FinALLY, DISRUPTION IS HERE!

The revenue model of real estate development is pretty straight forward. Stack a pile of stones on a piece of land and create value by enabling activities there. These can then be translated into a rental income or sales sum and that was about it. But, with the development of the Waterfront in Toronto, Google is demanding its place at the table of urban development, and with a much more lucrative business model. Is the real estate developer facing the same destiny as the Uber driver, as a powerless link in an optimized system?

The world of real estate so far has not been shaken up by disruptive technologies. There are no online platforms such as Booking.com, Uber or Amazon that have completely changed the rules of the real estate game. Booking.com, that is basically a hotel company without hotels. Uber, that's a taxi company without taxis. Unthinkable business models prior to the emergence of the 'platform economy' and, as a result, these companies have turned the markets in which they operate completely upside down.

Sure, in urban development the importance of the physical shopping street decreases under the influence of online shopping, but despite numerous technical innovations, urban development is still essentially about real estate, rental income and initial yield. Earlier predictions about the growing role of health insurance companies and energy suppliers in real estate development did not materialize. Friso de Zeeuw, who recently retired as professor in Area Development at the TU Delft, also confirmed this in his farewell speech, in which he dismissed these kinds predictions as 'voodoo'. Nevertheless, in the short term the real estate world will still receive its share of disruption. That share goes by the name Google Sidewalk Labs.

 The waterfront in Toronto that will be developed by Google's Sidewalk Labs

The waterfront in Toronto that will be developed by Google's Sidewalk Labs

Toronto Waterfront

Perhaps it has escaped your attention, but in the Canadian city of Toronto a revolution is under way. Sidewalk Labs, a daughter company of Google's Alphabet, has won the tender for the development of the waterfront of the city. You never heard of Sidewalk Labs? That is no wonder. Their biggest achievement so far has been the development of a network of Wi-Fi columns in New York City. However, their ambitions go sky-high: "Sidewalk Labs is reimagining the city to improve quality of life".

Toronto's Waterfront will be developed as a city district that lives up to all the clichés that we have about smart cities. "A city built from the internet up, merging the physical and digital realms". Sensors that generate endless data, self-driving cars, underground waste systems, smart grids, energy-generating houses, delivery drones and a lot of happy-looking people on the street. Impressive, but nothing different from what we have seen elsewhere. So why is it so revolutionary what happens there? The reason is in the scale of the project and the strategy of Sidewalk Labs.

 Artist impression of Toronto Quayside. Source: Sidewalk Labs

Artist impression of Toronto Quayside. Source: Sidewalk Labs

First steps of a tech company

Sidewalk Labs is "built to bridge the urbanist-technologist divide". They realize that building a city is primarily a physical task that they’ll have to master. The tech company does this by hiring people on a large scale with plenty of experience in urban development. The CEO, Dan Doctoroff, was responsible for the development of Hudson Yards as deputy mayor of New York. An urban development of $ 20 billion and - whether or not coincidentally - the location of the headquarters of Sidewalk Labs. So, for the time being Professor De Zeeuw is still correct in his statement that urban development remains a real estate game.

Toronto Quayside, which is now being developed as the first sub-area, is with its size of 5 hectares already large enough to be a serious lab for the integration of innovation and urban planning. However, it is only a first step in the development of the total waterfront of 800 hectares, where some 40,000 people will live and another 40,000 people will work. 80,000 Consumers, who move in an area that is fully developed and controlled by a company that specializes in building software platforms and that earns its money by generating and processing huge amounts of data and selling advertisements to its users.

 

Imagine all the things we could do

From this perspective, the city is a combination of a software and hardware platform on which economic value can be created in completely new ways and the resulting profit are up for grabs by new parties. And that fact is going to turn the game completely upside down. Because as owner of both the physical and online platform, Google has endless possibilities to research and monitor all aspects of the city and its residents, to create products and services that everyone wants or needs and to convert these into profit. As the founder of Google once said, "Think of all the things we could do if someone would just give us a city and put us in charge!”

It is still speculating what 'Google could do', but it is far from inconceivable that they will develop the new standard for living or working. A standard that no one wants to go without. Like Uber became the new standard for a taxi and Airbnb for renting out your home, a Google home © can become synonymous with the home of the future. A home in which the online and physical world have been integrated from the earliest design, where the well-being of the residents is continuously monitored, where life is easier, the energy consumption is lower and connectivity is everywhere. Et cetera, et cetera.

 

Changing the rules

In that business model a house is only the hardware that gives Google the possibility to make the residents part of the Google realm. The same way the sale of a Canon printer with a big discount is primarily a guarantee that the manufacturer will make a huge profit on ink cartridges in the coming years. And the same way Apple would like you to buy a MacBook or iPhone, after which it makes it increasingly uninviting to switch to another operating system by integrating services (your music, family photos, files in iCloud, address book, etc.).

The value of real estate is determined differently in that model than at present and is no longer so dependent on location or square meters. The value of real estate is derived from the value that can be realized with the services linked to it during the entire lifecycle of the building. The examples from Apple and Canon show that the price of the hardware in that model can be either very expensive and exclusive or very cheap, depending on the strategy of the manufacturer and what the customer likes to pay for the brand experience.

A very interesting development is that this step from Google can be the introduction of 'the brand as a selling point' in the real estate world. Brands currently hardly play a role in real estate development. People buy a house because of its location or design, but the name of the real estate developer has no meaning or added value. A Google home, however, that will have meaning. That is a house with extras, the new standard. That is the home that people want. That is the way it went with taxis. You used to just hail the first one that came by. Nowadays you call an Uber, because it is cheaper, easier and more accurate.

In this business model Google can play with the price of the house, for instance in exchange for the use of all the data the residents generate. Privacy legislation is hardly of worth when people voluntarily choose to make their data available within the secure walls of their own home. People are already willing to share their name, address, bank account and e-mail address with a manufacturer to get a $2 refund on a jar of peanut butter. How much will we be willing to share for a discount of $20,000 on the price of our house?

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The fate the Uber driver?

Where is the real estate developer in this story? After all, their added value was their ability to add economic value to a property position, through the development of buildings. What happens when someone becomes better at this game, because he knows his customers much better and is the only one who can offer the product the customer wants? How much money can a real estate developer pay to acquire a piece of land, compared to Google, given that the value of this same piece of land to them is no longer just a reflection of real estate value, but of platform services, advertisements and products that can be sold during the coming century?

Perhaps, the only answer is mirroring the Sidewalk Labs strategy. If tech companies are transforming into real estate companies, real estate companies should transform into tech companies. When tech companies hire architectural engineers and urban designers, real estate companies will have to hire programmers and data analysts and provide plenty of space for interactive technology in their 'bricks'. If they do not, they will ultimately be little more than the Uber driver. They will have the wheel in their hands, but will only drive where the app commands them, for the fee the app tells them.

The response from Sidewalk Labs' management after they had won the tender in Toronto was very telling. "Oh God, we've been selected. Now it's our turn!"