Your Building Is A Captive Distribution Channel: You Should Be Getting Paid More

Prasan Kale is CEO of Rise Buildings, a property technology platform powering connections between people & buildings.

We all know the old saw: The three most important things about real estate are location, location, location. And I’m not here to tell you that location isn’t still the single most important thing about real estate. It is. You could probably argue it still holds the top two spots. But the idea that the land under your property determines how your asset will perform suggests that earning profits from real estate is a passive pursuit.

On the contrary, savvy owners and operators increasingly recognize that the way to generate outsized returns in our industry is not just based on timing the market, catching a neighborhood on an upswing or regulatory capture in the form of tax incentives (though all of these things certainly help). Rather, it’s predicated on an important truth about how people who occupy commercial office and multifamily residential real estate interact with their built environment.

To the degree that improved profitability has been an active strategy, incremental profits have typically stemmed from one of two places: lower expenses or higher revenues. Expenses (i.e., more efficient operations) have been more of a focus over the last few decades, so I won’t spend much time on it here.

To the extent owners and operators have had opportunities to increase revenues in a building, it’s mostly from increased rent premiums due either to prime location (as mentioned above) or from providing “luxury” services such as door staff, shared spaces (think fitness centers), valet parking and other amenities.

For the majority of our industry’s history, this has held true: An office was a place to work and an apartment building was a place to live. That’s no longer the case. The seeds for this change began in the early part of the last century with the advent of mail-order from the likes of Sears and Montgomery Ward when people could order goods to their homes. The transition truly took shape at the beginning of our current century with internet-enabled commerce and it has only further accelerated since then. Fast forward to today and the on-demand economy is in full flight — accelerated even further by our current public health crisis.

So what does all of this mean for office and multifamily owners and operators? It means that it’s time to start seeing buildings for what else they are besides shelter; they are captive distribution channels for the delivery of goods and services. The ramifications of this change are deeply consequential for real estate owners and many of them are missing out on a significant opportunity to increase their revenue.

Think back to when eBay built an auction platform where buyers and sellers could come together and successfully complete transactions. There were costs to eBay for doing this: writing software, paying for servers, hiring marketing personnel and more. Now imagine if eBay allowed buyers and sellers to transact on their platform for free; it would not have been a recipe for a successful business. And yet in many ways, that’s exactly what property owners have done. They’ve built capital-intensive physical infrastructure that provides a platform for transactions between occupants and third parties — and they don’t charge a dime for it (other than indirectly through rents). Vendors get to use an enormously valuable piece of infrastructure to complete their transactions at no cost. Why?

Every time a delivery person comes through your lobby and muddies the carpet or takes up a staff member’s time, that is an expense that is incurred by the building and one that does not yield any incremental value to the building itself. Owners should be monetizing these transactions much the same way other marketplace providers do, but historically they haven’t.

The average person in the U.S. spends nearly $3,000 per year on e-commerce. At a (conservative) 2% capture rate for real estate owners, that translates to an incremental $60 per person in your building. And that number is only going to rise as e-commerce penetration is accelerating. In short, there is a significant opportunity to improve the NOI of a property without painful cost-cutting or major capital investment.

Maximizing the return on your buildings has never been more important than it is now that the stable and consistent revenue streams of yesterday have been disrupted. The potential for capitalizing on existing infrastructure and services is a market ready to be tapped by savvy building owners. It’s not a new idea; whether you model it after eBay or toll roads or taxes, it’s proven. The most successful businesses seize opportunities and it just makes sense to monetize the established distribution channels that you’ve invested in creating.

Forbes Real Estate Council is an invitation-only community for executives in the real estate industry. Do I qualify?

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