The Changing Alignment of the Construction and Real Estate Industries

The following is an editorial blog post from BuiltWorlds contributor Franco Faraudo, Co-Founder at Propmodo.

It was during the BuiltWorlds panel at the MIPIM PropTech Summit this year that I heard something that made me question the nature of how we create our built environment. It came from Doug Chambers, founder of FieldLens, a construction collaboration tool. They made headlines earlier this year by getting acquired to one of the world’s fastest growing startups, WeWork. At the time many industry observers, including myself, were asking themselves or anyone that would listen, “Why would a coworking company buy a technology designed exclusively for the construction industry?”

At the time WeWork pitched the acquisition as a way to collect even more precious building data, something that is at the heart of their global aspirations. But the underlying reasons might actually have to do with this quote from Doug’s conversation: “The construction industry’s incentives are misaligned.”

I believe Mr. Chambers, speaking to a crowd of construction technology insiders, was talking more on the granular level. Many of the subcontractors are not responsible for the outcome of their work. But I interpreted it in a much broader sense. The fact is, the incentives of the construction industry as a whole are misaligned, from the building’s perspective.

Real estate is a long-term asset. Even though accountants assign a “useful life” to structures, they are able to produce value long after they are fully depreciated. How much value a building can generate, and for how long, depends almost entirely on how they are designed and constructed.

In our current system, construction companies have very little interest in the long-term profitability of a building. Generally, they make sure they have been paid in full by the time the ceremonial ribbon is cut. They have few reasons, besides some malpractice liability, to worry about the effects of their construction decisions after they pack up their tools and move on to the next job site. This means that choices are inevitably made that negatively impact the long-term viability of a building, often at the cost of the building’s eventual owner.

WeWork represents a divergence from the traditional model. They build their spaces with the intention of owning and operating them. Consequently, when they build something their incentive is to build it to last. Any corners cut during construction will only come back to cost them down the road. As anyone in construction knows, design mistakes can often cost multiple times more than what it would have to just build it right in the first place, so an extra incentive to care about the ongoing operations of a property can pay dividends in the long run.

It isn’t only the “space-as-a-service” revolution that is making builders take the long view. Some governmental agencies are even stepping up to promote the importance of building maintenance in the design process. Singapore recently announced a plan to put in place a “Design for Maintainability” framework that would require technologies like Building Information Modeling (BIM) and involve facilities managers in the design process.

If experimental initiatives like this are successful we might see a shift towards a convergence between the construction industry and the building’s eventual operators. It makes sense on a theoretical level, builders would have no reason to swap long term gains for short term ones. Their ROI would depend on their creations being energy efficient, healthy, low maintenance and built to last.

When viewed in this light, the WeWork acquisition of FieldLens make a lot more sense. WeWork is finding ways to design and build to best suit their business model. They are both a construction company and a landlord. Based on the massive amount of interest and investment that WeWork has received, they are not the only ones who see the benefit of being the company that builds the space-on-demand world. What remains to be seen is if the legacy players in construction and real estate embrace the synergies that WeWork aims to exploit.

At Propmodo we write about the innovations and best practices in brokering, managing and operating buildings. We are a proud partner of BuiltWorlds because, like us, they see the convergence of our worlds in a truly transformative way. We all stand to gain from our physical world being built to its “highest best use.” Bringing the construction and real estate industry closer together could be the answer.