“Investing in Internet and broadband technology gives us an opportunity to educate our tenants about how they can increase their productivity,” says John Bucksbaum, CEO of General Growth Properties, who delivered the Farash Distinguished Lecture on Wednesday evening, October 11, to kick-off the Fall Members’ Meeting of the Zell/Lurie Real Estate Center at Wharton.
Today, even though the stock market’s honeymoon with e-commerce has ended, and many dot-coms are closing shop, Bucksbaum still believes that real estate developers must take e-commerce seriously. “Older people may think online shopping is different than shopping in a store, but young people don’t differentiate between the two,” he says. “To them, it’s just shopping. As e-commerce becomes normal, we had better be part of what is normal rather than outsiders looking in.”
The company has spent the past two years investing in technology that integrates the Internet into its operations. General Growth Properties is using the Internet to change the way it deals with its customers and tenants, as well as to increase its own efficiency. Although this is an expensive exercise, it will pay off in the long run, according to Bucksbaum. In fact, all real estate companies must adopt this approach if they want to survive in the future.
Bucksbaum believes that when real estate companies try to integrate bricks and clicks, “The most important issue to focus on is what you are trying to do. In our case, the most important question was, how do we increase traffic to our malls?” General Growth Properties has always tried to “give customers what they want, when they want it and where they want it,” notes Bucksbaum, but the arrival of the Internet has changed customers’ expectations. Shoppers now want to choose between shopping online or offline. “We went online because we wanted to sell more,” he says.
General Growth Properties is betting on its view that investing in high-tech infrastructure will help its retail tenants become more efficient. “Using technology to increase the efficiency of retailers helps us strengthen our relations with our tenants,” Bucksbaum says. He believes that broadband connections at malls will be enhanced by wireless connections over the Internet. So, as a customer is walking through the mall, it will be possible to send a message to her cellphone or Palm Pilot about a special on Nike products at the shoe store around the corner. “That is why we have made a big commitment to broadband,” he explains.
In addition to using the Internet to redefine its relations with customers and tenants, General Growth Properties is using technology to improve its own efficiency. Not quite paperless yet, Bucksbaum is encouraging lawyers to negotiate leases electronically and architects to review plans and blueprints online. The company is also moving towards introducing an Internet-based accounting system. “People have become very innovative,” he points out. “These steps will add to our productivity.”
Thursday’s Sessions: A Focus on Issues Ranging from Demographics to Entrepreneurial Activities
Dougal M. Casey, Managing Director of Clarion Partners; Adele Hayutin, Chief Economist of the Fremont Group, and G. Ronald Witten, President of M/PF Research, discussed demographic challenges and opportunities facing the real estate industry. Joseph Gyourko, Martin Bucksbaum Professor of Real Estate & Finance and Director, Zell/Lurie Real Estate Center, moderated the discussion. The panelists pointed out that ratios of working population to dependent population (defined as those below 15 and above 65) are changing all over the world. In countries like Japan and Germany, the working age population is shrinking, while the dependent population, especially those over 65, is increasing rapidly. In such countries, absolute population declines are likely. In countries like the U.S., South Korea and Sweden, the workforce is growing, but more slowly than the dependent population. In contrast, young developing countries such as China and Brazil have a fast-growing working population, which outpaces the growth of the dependent population. The conclusion: Think differently about work, the panelists said. “Importing workers will become much more competitive in the future, and worker productivity will become increasingly important.”
The panel also discussed the impact of demographic trends on housing demand. They pointed out that age is an important driver of housing choice, and people in their 20s and 50s contribute significantly to demand for rental housing. In the U.S. between 1990 and 1998, the population of single adults grew significantly, which has “favorable implications” for the rental market. The panel also pointed out that during the next five years, all major household growth in the U.S. is expected to be among households with no children. Another major trend, which has been widely discussed for years, is the aging of the baby boomers, which will create massive demand for senior housing.
Before the keynote address, University of Pennsylvania President Judith Rodin thanked the Bucksbaum family, represented by John and Matthew Bucksbaum, for the family’s gift of the “Martin Bucksbaum Endowed Chair” in Real Estate at Wharton. The chair was created to honor the memory of Martin Bucksbaum, an innovator in the real estate profession and a founder of the concept of the modern shopping center. President Rodin also announced that Center Director Joseph Gyourko would be the first holder of the Martin Bucksbaum Endowed Chair. John Bucksbaum briefly responded to President Rodin, then introduced his father, Matthew, Chairman of General Growth Properties and Martin’s brother, who spoke poignantly about Martin’s contributions to the industry and the growth of the family’s business interests into a real estate portfolio currently valued at approximately $10 billion.
Keynote Presentation: “The Forces Shaping B2B E-Business” by Professor Lorin Hitt
In his keynote presentation, Professor Lorin Hitt, who teaches in Wharton’s Operations and Information Management department, spoke about “The Forces Shaping B2B E Business.” Hitt pointed out that fear and opportunities for gain have generated a lot of interest in business-to-business (b2b) e-commerce. The formation of at least 25 major b2b consortia and 700 online marketplaces was announced by last May. Venture capitalists in the U.S., until recently, were aggressively pumping capital into this business. “B2B investments represent 40% of all VC investment,” Hitt observed.
The lure of b2b e-commerce stems from its ability to connect massive markets. “All commerce is $47 trillion worldwide, and 60% of that commerce is among businesses,” says Hitt. Those who launch online marketplaces believe that if they can move but 10% of these transactions online by 2005, and charge a fee of 1% to 2% per transaction, their online marketplaces should produce billions of dollars in revenues. Hitt dismisses this argument. “People forget that 99% of transactions take place on the telephone and the phone companies get zero transaction fees for these deals.”
The real value of b2b e-commerce lies in the ability of online marketplaces to offer potential for cost savings. But if these are achieved by simply squeezing suppliers through such techniques as reverse auctions, then, Hitt observes “this doesn’t represent an increase in productivity, just a redistribution of value.” In practice, Hitt warns, although b2b commerce offers the promise of large potential gains, realizing these gains is extremely complex and risky. “B2B e-commerce may also be fundamentally incompatible with some products,” says Hitt.
After lunch, and expanding upon themes from the keynote address, Peter Linneman, Wharton’s Sussman Professor of Real Estate, moderated a panel about b2b e-commerce in real estate. The participants included Andrew Florance, CEO of CoStar; David A. Hefland, Executive Vice President of Equity Office Properties Trust; Devin Murphy, Managing Director of Morgan Stanley Dean Witter; and Scott Rechler, Co-CEO of Reckson Associates Realty. Asked whether investors are interested in real estate web ventures, the panelists observed that real estate is well positioned to benefit from the Internet. It is a highly fragmented industry, and as such, b2b markets that aim at overcoming inefficiencies — such as information asymmetries — do have potential. Incumbent real estate companies, which have strong customer relationships in place, are better positioned to exploit this potential than upstart newcomers.
Real estate does face challenges in implementing b2b strategies. While other industries may be able to eliminate intermediaries, eliminating real estate brokerage firms is hardly easy. “The issue is not eliminating brokers from a real estate transaction, or saving a couple of pennies on a deal where a tenant is paying you $50 per sq. ft., but bringing information efficiencies into the industry,” the panelists said. The panel also addressed the complicated question of valuing e-business ventures. Their view was that valuation of private companies always involves a negotiation and is fundamentally more an art than a science.
The final panel, moderated by Asuka Nakahara, Associate Director of the Zell/Lurie Real Estate Center, dealt with entrepreneurship. The panel included: Stephen Clark, President, Cypress Realty; Penny Pritzker, President, Pritzker Realty Group; Robert Spoerri, CEO, Comro.com; and, Don Wlliams, Chairman, Trammell Crow Company.
The premise discussed: While technology certainly will play a role in the future of real estate, it will not change the major players in the industry. As such, entrepreneurs should expect technology to bring about an evolution, rather than a revolution, in real estate.
How, then, will value creation in real estate change as a result of technical or demographic changes? Demographics are crucial because they point to emerging opportunities. For example, developers of senior housing are preparing to serve the needs of millions of aging baby boomers. But opportunities abound in several areas, ranging from resorts to affordable nursing homes, the panelists said. Such businesses offer great opportunities in the long run.
Before real estate companies can exploit these opportunities, they face another major challenge: recruiting and retaining their employees. Though the number of those leaving traditional businesses to join dot-com start-ups has waned, real estate still faces a bitter war for talent vis-á-vis other industries. Steps such as offering equity positions in projects or stock options to employees can help nurture an entrepreneurial mindset. “Most real estate projects involve big dollars, and you can’t afford to make mistakes. Offering an ownership stake certainly helps to sharpen focus. It a big attraction in recruiting good people.”
Posted November 2000