The digitalisation of commercial real estate: smart space as real estate finance’s new asset

Introduction: the emergence of smart space

This chapter deals with an ongoing process: the digitalisation of commercial real estate under the combined effects of smart technology embedded into the very fabric of the built environment and the implementation of pervasive computing, a sweeping concept in computer sciences (Weiser, 1991).

While the introduction of Internet of Thing (loT) devices and other cyberphysical systems in the built environment has been widely publicised, few out of computer sciences specialists might have heard about pervasive computing, the information technology (IT) conceptual framework which underpins the implementation of smart technologies in the built environment. Pervasive computing originated in the early 1990s when Xerox PARC’s Chief Technology Officer Mark Weiser and his team invented the third era of computing in human-computer interactions.

The premise is straightforward: instead of humans actively engaging with computers (e.g. sitting at a desk to use a software), computers should be calmly and transparently interacting with humans in space without the latter being even aware of computers’ presence. Thus, computers can remain in the background at the periphery of human attention at all time and everywhere (Weiser and Brown, 1996). Computing becomes a ‘calm technology’. Due to its quest for ubiquity, pervasive computing is also known as ubiquitous computing (ubicomp). Without the seamless human-computer interactions enabled by ubicomp, smart cities and smart buildings would not be possible. Ubicomp whose apparent simplicity should not hide the drastic consequences on human lives lies at the core of commercial real estate’s digitalisation.

As cities and buildings are slowly moving towards Weiser’s vision, social scientists have labelled the unprecedented level of cyber-physical systems pervading physical space in smart environments a “tectonic shift” (Hayles, 2014). These systems turn buildings into cognitive assemblages characterised as “complex interactions between humans and nonhuman cognizers and their abilities to enlist material forces” (Hayles, 2017). For commercial real estate, the so-called fourth industrial revolution (Schwab, 2016) is therefore a lot more than technological gimmickry and entrepreneurial fever exemplified by massive investments in proptech.

Fundamentally, the digitalisation of commercial real estate has a paradigmshifting impact on space, a crucial dimension of real estate which is admittedly invisible, thus oftentimes taken for granted or flatly ignored in real estate finance. However, in Graaskamp (1970)’s own words, “the essence of real estate is [...] space, for this is the usable commodity created by the intersection of land, wall, floor, and roof planes”. With smart technologies, the nature of space in the built environment is changing. Thus, the very commodity that real estate finance has to contend with is being transformed.

Not only are buildings evolving towards smart buildings, but the urban environments they sit in are also mutating into smart cities. A digital skin is literally donning cities and buildings, serving as the backbone to their new-found smartness (Gross, 1999; Rabari and Storper, 2015). The resulting smart cities are “cities of bits and atoms” (Mitchell, 1995) while smart buildings exemplify “the intense interaction between the occupants and the built environment” (Liu and Gulliver, 2013).

The concept of a new space opening up owing to information technology (IT) is not new, but it has rapidly materialised in recent years as technology pervades always ever more aspects of the built environment. In the 1970s, French sociologist Henri Lefebvre (1974) had the intuition that the rapid rise of information technology would lead to a new specific type of space dominated by technology although he could not define it. Over the years, this space has taken many names in the computing sciences literature: cybernetic space, pervasive space, intelligent space.

In the context of commercial real estate, Lecomte (2019a) calls it “smart space”. Smart space sits at the intersect of digital space and physical space. It embodies “the congruence of real and virtual in smart environments”. Lecomte (2019a) explains:

Space has traditionally been a silent component of real estate. Smart technologies powered by ubiquitous computing are turning space into an active part of real estate, and to some extent into real estate itself. [...] The whole real estate discipline is challenged by what amounts to a paradigm shift.

In particular, space users’ mode of relation to buildings shifts from a relational ontology to a phenomenological one whereby space in real estate becomes a highly personal experience (Lecomte, 2019a). In addition to Graaskamp’s classic four dimensions of real estate (length, width, height, and time), a fifth dimension of real estate emerges in the form of digital which unfolds in the digital-time realm, a new realm in real estate analysis (Lecomte, 2020).

Concretely, the emergence of smart space bears important consequences for the real estate industry. Buildings immersed in smart environments have to leverage on synergies between digital and physical in order to create value for space users (Lecomte, 2019b). As buildings serve as platforms to digital, they are no longer the focus of value creation, but tools powered by technology and ubicomp. Smart buildings have to be proactive, rather than reactive. They are context-aware and display bi-directional consciousness. As pointed out by Ratti and Haw (2012), smart buildings are “living bits and bricks” which embody “a feedback fuelled world where we don’t just inhabit our architecture but integrate with it”.

Furthermore, with smart buildings, commercial real estate moves from asset provision to service provision (RICS, 2017). Smart buildings, nicknamed ‘¡buildings’ (Carvalho, 2015), enable the commercial real estate industry to broaden its value chain by linking the built environment with IT applications (e.g. cyber-physical systems, software, data analytics). Consequently, commercial real estate’s value drivers are changing, which questions the relevance for smart buildings of pricing models initially developed for non-smart buildings, such as hedonic regression models anchored in classic physical structure and location characteristics.

Case in point: in smart cities, physical location is no longer the key to a building’s value (Berman et al., 2016). By contrast, what matters in smart buildings is their digital positionality, i.e. access to “interactive loci or gateways where human tasks are mediated and value created” (Lecomte, 2019b). One can safely forecast that over the coming decade, digital will play an increasingly important role in pricing models of commercial real estate in smart cities.

Noticeably, models should account for the fact identified by William Mitchell in his seminal book Me++: The Cyborg and the Networked City (2003) that smart cities cater to hyper individualised space users. Highly personalised user-centric digital services available in smart buildings create a “market of one” (Curry and Sheth, 2018). The wide array of Gibsonian affordances in smart buildings questions the classic concept of property heterogeneity derived from physical structure and location, and the best way for real estate finance to deal with it.1

This chapter presents two new pricing models applicable to smart buildings in smart cities. They build on the hedonic pricing theory to design methodologies taking into account smart commercial real estate’s digital realm. They accommodate smart space’ extreme experiential diversity underpinned by smart buildings’ user centricity.

This chapter also introduces a new concept of property rights in smart cities: digital rights. As smart buildings are externally covered by smart cities’ digital skin and internally laden with an Information and Communication Technology (ICT) infrastructure that turns ubicomp into reality, smart space is likely to mediate a growing number of human activities in the years to come.

By entering into a building’s physical space, building occupants step into smart space. Whilst relations in physical space are regulated by property rights, what rights, if any, should regulate smart space? Who should own access to and/or have control over the new digital realm? Is smart space dependent on physical space, or is it independent from any physical structure, by existing as a fully fledged legal entity with its own set of rights?

Since Tudor enclosures in 13th-century England, property rights and technology have traditionally been closely intertwined. Thus, unsurprisingly, the digitalisation of commercial real estate carries with it a natural evolution in the concept of property rights. Ratcliff (1961) provides a good summary of the situation real estate is facing with smart technologies:

Down through the centuries property has been moulded and fitted to the needs of the social organization, needs that are ever-changing through the

Digitalisation of commercial real estate 81 broadening of knowledge, the surges of social movements, the slow changes in the social mind, and the advances in technology. [...] Changes in the property concept have been associated with changes in man’s way of life and with advances in technology.

The thesis presented in this book is that smart space should come with a set of rights encapsulating space users’ relations in smart environments. These rights are called digital rights. Similarly to property rights in physical space, digital rights are rights to smart space. Defining rights that match smart buildings’ digital dimension in smart urban environments is important but not sufficient. How should these digital rights be valued and exchanged? And ultimately, what does it mean to own a building in a smart city? This chapter explores these questions. It analyses the nature of property rights in smart urban environments, lays out a series of axioms defining the economic foundations of digital rights, and proposes a market template for exchanging these rights. The issue of digital rights arises in commercial real estate because of the potential economic value of smart space for the real estate sector.

As demonstrated in the following chapter, aggregate thinking seems unfit to analyse smart real estate assets. Instead, approaches presented in this chapter rely on micro-scale analysis and micro markets. Many concepts presented here might seem a little abstract. Like the other ideas introduced in this book, they map out a vision of what the future could be for real estate finance in the context of radical technological innovation. They are exploratory in nature and meant to foster a healthy debate among academics and industry researchers.

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