Economic foundations of digital rights in smart buildings
This section presents a theoretical approach to digital rights, by modelling smart space in economic terms. Its aim is to add the digital realm to the classic framework applied in real estate economics. To do so, it relies on Henri Lefebvre’s (1974) analysis of urban space. Lefebvre views urban space, or “lived space”, as either dominated space or appropriated space. The two categories of space experienced by people coexist in cities. In a capitalist economy, property rights signify the domination of physical space by property owners, which translates into digital rights for smart buildings in smart cities. The book proposes twelve axioms to model smart space in smart buildings according to the Lefebvrian paradigm of space. These axioms capture the power struggle underlying smart space attribution as different stakeholders in a building (owners, tenants, occupants) might have diverging interests, in particular as far as control in and over space is concerned. Findings from this analysis can serve to inform the pricing of digital rights in smart buildings. The fundamental principles for an economic analysis of digital rights are introduced after a brief presentation of Henri Lefebvre’s theories on urban space and their relevance to smart space. 2 Lefebvre’s paradigm of space domination and appropriation In his seminal opus on urban space, The Production of Space (1974), Henri Lefebvre asserts that in cities, there are two categories of space: dominated (dominant) space and appropriated space. Dominated space is “a space transformed and mediated- by technology, by practice”. Dominant space is “invariably the realization of a master’s project”. For instance, military architecture, fortifications and ramparts, dams and irrigation systems are classic examples of dominated space. The polar opposite to dominated space is appropriated space. An appropriated space is “a natural space modified in order to serve the needs and possibilities of a group that it has been appropriated by that group”. A site, a structure, a square, or a street may exemplify appropriated space although “it is not always easy to decide in what respect, how and by whom and for whom they have been appropriated”.), the building’s physical structure and ICT infrastructure, property rights in physical space, and digital rights in smart space (i.e. Digital Access Rights in full and divided ownership of Digital Usage Rights and Data). The price of a smart building has to include all these smart real estate resources.
(2) In the proposed regime of digital rights, rights relative to smart grids are deemed to be part of property rights in physical space.
Lefebvre assesses that dominated spaces and appropriated spaces which are antagonistic should be combined. There is no appropriation without domination. Hence, appropriation is the result of a struggle with overpowering historical trends towards domination. Dominated space is a space of power. It is laden with “constraints and violence [which] are encountered at every turn”.
Conversely, appropriation is a process that plays out over time, and cannot “be understood apart from the rhythms of time and of life”. When it comes to the private sphere, Lefebvre propounds that “in the best of circumstances, the outside space of the community is dominated, while the indoor space of family life is appropriated”. What people essentially buy when purchasing their house is time, i.e. the time to appropriate their own domestic spaces.
Technology does play a crucial role in enabling spaces to become dominated. More than any other elements in the built environment, commercial buildings condense the whole paradigm of space domination by technology, which is not devoid of consequences for space users’ ability to appropriate smart space. “Thanks to technology, the domination of space is becoming, as it were, completely dominant. [...] In order to dominate space, technology introduces a new form into a pre-existing space”. According to Lefebvre, the more a space is functionalised, the less susceptible it is to appropriation. A highly functionalised space is removed from the sphere of space users’ lived time which is “diverse and complex”.
Irrespective, Lefebvre acknowledges that things are never in black and white in the complex relationship between technology and space. Indeed, “there is no such thing as technology or technicity [...] bearing no trace of appropriation” even though technology systematically favours domination over appropriation 4
Another way to look at dominated and appropriated spaces is to think in terms of quantitative and qualitative spaces. Dominant space is quantitative, i.e. it relies on objective measurements, whereas appropriated space is qualitative. Interestingly, the space of consumption, the quintessential productive space, is quantitative whereas the consumption of space out of any productive activities (e.g. leisure) is qualitative. Lefebvre assesses that “the dominant tendency [...] is towards the disappearance of the qualitative, towards its assimilation subsequent upon [...] brutal or seductive treatment”.
At the more extreme end of the spectrum, a space which is rendered totally functional and dominated becomes abstract. Abstract space is measurable not only as geometrical space, but also as “social space [which] is subject to quantitative manipulations: statistics, programming, projections”. As a tool of domination, abstract space is lethal by “[asphyxiating] whatever is conceived within it”.
Lefebvre, who analyses the dichotomy between domination and appropriation from space users’ perspective, is firmly against property rights regimes which, in his views, foster urban space domination by land owners13. Lefebvre’s vision supports the right to the city for all city dwellers (Purcell, 2013). Property rights are supposedly hindering this fundamental right to the city which should belong to people who inhabit it. Space users should be entitled to their own “appropriated space-time” so that their use value comes to replace the market’s exchange value of properties. In the context of digital rights, one could argue that digital rights should not exist in the first place as they ‘rob’ space users of their legitimate right to smart space. The analysis of digital rights presented here approaches this aspect of the Lefebvrian paradigm in a very pragmatic and non-partisan manner. It does not question the existence of digital rights. Rather, it focuses on their optimal attribution among the different stakeholders involved in a smart building.
• Space appropriation in smart buildings
The Lefebvrian paradigm of dominated/appropriated space provides a useful framework to analyse smart space through the prism of control. Digital rights are the tools enabling economic control over smart buildings as income-, or rather value-, generating properties. The phrase “value-generating property” embodies the multidimensional real estate resources at work in a smart building (physical, embedded ICT infrastructure, digital skin/cloud, data). Digital rights offer control over these multiple resources.
Digital rights are therefore a marker for space domination and appropriation16. Digital Access Rights (DARs) epitomise space domination in the space-time realm of commercial real estate while Digital Usage Rights (DURs) symbolise space appropriation in the digital-time realm (as introduced in Lecomte, 2020). Markedly, there are no Digital Usage Rights without pre-existing Digital Access Rights. That is, there is no appropriation of smart space without technology-powered domination of pre-existing space. In a simplistic vision of spatial domination, smart buildings’ technological apparatus allows for the domination of physical space and the emergence of smart space.1?
Hence, smart space’s genesis supposes at its very core the domination of physical space by technology. Without this fundamental process, smart space would not emerge. All smart space is therefore dominated space. This originally dominated space acts as the intrinsic building block of a smart building and gives rise to Digital Access Rights, i.e. rights to dominate physical space with pervasive technology and create smart space. The value of these rights should somehow reflect the scope of spatial domination, e.g. the number of human-technology interactions in a smart building.
Once smart space is being dominated (i.e. a functioning smart building), it can only create value for owners and tenants by being appropriated. Appropriation in smart space implies the ability to use smart space as the driver or background of value-creating economic processes in real estate. Digital Usage Rights allocate this value between owners and tenants, including potentially the most valuable smart real estate resource of all: data. Digital Usage Rights embody space appropriation in a smart building. By renting out spaces, tenants appropriate both physical space and smart space.
In addition to tenants as space appropriators, building occupants’ situation can also be analysed in light of Lefebvre’s paradigm. Space users’ interactions in smart space generate a long-term memory process captured and powered by data and conceptually known as Umwelt. Umwelt is a space user’s own digital surrounding world which takes shape over time as she/he interacts in smart space. A myriad
Digitalisation of commercial real estate 105 of questions arise when the notion of Umwelt collides with digital rights. Is Um-welt truly a form of spatial appropriation, or simply domination in disguise? Who should own space users’ Umwelts? In particular, should the rights to collect data in smart space (as part of DURs) come with the rights to own space users’ digital surrounding worlds? And, ultimately, is space appropriation possible at all for smart buildings’ occupants given the technology involved and/or the proposed regime of digital rights?
To identify the rightful ownership of space users’ Umwelts in smart space, let’s focus on data. Data is the raw material of these personalised digital surrounding worlds. According to the digital rights regime presented in this book, data ownership is divided between property owners and tenants based on Digital Usage Rights (DURs). Hence, the right to shape building occupants’ digital surroundings belongs to tenants for their tenanted spaces and property owners for all other spaces. Nevertheless, should space users be granted rights to their Umwelts in parallel to what DURs prescribe?
The answer to this question can be unequivocally positive provided specific rights unbundled from DURs are granted to space users:
- - right to access one’s Umwelt and/or modify it in part or in full;
- - right to control use of one’s Umwelt for some or all activities/ interactions in smart space and related data collection;
- - and as an extreme case of the above, the right to prevent use of one’s Umwelt in smart space altogether (without any authorised data collection).
Unless some or all of the above-mentioned rights emerge, building occupants have no abilities whatsoever to control their Umwelts18 (i.e. to appropriate smart space). Granting building occupants rights over their Umwelts would represent a dilution of DURs potentially at the expenses of both property owners and tenants. Equivalent monetary value to that extracted from DURs’ full ownership might not directly materialise with building occupants. Nonetheless, one can expect these rights to trigger an increase in space users’ welfare, and consequently to lead to accrued experienced utilities. Tenants might benefit reputationally but also economically through increased traffic and sales. In turn, property owners might benefit through increased valuation. How much net value is thus created would eventually determine owners’ and tenants’ willingness to unbundle and share their DURs.
Hence, the decision to grant building occupants’ rights to Umwelt represents a trade-off between direct and indirect value creation in a smart building. Owners and tenants would have to decide on their digital strategy as part of what amounts to an optimal digital ecosystem within a smart building. All stakeholders would have to agree on a ‘digital charter’ defining the dos and don’ts in a smart building. In the future, regulators can be expected to intervene in digital rights’ attribution, e.g. by giving some level of control to space users over their own Umwelt. Controlling DURs could be part of regulators’ agenda as well as limitations on DARs’ full ownership whereby property owners are requested to turn off specificinteractions/ data collection according to space users’ own idiosyncratic, albeit legally binding, requests. Over time, the share of building occupants’ Umwelts in the overall value of a building’s DURs will keep growing to the point of dominating all DURs. As mentioned in Lecomte (2020), smart space is different from physical space because it continuously grows over time, each time a space user steps into a smart building.
Implied in the analysis of digital rights presented in this chapter is the view that without proper safeguards, control over building occupants’ Umwelt is an extreme form of spatial domination for the exclusive benefit of digital rights owners. It is extreme insofar as attempts to appropriate smart space by space users are doomed to fail without space users being aware of it, or worse with space users being under the illusion fuelled by calm technology that they are in control over smart space. In smart urban environments, domination is so ubiquitous and pervasive that it becomes invisible.
In theory, data analytics powering smart buildings make it possible for space users to appropriate smart space much faster than they can appropriate physical space in non-smart buildings. However, can quantitative space ever be qualitative? Lefebvre (1974) explains:
Domination by technology tends towards non-appropriation- i.e. towards destruction. [...] Appropriation itself implies time (or times), rhythm (or rhythms), symbols and a practice. The more space is functionalised - the more completely it falls under the sway of those ‘agents’ that have manipulated it so as to render it unifunctional- the less susceptible it becomes to appropriation.
Space users’ Umwelt which combines time, rhythm, and practice in smart space could be the answer to this fundamental dilemma, provided it can ever set itself free from the grasp of technology. To achieve that, it might need to be granted a legal identity with rights of its own (e.g. as a legally defined digital-self with rights to privacy among others).
As mentioned before, without safeguards such as full public disclosure and rights granted to space users, the seemingly perfect space appropriation which translates into smart space’s remarkable user-centricity could easily result in even greater control through code as evoked by Lessig (2006). Indeed, in smart space as in cyberspace, code can be the de-facto law with the consequence to institutionalise algorithmic control in space. To refer to Lefebvre’s terminology, smart space has a natural tendency to become abstract. That’s why pressures towards space users’ control in smart buildings would be very difficult to contain in a ‘laisser-faire’ environment.
Furthermore, smart space’s overpowering quest for value means it is essentially a productive space. Contrary to the ‘old’ physical space analysed by Lefebvre in the 1970s when the consumption of space (out of the ‘space of consumption’) could be unproductive, there are no unproductive spaces in smart buildings unless they are designed to be so. By definition, every inch of smart space is dominated,
Digitalisation of commercial real estate 107 ready for appropriation in exchange for DURs. The odd exception might be spaces designed to be unproductive although they might be concomitantly contributing to smart buildings’ value creation in other synergetic ways. Hence, all forms of spatial consumption in smart buildings are intrinsically productive, either directly (e.g. generating sales in a retail outlet) or indirectly (e.g. data collection feeding the buildings’ analytics).
Faced with this new economic reality, commercial real estate players should acknowledge the dichotomy between smart space domination and smart space appropriation in their business models and aim, under what can be expected to be a growing number of exogenous constraints (e.g. cybersecurity, challenge to their digital rights) to optimise smart space’s value-generating potential for their properties in the interest of all stakeholders.
• Axioms
Twelve axioms are proposed to model digital rights and smart space in economic terms. The objective is to incorporate the digital realm into existing models developed in real estate economics. These models were designed for the space-time and money-time realms of real estate only, before pervasive computing even existed. The twelve axioms presented here propose an economic analysis of digital rights that encompass all three realms. By highlighting the rationale behind the regime of digital rights proposed in this book, they ultimately lay out the foundations for much broader and in-depth studies that the digitalisation of real estate will undoubtedly trigger in the field of real estate economics.
The twelve axioms cover four broad topics: the creation of digital rights (axioms 1-3), utilities in smart space (axioms 4-7), the supply of smart space (axioms 8-10), and profit maximisation in smart space (axioms 11-12). Appendix 2.2 which refers to the water rights model of property rights to shed light on the digital rights regime introduced in this book provides the legal background to axioms *1 and #2 listed below.
Axiom #1: Primacy of physical space over digital rights
Property rights supersede any digital rights. Digital rights are attached to property rights. They are derivative of building owners’ property rights. Digital rights are bounded by physical space which delineates their reach in a smart building. Thus, digital rights cannot emerge ex-nihilo out of property rights. As a result, property rights and digital rights are inseparable.
Only property rights holders are entitled to create smart space (Digital Access Rights) and to use smart space (Digital Usage Rights). The latter rights are transferrable to tenants for clearly delineated physical space and duration according to contractual agreements between landlords and tenants (e.g. smart space leases).
The inseparability of property rights and digital rights asserts the dominance of the physical realm over the digital realm in smart real estate. The opposite rule (i.e. separability of property rights and digital rights) would overlook thefact that smart buildings are first and foremost physical structures, which serve as platforms to digital and not the reverse. This axiom potentially limits third parties’ involvement in digital rights (e.g. technology companies which might be purveyors of smart space solutions) in a parallel market for smart space as there is no possible ownership in the digital realm without underlying tenures in the space realm.
The primacy of property rights over digital rights underscores the importance of physical space for digital rights which would be worthless without it. Dominated physical spaces are the raw material from which digital rights emerge. By the same token, smart space does not create value for property owners and tenants unless they are ‘activated’ by space users. In that sense, digital rights embody the fact that smart buildings are akin to a series of preset value creating processes with consequences in three realms of real estate: space-time, money-time and digital-time. For the legal background to this axiom, one may refer to the riparian doctrine of property rights introduced in Appendix 2.2.
Axiom #2: Transferability of digital rights
Digital rights are transferrable within the limits of Axiom *1 and in accordance with rules which differ between the two categories of digital rights: Digital Access Rights and Digital Usage Rights.
Digital Access Rights (DARs) cannot be transferred to tenants or third parties. They must remain under property owners’ full and exclusive control at all times. Conversely, Digital Usage Rights (DURs) can be transferred. Landlords automatically transfer DURs attached to tenanted physical spaces as part of lease agreements. They may also transfer to third parties DURs on non-tenanted spaces. These transfers are strictly limited in space, time, and scope. In the event of a building’s sale, digital rights along with property rights are transferred to the new owners. This includes all DARs, and DURs on non-tenanted spaces (e.g. public areas) which automatically revert to the new owners. Meanwhile, DURs on tenanted spaces follow the terms and conditions of ongoing lease agreements signed for these spaces.
By the same token, tenants have the ability to transfer to third parties part of all of their DURs according to terms and conditions stipulated in their smart space leases. In the event of lease termination or expiration on the physical space (space realm), all underlying DURs automatically revert to landlords, irrespective of who the digital rights holders are at the time. Fundamentally, all transfers of DURs to third parties are leaseholds with a break clause for the initial digital rights holders. In accordance with the principle of physical space’s primacy, the only freehold in smart space stems from the ownership of property rights linked to the building’s physical structure. The limited transferability of Digital Usage Rights represents a risk for third parties as they would have to relinquish their use of smart space upon a building’s sale or lease termination, which might occur before their agreements’ initial maturity.
Axiom #3: The production of smart space and the concept of digital vacancy in smart buildings
AXIOM 3.1: APPROPRIATED SPACE AS DOMINATED SPACE
All appropriated spaces in a smart building are dominated spaces. However, not all dominated spaces are appropriated. Hence, at any point in time, in the space realm, the total amount of dominated space (D) in a smart building is equal to, or larger than, the amount of appropriated space (A). D and A are measured in units of physical space (e.g. sq.m2, sq. ft) with D > A.
Vj = D-A is a smart building’s potential for immediate appropriation. Vj is a measure of the building’s digital vacancy in units of physical space (i.e. in the space realm). V] is a short-term vacancy indicator of appropriation. The appropriation ratio given by D/A is a variation of Vp The larger the ratio, the more dominated spaces are available for appropriation in a building. The ratio is by definition greater than or equal to 1.
If the total amount of physical space in the building, P, is larger than D, then V2 = P-D is another measure of digital vacancy in units of physical space, but contrary to Vp V2 is a long-term vacancy indicator since it would require for physical space to be dominated and turned into appropriable smart space for vacancy to decrease. This process bears a cost for the DAR holders (cost of domination).
AXIOM 3.2: THE PRODUCTION OF APPROPRIATED SPACE
Producing appropriated space from dominated space carries a cost for tenants equal to the price paid for Digital Usage Rights (DURs) bought from landlords.1^ In a classic landlord/ tenant framework, the price at which a landlord is willing to sell DURs should at least capitalise all rental incomes paid by the tenant for usage of smart space according to the terms of the lease:
Price of DURs > Rents paid by tenant for usage of smart space (digital realm)
By the same token, the price that a tenant is willing to pay for DURs does not exceed the value he/she will be able to create by having the right to use smart space. For tenants, value created in smart space comes from two sources: their operations in smart space (e.g. incomes generated in retail outlets owing to the use of smart space) and value stemming from data collected in their rented spaces, keeping in mind that the long-term value of appropriation for a tenant lies in his/her ability to leverage on space users’ Umwelts through data. Thus, for a dominated space to be appropriated by a tenant, it requires that within that space: Price of DURs < Value created in smart space by the tenant.
Therefore, the price of DURs is bounded by rents paid by the tenant to the landlord for usage of smart space (floor) and the value created by the tenant in smart space (cap). Besides, for new supply of dominated spaces to be created by the landlord (if P-D > 0), it requires that the cost involved in dominating physical space - which is equivalent to the cost of Digital Access Rights (DAR) - be smaller than, or equal to, the price of DURs charged by the landlord to the ten-ant. Thus, for a given smart building with P physical space and D smart space, there will be new supply of dominated spaces ready for appropriation, provided V2 is positive and price of DURs > cost of DARs.
AXIOM 3.3: VACANCY IN SMART SPACE
The issue of vacancy in smart buildings has to be assessed in light of landlords’ ability to collect data in non-tenanted smart spaces. Vacant dominated spaces do not generate direct incomes for owners until they are appropriated by tenants (i.e. physically rented). But, although physical space is vacant in the space realm, the landlord who owns DURs on smart space has the ability to generate income through data collection and analytics in the digital realm. For vacancy in dominated smart spaces, there is thus a disconnect between the space realm and the digital realm. Concretely, the landlord is faced with the following tradeoff: either to maintain smart space as dominated space only (without collecting any data), or to aim to appropriate it in order to create value through data. The landlord will opt to appropriate non-tenanted smart spaces (thus potentially reducing the supply of D available for tenants) if the cost of appropriation is such that: cost of appropriation of vacant dominated smart spaces < value of data collected in these spaces. The same rule would apply to public areas in a smart building.
Therefore, there are three types of vacant space in a smart building: (i) physically vacant and non-dominated spaces, (ii) physically vacant and dominated smart spaces, (iii) physically vacant and appropriated smart spaces. The second type can satisfy the demand for D in the short term while the first type can be dominated to meet demand for D with a lag (time to domination) and at a cost (cost of domination). For a landlord to agree to rent the third type of space, it requires that full rents paid by tenants (rents on physical space plus DURs on smart space) more than compensate him/her for the loss of forgoing data collection and analytics in these spaces (opportunity cost), which is the case if: value of data collected by landlord - rents on physical space < price of DURs.
Thus, the amount of smart space available for tenants’ appropriation in a smart building is a function of the value attached to data collection and analytics carried out by landlords in smart spaces. If, as mentioned previously in the presentation of the digital rights regime, the value that a tenant can create in smart space outweighs the landlord’s, then the amount of dominated space will tend towards P and a smart building’s physical space will eventually be fully dominated by smart technologies (which might be de facto the way smart buildings are built in the future as fully integrated sets of processes in physical and digital spaces).
Axiom #4: Utilities of dominated and appropriated smart spaces
For all spaces in a smart building, the utility of appropriated smart space is always superior or equal to the utility of dominated smart space prior to appropriation so
Digitalisation of commercial real estate 111 that U(A) > U(D). If U(A) Axiom #5: Utility of user centricity in smart space Physical space is dominated by owners. Dominated space is appropriated by tenants in order to cater to space users’ experiences. Hence, the quality of appropriation can be measured from space users’ perspective as the additional utility derived from appropriated space versus dominated space. For a given space s, the difference between space users’ experienced utilities after and prior to appropriation assesses the additional utility created through appropriation: AUS = U(AS) - U(DS). Experienced utility in appropriated smart spaces is derived from features fostering smart space’s user centricity. Therefore, AUS is the additional utility of smart space’s user centricity (UC) as experienced by space users so that U(UCS) = U(AS) - U(DS) or U(AS) = U(DS) + U(UCS). The same applies to all smart spaces in a building so that in any smart building, U(UC) = U(A) - U(D) where D is the sum of all dominated spaces in a building and A the sum of all appropriated spaces in the same building. Axiom #6: Time to spatial appropriation and user-centric utility as key value drivers in smart buildings For an interaction i in smart space requiring Di dominated smart space and Ai appropriated smart space: U(Di) < U(Ai) and U(Ai) = U(Di) + U(UCi) where U(UCi) is space users’ user-centric utility derived from interaction i. The first derivative di = cU(Ai)/ot is the time sensitivity of appropriated space Ai’s utility, di is the slope of interaction i’s utility curve over time. An alternative definition of di is to consider the time sensitivity of space users’ user-centric utility: SU(UCi)/ ct. di can be expected to be positive and then to plateau after a while as interaction obsolescence kicks in (see axiom *7). The conversion time from dominated physical space to fully appropriated smart space for all interactions carried out in a building is key for property owners and tenants. To illustrate this point, let’s consider interaction j carried out in the same physical space as interaction i and in competition with interaction i for smart space. Interaction j requires Dj dominated space and Aj appropriated space such that Dj = Di and Aj = Ai. Interactions i and j are mutually exclusive. The graphs below show the evolution of U(Ai) and U(Aj) over time. At the inception of an interaction’s operation, both utilities are at U(D), dominated physical space’s utility such that U(D) = U(Di) = U(Dj). U(D) is (artificially) supposed to be fixed over time and common to all appropriated spaces in the building. Smart space needs to be appropriated in order to generate U(Ai) and U(Aj) for interactions i and j, respectively. By comparing the Figures 2.3 and 2.4, it is obvious that U(Ai) picks up faster than U(Aj). Thus, interaction i’s time to appropriation ti is shorter than Utility in Figure 2.3 Axiom #5 - Utility of interaction i over time. Figure 2.4 Axiom #5 - Utility of interaction j over time. Digitalisation of commercial real estate 113 interaction j’s tj. Based on time to appropriation only, interaction i is preferred to interaction j. However, time to appropriation is not sufficient to decide between the two interactions. In addition to time to appropriation, each interaction’s cumulated user-centric utility measures the actual value created by an interaction in smart space over time. This is represented by the shaded area Ai and Aj on the graphs. In mathematical terms, the two areas are given by: I Ort oo U(Ai)dt- Ju(Di)dt = £u(UCi) 0 0 t=o IOQ OO U(Aj)dt- Ju(Dj)dt = ^U(UCj) 0 0 t=o To inform the choice between two interactions in the same smart space, the one with the largest value of A should be selected. The same rule can be generalised to n interactions in a smart building. Values determined over owners’ investment horizon should be used in conjunction with time to appropriation to select n interactions in smart space such that: Max^Ai. An interaction strategy based ¡=1 on user-centric utility maximisation obviously overlooks the role of profit in smart space decision making, a point covered thereafter in axiom #12. Axiom #7: Interaction obsolescence in smart space In a smart building, obsolescence is assessed one interaction at a time. Consider a smart building with appropriated smart spaces serving as the background to n interactions broken down into two types of interaction: For one unit of smart space, the utility of specific interactions is always superior or equal to the utility of standard interactions: U(S) < U(Sp). All interactions suffer from obsolescence. As smart space loses its appropriated characteristics (e.g. differentiation), its utility falls back to dominated spaces’ utility U(D) (i.e. smart space prior to appropriation), thereby adding no extra value to owners and tenants, and no extra utilities to space users. Thus, U(D) serves as a floor for all interactions’ utilities in the building such that: V i, lim Ufinteraction i)= U(D). t—> oo In this context, specific interactions suffer more than standard interactions from obsolescence due to the speed at which technology enables competitionamong property owners and tenants. Specific interactions’ obsolescence results in these interactions joining the rank of standard interactions over time. By shifting from Sp to S, a specific interaction becomes commoditised and loses its ability to generate additional user-centric utility for space users. As the number of specific interactions dwindles over time so that standard interactions keep increasing, a building’s total interactions in smart space end up generating less and less user-centric utility, resulting in decreased property value. If n is the total number of interactions in a building, then S + Sp = n with lim S = n t->oo lim U(Sp) = U(S) t->oo And lim U(S) = 0(D) t—>oo This has an impact on the value of digital rights. Due to interaction obsolescence, maintaining value in smart buildings requires a constant quest for owners to upgrade the set of interactions available in smart space. While DARs have no value beyond the cost of domination (which is expected to be stable, at least in the short term), DUR pricing is likely to be volatile over time and across tenants. In addition to market forces, DUR pricing will depend on assessments made by landlords of their tenants’ ability to create value in smart space by leveraging on their DURs (see axiom #9). As the utilities of all interactions tend to converge to U(D) over time, the price of DURs would follow suit and decrease to the cost of domination C(DAR) if nothing is done to remedy interaction obsolescence: lim P(DUR) = C(DAR). t— Axiom #8: Inelastic supply of smart space Because physical space is limited by land supply and construction, smart space is bounded by physical space. Notwithstanding the fact that technology might allow for higher interaction density in smart space, it cannot extend the quantity of physical space available in a building in both the short and long terms. Hence, supply of smart space is expected to be inelastic. This is a realistic assumption as one can assume that all physical spaces of newly constructed smart buildings will be dominated right from the start, i.e. D = R and there is no supply of vacant non-dominated spaces available in the building. Axiom #9: Appropriation multiplier of smart space The simple model of smart space presented here considers that the supply of smart space is limited by an inelastic supply of physical space (axiom #8). That is, one unit of physical space combined with a fixed number of units of digital space, say one unit, creates one unit of smart space. The relationship between physical and digital spaces is deemed to be fixed over time. However, one can envision a more Digitalisation of commercial real estate 115 complex, and realistic, hypothesis where, owing to tenants’ expertise in appropriating smart space, one unit of dominated physical space can be appropriated in such a way that it results in more than one unit of appropriated smart space. Therefore, there is a multiplier effect which should be modelled with an appropriation multiplier. Let’s call
Figure 2.5 illustrates these three cases. The line (p = 1 delineates two areas: Appropriated smart space 1 Figure 2.5 Axiom #8 - Appropriation multiplier <ï> in smart space. Dominated -> physical space Changes in the appropriation multiplier can serve as an indicator for tenants’ performances in supporting their activities in smart space as the appropriation multiplier enables tenants to increase physical space’s yield. In the context of an inelastic supply of smart space due to physical space,
To be implemented, the concept of multiplier supposes a consensus on what metrics to apply in smart space. Lecomte (2020) explores a range of potential measurements and suggests a phenomenological measure quantifying space users’ experiences in smart space after Csikszentmihalyi’s (1990) flow. Until a reliable metric for assessing smart space emerges, analyses based on appropriation are unlikely to be reliable. A similar concept of multiplier could apply to the domination process of physical space in smart buildings. For the sake of simplicity, assumption is made in this chapter that smart space’s domination is perfect. Hence, the value of DARs is the maximum it can be at all times. However, should a domination multiplier apply, this might not always be the case. If P is the physical space and X the domination multiplier is such that: D = X *P with X > 0. Axiom #10: Physical space’s inelasticity as source of loss for tenants in smart space As supply of smart space is bounded by supply of physical space, demand for smart space might not be fully met. Smart space is a scarce resource. This unfulfilled demand for smart space results in a loss for tenants who are space appropriators as illustrated in Figure 2.6. On the supply side: Sp is the supply of physical space. Sd is the supply of digital space. Contrary to Sp which is limited in the space realm, Sd is perfectly elastic in the digital realm. That is, as long as the price of Digital Usage Rights at which tenants are willing to buy usage of smart space from property owners is larger than the cost of dominating physical space, property owners will create smart space in the digital realm. However, due to the inelasticity of Sp, the supply of smart space Sss is limited to Sp: Sss = Sp. The appropriation multiplier
On the demand side: demand for smart space Dss is a function of the cost incurred by tenants to appropriate smart space. This appropriation cost is equal to the price paid by tenants to landlords for DURs plus technology-related costs. For the sake of simplicity, the cost of appropriation above P(DURs) is ignored in this analysis. Demand for smart space decreases as the price of DURs increases. If both Sp and Sd were perfectly elastic, Dss would be satisfied at (q*, p*). However, as Sp is inelastic, Dss can only be satisfied at point B such that (q', p'). (q*-q') is the unfulfilled demand for smart space due to physical constraint. At point B, the price for DUR is p', which is significantly larger than Unit Price Figure 2.6 Axiom #9 - Inelasticity of physical space as source of loss for tenants. p*. Hence, as a result of physical limitations constraining the creation of smart space, DAR holders can charge p' for DURs giving tenants usage of q' quantity of smart space. This generates a surplus for property owners equal to the area of the triangle (A, p*, B) on the diagram, which is also a loss for tenants who are overcharged for their usage of smart space. Physical constraints on smart space enable property owners to benefit from scarcity in DURs at tenants’ expenses. For a given level of Sd, the smaller the supply of Sp, the larger the loss for tenants. Let’s consider the case where faced with this loss, tenants decide to sharpen their expertise in appropriating smart space so that their appropriation multiplier cp is larger than 1. Figure 2.7 illustrates the new situation where D = P and 1. The loss incurred by tenants is reduced to area (C, p*, D) as the supply constraint on smart space is partly released owing to q>. Supply of smart space does not correspond to supply of physical space anymore since one unit of physical space can create
Unit Price of Digital Figure 2.7 Axiom #9 - Price of Digital Usage Rights (DURs) per unit of smart space in a building (i> > 1 and D = P). If q*, then there is a surplus for tenants, which puts downwards pressures on the price of DUR at which property owners can transfer usage of smart space to tenants (i.e. the owners’ price limit is the cost of domination, C(DAR)). The appropriation multiplier is a way for tenants to release the pressure imposed on the price of DURs as a result of physical space’s inelasticity. It also implies downward pressures on the demand for rented physical spaces in the space realm. The pressure on physical space depends on the relative value-creating potential of both physical and digital spaces inclusive of synergies between the two spaces. In order to preserve the value of their property rights, owners of physical properties have to anchor smart space’s value creation processes in physical space as much as they possibly can. Being able to correctly assess tenants’ expertise in appropriating dominated physical space is also key in allowing landlords to finetune their pricing of DURs. As the cost of dominating physical space, C(DAR) can be expected to decrease due to technological progress over time, the optimal level of Dss will keep increasing with ever lower DUR prices. Thus, appropriation multipliers will have to increase faster than the speed at which the cost of domination decreases so that tenants do not lose out to DAR holders in the race for value in smart space. The bottom line of this modelling implies that: (1) the space with the most to lose from the competition for smart space’s value Digitalisation of commercial real estate 119 between property owners and tenants is physical space in the space realm, and (2) technology becomes a tool for tenants to compete with property owners in the digital realm. Axiom #11: Optimal level of space appropriation by tenants in a smart building For tenants, the optimal level of smart space appropriation in a smart building is such that the marginal profit derived thanks to the usage of smart space is equal to the marginal cost necessary to appropriate smart space. That is: Marginal profit of smart space appropriation = Marginal cost of smart space appropriation, or A Profit from appropriation = A Cost of appropriation. The cost of appropriation is equal to the sum of price paid for DURs and the technological cost of appropriating smart space. The latter component is deemed to be marginally negligible as progresses in technology allow for scale effects?® Hence, the optimal level of space appropriation in a smart building is such that: A H(A) = A P(DUR). It depends on the price charged by owners for DURs. If DURs are overpriced due to market inefficiencies (axiom =10), the quantity of smart space in a smart building is sub-optimal for tenants. Axiom #12: Digital rights holders’ search for profit maximisation as smart space’s main objective Whilst space users experience smart space through their own digital worlds (Umwelts), smart space is actually technology-dominated physical space with pre-defined engineered interactions. Thus, whereas space users are aiming to maximise experienced utilities in smart space, these interactions are designed to maximise profits for property owners and tenants. Profit and utility are obviously intertwined insofar as a smart building’s ability to maximise its occupants’ utilities in smart space is linked to property value as exemplified in the activity-based hedonic pricing model of smart buildings presented earlier in this chapter. Therefore, owners’ and tenants’ profit maximisation always dominates space users’ quest for utility maximisation in smart space since owners and tenants are the digital rights holders. At any point in time, - Owners aim to maximise their net profits on smart buildings’ entire spaces as defined by property rights and digital rights (i.e. non-dominated physical spaces, dominated physical spaces, tenanted and non-tenanted appropriated smart spaces). For them, DARs represent the cost necessary to dominate physical space and produce smart space. Owners’ net profits from the entirety of spaces in the building are a function of: (1) net income on physical spaces, (2) DURs transferred to tenants for usage of smart spaces in dominated physical spaces, (3) value created through data collection and analytics in non-tenanted smart spaces (e.g. common areas), (4) cost of dominating physical spaces, and (5) capital gains in case of property sale. The optimisation problem facing property owners is as follows: MAX net profits on all spaces in the building (sum of elements 1 to 5) - Tenants aim to maximise net profits on their appropriated smart spaces. For them, DURs represent the cost necessary to use smart space. At the interaction level, two parameters identified in axiom *6 impact tenants’ profits: (a) time to appropriation, (b) cumulated user-centric utilities over duration of operation. At the building level, shortages of dominated physical spaces to be appropriated might hinder their ability to generate profits in smart spaces, notwithstanding the presence of appropriation multipliers (axiom #9). Tenants’ optimisation problem is as follows: MAX net profits in tenanted appropriated smart spaces within a building - Space users aim to maximise their experienced utility in smart space, which according to axiom #6 is given by: n MAX Ai = A ij, V space user i j=l where Aij is the cumulated user-centric utilities derived from interaction j by space user i, and n is the number of smart space interactions in the building. By future proofing their properties’ ICT infrastructures, upgrading existing interactions, and developing new ones, smart building owners will ensure that dominated physical spaces available for appropriation keep up with demand for smart spaces by tenants and space users, in terms of both quantity/functionality and utility. To achieve that, lease agreements for smart spaces should strive to promote cooperation between landlords and tenants, e.g. by establishing some degree of profit sharing for value created in smart space as part of standard terms in DUR transfers. BOX 2.2: Economic foundations of digital rights in smart buildings (in twelve axioms) The following twelve axioms rely on Lefebvre’s (1974) paradigm of space domination and appropriation. Axiom #1: Property rights and digital rights are inseparable. Digital rights are incidental to property rights. Axiom #2: Digital rights are transferable within set limits. While Digital Access Rights (DARs) should remain under the exclusive control of property owners at all times, Digital Usage Rights (DURs) are transferable under smart space leasehold-type agreements with a break clause for the initial rights holders. Axiom #3: All appropriated smart space in a building is dominated physical space. Axiom #4: Utility of appropriated smart space is always superior or equal to utility of dominated physical space. Axiom #5: Utility of appropriated smart space is equal to the sum of dominated space’s utility and user-centric utility. Axiom #6: Value created in appropriated smart space is a function of cumulative user-centric utility over time. The time necessary for an interaction to start generating user-centric utility is called time to appropriation. Axiom #7: Ceteris paribus, all interactions’ utilities tend to converge to dominated physical space’s utility over time. Axiom #8: The supply of smart space in a smart building is bounded due to physical space’s inelasticity. Axiom #9: Owing to technology, tenants can overcome physical space’s inelasticity by appropriating more smart space from the same quantity of dominated physical space. This effect is captured by an appropriation multiplier. Axiom #10: Constraints on the supply of smart space result in a loss for tenants. Appropriation multipliers enable them to reduce the loss. Axiom #11: For tenants, the optimal quantity of appropriated smart space is such that marginal profit derived from smart space is equal to marginal cost of appropriation. At that point, tenants’ profit in smart space is maximum. Axiom #12: Smart space’s underlying objective is to enable digital rights holders (i.e. property owners and tenants) to maximize profits derived from the ownership and operation of spaces in a smart building. BOX 2.3: Digital rights and obsolescence in smart buildings S^T • This translates into a loss for digital rights holders as Digital Usage Rights’ value may eventually fall to the cost of physical space domination, thereby wiping out any additional value created by appropriation of smart space.
