advertising: advertising through owned channel on behalf of product or
service suppliers;
• Direct commerce: Supply of product directly to customers, bypassing other channel intermediaries;
• Transaction facilitation: facilitates the matching of buyers or sellers in any market;
• Service provision: provision of a general or specialist service to the customer, often on ad hoc basis;
• Utility provision: provision of product/service which can be paid for as it used;
• Online community: Provision of community of common interest;
• Information trading: Provision of information about markets, products, services and/or market traders; and
• Market aggregation: aggregation of demand or supply through a digital marketplace providing products and services.
Table 6 summarises some of these important impacts. Table 6 Summary of real estate services transformation (adapted from Dixon et al, 2005) Service function Forces for change
Technological change has also been mirrored by changes to lease structures and the provision of serviced office space, although it is difficult to unravel the true impact of ICT (Dixon et al, 2005). Research by CORENET (2004d) also showed that corporations would, at least, by 2010, be willing to pay for flexibility in the workplace. As Figure 6 shows, 47% of respondents would be willing to pay 5% or more for flexible workplace design and 41%, 5% or more for flexible contract terms.
ERES 2005
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Figure 6 CORENET findings (adapted from CORENET, 2004d)
0
5
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No premium <5% =>5% No premium <5% =>5%
% re
spon
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Flexible ContractTerms
Finally, the linkage between ICT, organisational design and potential impact on rent is revealed by recent research from Actium Consult (2005) which shows that flexible working shifts the cost balance form Property (65%) and IT (35%) of total infrastructure costs in a traditionally operated building to 55% property and 44% for IT. 'Connectivity' in a building therefore offers landlords the opportunity to provide value-added services which can be focused to the customer's business. This requires the partnership with a technology service provider to provide ICT services and support. In the USA, the benefits of such provision for both landlord and customer have been highlighted by BOMA (2000). In practice, however, there were severe teething problems with some of the early adopters in the USA (Mattson-Tieg, 2002). Figure 7 Enhancing rent and building value and tenant attraction/attention (adapted from BOMA, 2000)
Tenant satisfaction& Retention
Building Value Enhancement
Potential New Revenue Streams
Connectivity
Tenant satisfaction& Retention
Building Value Enhancement
Potential New Revenue Streams
Tenant satisfaction& Retention
Building Value Enhancement
Potential New Revenue Streams
Connectivity
Clearly there is a mixed picture emerging in relation to connectivity in the UK and overseas, and new research is needed to test the addition of such value for both occupiers and owners in practice in the UK.
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The research on which this paper is based therefore seeks to: • Define the mechanisms through which value to the landlord and the occupier
may be expressed;
• Quantify the impact of connectivity upon value using those mechanisms as a framework;
• Identify future trends in value; and,
• Highlight best practice examples of connectivity management and occupier relationship management.
4.0 Methodologies for unlocking connectivity value impact The methodologies for unravelling the impact of ICT have been explored in previous research. The majority of research has tried to unravel ICT impact through a cashflow approach, but as Dixon et al (2005) suggest, three main effects need to be analysed: • 'Blurring', where it may be difficult to deconstruct the charge for rent and other
services;
• 'Substitution', where some services are high margin, a lower rent may be agreed; and,
• 'Enhancement', where high quality services are provided, an increased or premium rent may be payable.
As Tien Foo et al (2003) point out compared to an unconnected building, a broadband-ready office commands a potential premium through a lower yield, faster leasing and fewer voids with a higher rent and an occupation charge for the broadband services in the cashflow streams. Thompson and Hill (1999) used a hypothetical business model to illustrate the case of a new 150,000 sq ft central London office building with an installed 2Mb leased line (one of the fastest services available at that time) could pay back within 4 years. Almond (2001) also used DCF analysis on a 100,000 sq ft multi-tenanted building to show the payback period and breakeven point for the investment. Finally, Tien Foo et al (2004) used a combination of cashflow-based analysis and network analysis (after Katz and Shairo, 2001) to show how connected property can produce a premium rental value. Network externality benefits can arise also where the utility of a user increases as a result of growth in the network (Katz and Shapiro, 2001), and Tien Foo et al (2004) incorporated a measure of this (based on size of office building as a proxy) in an incremental net present value model to estimate the economic gain of investing in ICT and broadband. Excluding intangible economic benefits such as enhanced landlord-tenant relationships, lower leasing risks, higher market branding and so on, their research showed that ICT/broadband connectivity produced a premium of 3.86% of unit rental value13.
13 When probabilistic uncertainties are introduced the premium increases to 5.27%. ERES 2005
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5.0 Some preliminary findings: the evidence for technology-led change in office
markets 5.1 Online results In May 2005 the first phase of a survey of property owners, occupiers, managers and advisors was set up. Using a structured, on-line questionnaire the objective of the survey was to gainsay expert opinion from within the property stakeholder community as to the impact, and relative importance, of connectivity provision in buildings. The first phase involved emailing a list of 2,967 verified individuals at their workplace soliciting completion of the questionnaire. As at 1st June 2005, 128 responses had been received, a response rate of just over 4%.
As a structure representative of UK industry by sector, these preliminary responses show a cohort with a disproportionate presence in the real estate and construction sectors and many too few manufacturing responses. Company size is also skewed in this preliminary data with too few small and micro-sized responses to make cross-cutting analysis by size worthwhile (Table 7).
Given that, hitherto, connectivity has been perceived as an issue for the office sector and that responsibility for property matters is often outsourced to the real estate industry, these shortcomings are not felt to invalidate the limited results of the survey so far. However, having noted these structural issues, care should be taken in the interpretation of these results in isolation.
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14
Table 7 – Structure of preliminary responses Sector\Company size micro small medium large Manufacturing 4 5 9Construction 4 10 3 17Business or Financial services 3 12 9 10 34Real estate 3 11 11 10 35Public sector 6 12 6 24Other 1 6 2 9Totals 6 38 53 31 128
ne of the main objectives of this survey was to examine the issue of the potential pact of connectivity on rents and values. Each of the stakeholder groups14 were
sked whether, in their opinion, a “connected” building commanded a higher rent an a conventional building and, if so, what that premium might be. Overall, 66% of spondents felt that connectivity had a positive impact on rents, but there were
ignificant differences between the stakeholder groups. The 66% was made up of 3% Property Managers, 22% owners or investors, 9% Occupiers and only 2% gents or Advisors (Figure 7).
hen asked to quantify this impact further, those respondents that felt that onnectivity commanded a rental premium proved much more reluctant to commit to n estimate, responses dropping to 49. The estimates that were provided also howed significant differences between groups (although the advisors group only aw 5 responses in total). Average responses ranged from 1.9% from occupiers of roperty, to 3.5% from Agents and Advisors. Overall the likely impact of connectivity as expected to raise rents by 2.8%
RES 2005 18
Investor/Owners of property; Property Managers; Agents/Advisors; and Occupiers
A similar question was asked with respect to value rather than rent. In this case only 39% felt that connectivity would have a positive impact on value. Again there were differences between the stakeholder groups, but not as marked as for rents.
Property managers provided the biggest positive response with 20%, owners and investors showed 10% with the remainder split between agents and occupiers.
no impact on rents34%
Agent2%
Manager33%
Investor22%
Occupier9%
positive impact on rents 66%
Figure 7 – Rental impact of connectivity
Quantifying the impact saw a degree of unanimity, although little justification of the estimates. Property managers were the more bullish group with an estimated yield impact of 0.5% to 0.75% for a connected building over a conventional one. All other stakeholder groups estimated 0.25% to 0.5%
The disparity between rent and value impacts seems inconsistent. It may be that the ownership of the connectivity itself may be an issue here. In some business models the building owner never owns the infrastructure, instead just taking a volume based slice of income. It could be that this is colouring opinion here.
In addition to issues of rent and value, the survey solicited opinion on the relative importance of connectivity compared to other factors and the importance of different aspects of connectivity.
Connectivity was expected to be less important than location for the value of a building, but perhaps on a par with design issues and even proximity to local services. Broadly, the data bears this view out, but with significant differences between stakeholder groups (Figure 8).
As would be expected, location was scored highest by all the groups, although occupiers placed it slightly less important than did the other groups. Design and Layout was felt to be slightly important by Agents and property managers but slightly unimportant by owners and occupiers. Proximity to local services was felt to be broadly a neutral factor in the attractiveness of a building by all groups.
None of the groups scored connectivity as important in this frame of reference. However, once the importance of location is discounted, there is little difference between connectivity and the other issues, save for the view of agents and advisors, who see connectivity as significantly less important as an influencer of value. ERES 2005
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The importance of different aspects of a connected building was also explored. This question sought the relative importance of:
• Reduced voids – Anecdotally, connected buildings let more quickly;
• Higher retention rates – customers are tied in more effectively in a connected building;
• Customer service – Connected buildings provide a wider range of customer services;
• Service availability – the importance of resilience in the connectivity itself;
• Potential obsolescence – fast-moving technologies go obsolete quickly; and
• Potential liability – Onerous contracts affecting the sale of a building for example.
As would be expected, there were significant differences between stakeholder groups of the importance of each feature (Figure 9).
Owners and managers placed reduced voids as the most important feature of connected buildings. As far as owners are concerned, the quicker a building starts to
1.00 2.00 3.00 4.00 5.00
Agent/Advisor
Manager
Owner/ Investor
Occupiers
1 unimportant to 5 important
Proximity to local servicesConnectivityDesign & LayoutLocation
Figure 8 – Relative importance of connectivity
produce income, the better. Agents were broadly neutral on the subject but occupiers saw it as fairly unimportant.
Tenant retention was seen as broadly neutral by all the groups save occupiers who saw this as unimportant, raising questions about the premise that better facilities help to retain customers.
Occupiers were much more convinced of the customer service category, rating it as fairly important. Other groups saw it as neutral to fairly unimportant.
Service availability was the most important feature as far as occupiers were concerned. Managers also saw it as fairly important. Building owners saw it as neutral and agents as fairly unimportant.
Potential obsolescence was seen as broadly neutral save for owners who thought it more important. Potential liabilities on sale were seen as fairly important by owners and occupiers, but neutral by agents and managers.
ERES 2005
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This preliminary analysis tends to support the contention that connectivity has
b all the other drivers of value.
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ecome an important feature of buildings, but alongside
1 2 3
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Higher tenant retention
Better customer service
Service availability
Potential obsolescence
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Figure 9 – Connected features – relative importance
t also raises some questions that beg a better definition and understanding of the eatures of connectivity and what it can deliver.
.2 Case studies
nitial research findings from our work reveal a growing niche market that is eveloping in flexible space. A prime example is Empress State in London. Empress tate, is a 1960s office block, is a landmark building and, as London’s 14th tallest, as dominated the west London skyline for nearly 40 years. A major £102mn efurbishment of the building was completed by Land Securities in 2003 and the ompleted building comprises 40,000 sq m of office space on 30 floors with a onference bar, 200 seat restaurant and coffee bar, fitness club, child care facilities nd a top-floor revolving bar. The building has a central IT room with server racks nd is pre-wired with Cat 6 cabling making IT installations quick and easy. Land ecurities is also considering including a wireless network also (Tinworth, 2003a). he units in the building are offered under Land Securities flexible lease structure
Landflex), which is an integrated accommodation package that allows a company to atch their business accommodation requirements to their business plan and inimise their total accommodation costs15. This is achieved by providing a choice of
ease lengths for a range of different sized units priced in terms of 'occupational cost' ather than rent. This was developed against the backdrop of the Code of Practice for ommercial leases which suggested that landlords should offer priced alternatives to heir tenants on a number of aspects of their lease including length, rent review rocess and break clauses. Land Securities has ambitions to expand Landflex to ome 1.5 million sq ft across Central London (www.landflex.com).
andflex have also developed and let 7 Soho Square in London using a similar easing model, and their niche market is also populated by Stonemartin. These
5 Research by OPD (2003) suggested that typical cost savings at Empress State over onventional space was approximately 8%. The building is currently let to the Metropolitan olice.
companies are therefore filling a niche market with a pricing package that reflects ICT connectivity within the services provided. In a more conventional lease model the Spinningfields development in Manchester also seeks to capture connectivity value. Due for completion in 2008, Manchester’s Spinningfields is a major development that is intended to secure a thriving new business quarter in the city centre, incorporating high quality architecture and urban design to create a mixed-use, modern and distinctive location (Manchester City Council, 2003). Spinningfields is one of Europe’s largest city centre commercial developments, incorporating a ten hectare site that includes 122,000m2 of office space, two new hotels, luxury riverside apartments and more than 30,000m2 of high class restaurants, shops and bars. The Spinningfields project is a joint venture between Manchester City Council and Allied London, and the IT infrastructure is provided by MiSpace. At the heart of the development is an open access wireless network, which provides a flexible way for occupiers to connect to Internet services and dedicated broadband (Tinworth, 2003b) with bilateral connections to buildings, the ability to upgrade quickly and 24/7 support facilities. 6.0 Conclusions and further research This paper has summarised how the 'new economy', founded on Information and Communications Technology (ICT), is a cornerstone of technology-driven frameworks for economic growth, and can not only potentially recombine existing physical spaces to produce new urban forms, but also impact on real estate, in terms of space requirements and speed of turnover. The paper examined some key conceptual frameworks and argued for a 'socio-technical' conceptual framework to aid understanding of ICT in the commercial property sector, focusing on offices. It also suggested that ICT-led change, acting in concert with other factors has important ramifications for commercial office property. However, future research on the impact on ICT is more likely to achieve tangible and measurable results if longitudinal studies are developed to identify temporal and spatial change, and if ICT is placed in context within a 'socio-technical framework'. To adopt a deterministic slant risks propagating myths. Although research on the impact of office design/layout on worker productivity appears well-developed in FM (see, for example, Price (2002) and Mawson (2001)), in our view, continued research is needed to address the linkage between the impact of ICT and productivity on space demand and supply in the office sector and sub-markets. Using a longitudinal approach, based on benchmark surveys and case studies would then potentially enable change to be mapped more accurately. In mapping impact and change from ICT on rent and service provision, key methodology issues are posed. Preliminary findings from BPF-funded research suggest that a niche market is emerging in the flexible space sector with Landflex and Stonemartin, including technology as part of their connectivity offer for customers. This preliminary analysis also tends to support the contention that connectivity has become an important feature of buildings, but alongside all the other drivers of value outlined in the socio-technical model formulated earlier in this paper. However, it also raises some questions that require a better definition and understanding of the nature of connectivity and what it can deliver to stakeholders and office buildings.
Further research is therefore being conducted to examine how valuers, investors and occupiers perceive connectivity and its impact on value, and how flexible space products are being priced in the market to reflect connectivity. ERES 2005
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Acknowledgements Our thanks go to the British Property Federation for funding this research. Our thanks are also due to Pat McAllister of Department of Real Estate and Planning, University of Reading, and Jon Snow of iX Consulting for their comments on some of the points made in earlier variations of this paper. Our thanks are due also to Samantha Damon and Liz Somerville of Colo Advisers, and PIREC partners for their help in co-ordinating PIREC. References Actium Consult (2005) Summary Total Office Cost Survey - March, Actium
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