Counting on Disruptive Innovation

Three factors shaping fundamental change, by Sadhvi Subramanian of Capital One Bank.
Sadhvi Subramanian

Sadhvi Subramanian

Washington—We live in a time of disruptive innovation. Tech giants such as Amazon, Netflix, Apple and Google have redefined such seemingly well-entrenched fields as retail, entertainment, personal computing and advertising—and newcomers such as Airbnb and Uber have already transformed their industries.

So far, the impact on commercial real estate of these disruptive innovators has varied from sector to sector. For instance, Netflix’s success drove Blockbuster into bankruptcy, which in turn flooded the real estate market with millions of square feet of retail space. In other cases, the effect has not been as dramatic.

During his keynote address at this year’s ULI Washington Real Estate Trends Conference, James Chung described three enablers of disruptive innovation that provide a context to understand fundamental shifts already underway in commercial real estate. Chung is president of Reach Advisors, a New York-based strategy, research, and predictive analytics firm. The three enablers he identified are the shared economy, the assortive economy and the data economy. He describes them as follows:

  • The shared economy: Dominance today is driven by coordination of community assets rather than control of private ones.
  • The assortive economy: Dramatic demographic clustering is replacing predictable longstanding demographic patterns, redefining consumer behavior.
  • The data economy: Data is now a differentiator rather than a by-product.

In addition to driving changes today, Chung believes that these enablers will be the source of any large-scale disruption that occurs in the future. These categories provide a useful guide for understanding changes we at Capital One have observed in the Washington real estate market. Similar changes are evident broadly across the country.

The shared economy: Work/live/play in one community

The concept of the shared economy is intertwined with the values of the Millennials who are its chief exponents. As Chung pointed out, Millennials embrace the kind of peer-to-peer, shared relationships embodied by Uber and Airbnb. But there are other characteristics that we can fold into Chung’s shared economy. Millennials would rather rent—whether it’s music, bicycles, or an apartment—rather than own. They also embody contradictions. They desire community, preferring to live, work, and play in a single neighborhood. At the same time, they hesitate to put down roots, valuing the flexibility that enables to switch jobs when a better opportunity arises.

In Washington, the impact of the shared economy can be clearly seen in mixed-use projects such as The Wharf, the massive real estate development on Washington’s Southwest Waterfront. The Wharf includes condominiums and apartment buildings, office buildings, hotels, a music venue accommodating 6,000 people and thousands of square feet of restaurants and retail space.

The shared economy has also made itself felt in the office market. In addition to encouraging telecommuting, firms like Accenture increasingly use hoteling, a system in which employees reserve shared workspace as needed rather than occupy a designated office or cubicle. Technology is also playing a role. In Washington’s many law firms, legal libraries are being moved to the Cloud and shared online by attorneys as needed, much as they access music from Spotify.

The result is that employers are reducing the footprint of their offices. They need less space because they are using it more flexibly and efficiently. Equally important, the move to smaller or denser offices reflects the preferences of their employees.

The assortive economy: One size no longer fits all

The traditional demographic patterns that supported the mass market through much of the 20th century are fading, and social sorting is moving to extremes. To cite an example, a college degree, once a great leveler, has become a differentiator. As Chung observed, the 30 percent of Americans with college degrees are increasingly marrying each other and thus concentrating their earning power. To be successful, businesses must focus on a niche—both from a product development and a marketing standpoint. It all has to be very specific.

The effects of the assortive economy, so evident in our politics, are equally apparent in commercial real estate. The emergence of Ballston over the last 15 years is an example of real estate developers pursuing a niche strategy. Companies moved there to take advantage of the Northern Virginia community’s well-educated young workforce. Developers built new offices and hotels to serve these companies and high-end apartments and retail to serve their employees. According to Jones Lang LaSalle, a similar cycle of development is now occurring in Washington around the new Technology Corridor in Northwest Washington, in Crystal City and in Georgetown.

The data economy: There’s strength in numbers

Of course, many observers have highlighted the enormous potential of the data economy. IBM estimates that 2.5 quintillion bytes of data are being produced every day worldwide and, at that rate, 90 percent of the world’s data has been created in the last two years. For real estate organizations, data can be a differentiator, enabling them to mitigate risk and maximize return on their investments—but only if they have the capacity, either in-house or through a vendor, to source, manage, and analyze it effectively.

Commercial real estate companies are using big data to fine-tune their strategies, make decisions, and innovate. They are applying it to such issues as site selection, transaction costs, marketing, and design. In effect, data can help real estate developers and investors navigate the shared and assortive economy, helping them locate their niche market and understand how best to serve it.

Moving beyond stereotypes and assumptions

Disruptive innovators see the world from a new, more accurate perspective that enables them to gain competitive advantage. The shared, assortive and data economies provide a useful lens for commercial real estate professionals to do just that—assessing just how far the industry has come in terms of disruptive innovation and determining where disruption might emerge in the future. So while there’s a lot left to be learned, time is short. That next disruptive innovator might be right around the corner. Better to be that disruptive innovator yourself.

Sadhvi Subramanian is responsible for Capital One’s commercial real estate activities in the Washington, D.C., area, including construction loans, terms loans and lines of credit to local funds and developers. Prior to joining Capital One, Subramanian worked for Crown Capital Corporation, an investment bank in St. Louis.