Text of speech given to the Urban Land Institute, San Francisco, April 2002

Remember when futurists were predicting that telecommuting would be the death of cities. Well, all we have to do to find out what happened is look at San Francisco – office towers are full and rates are soaring. Clearly, the futurists were wrong.

 

But at least one real estate expert disagrees. Barry Liebert is one: he runs Arthur Andersen’s real estate transformation practice, and he believes that the information revolution is just beginning now.

Mr. Liebert thinks that the affect of technology on cities and their office towers is just beginning – that within five years, technology will reduce the demand for real estate and thereby reduce its value.

What’s a commercial owner or manager to do? Is a 20% drop in property value inevitable, as Mr. Libert predicts? Or is there another way to address the realities of office real estate in this new era? What opportunities does this technologically-induced social disruption present for commercial real estate?

Let’s use the futurists own technology assessment model to figure this out. Envision a pebble thrown into a pond. Think of that pebble as technology, and that like a pebble, technology creates many rings of affect, of disruption.

The first ring is universal access to information from any location. The second ring of effect is telecommuting and hoteling. All that has happened.

One scenario for the next ring could be that the perceived value of real estate shrinks, rents fall, services and maintenance decline. Then center cities become less attractive, then more dangerous, then empty streets, property worthless, in the extreme, like the movie Escape from New York, prisons for the worst criminals in society.

Sure it’s extreme. Itâs the scenario technology companies are driving – think of Microsoftâs slogan, where do you want to go today? Clearly Microsoft’s answer is not to the office. They want you to say glued to your screen, surfing the net, and the more talk about center cities dieing, the more they’re hearing their virtual cash registers ring.

So let’s go back to the hoteling and telecommuting ring, a ring of effect that was actually driven by employees, who wanted to integrate home life with work, to reduce stress, take control.

In this scenario – and in stark contrast to the Escape from New York scenario – the benefit to companies of lowering corporate real estate costs is perceived to be secondary to a far more important benefit: increasing the satisfaction, loyalty and productivity of human capital.

Here, the next ring of affect is a heightened focus on increasing the productivity of human capital. Studies are conducted that show that the greatest creativity comes from in-person interaction.

Another by-product of this interaction is that staff gain a better understanding of the company and its brands. Each employee understands at a visceral level what the company stands for and what their own contribution is. Loyalty and retention goes up, customer retention goes up because service is improved, productivity is enhanced and profit grows.

The same recognition of the critical importance of human capital that initially compelled companies to move staff out of cities to work at home now would compel them to move staff back to the office.

Employees enhance their sense of contributing, of being important, of being respected. In the case of professional service firms, this staff contribution may be important enough to warrant an office in 101 Cal, the Bank of America building, Embarcadero Center.

Each of these addresses carries the attributes of importance, prestige, even the value the company places in its employees. But none carry any associations that clearly differentiate it from other buildings of the same class.

Today, when so many businesses are focused cutting costs, so the primary way of making a decision between Class A buildings becomes an issue of rent.

Compare this to the purchase of a luxury car. You would never buy a BMW over a Mercedes or Jaguar solely because its cost was lower. You make the decision on some intangible benefit, something that the car adds to your view of yourself and the way others view you.

Now translate that kind of brand value we understand so well with cars to luxery office buildings. Picture a world where office buildings have the fully developed images that other business products and consumer goods have.

These properties and their bankers would place as much value in their brand – their image and personality – as they do in the physical assets they own.

And why will rents go up? Because businesses will pay more for branded office space for the same reason that PC makers pay more for Intel chips than AMD chips: because the association with Intel makes their products look faster and more powerful.

In that same way, a business of the future might focus on reinforcing its cutting edge, creative image by picking an office location which shares those same brand attributes.

Which leads me to our story about Embarcadero Center.

My firm was hired by the Embarcadero Center to apply consumer branding techniques to this office location in hopes of appealing to that business of the future. The project had two objectives which would, assuming the project was a success, yield two benefits.

The first objective was to develop a specific brand image for the Center, one that would be unique in the market, and the second objective was to figure out how best to communicate this image.

And the two benefits that would accrue from the branding program would be to achieve a rate premium over the Center’s competitors, and to sustain that premium should Barry Liebert’s predictions about falling demand for office space come true.

Our strategy was to create a brand that would go beyond ãone of several prestige office addressesä to truly differentiate the Center.

Using consumer branding methodology, we started by talking to the customer, the Centerâs current tenants. We asked them to tell us why they chose the Center and, more importantly, if there was a relationship between their office location and their success.

We wanted to lift perceptions about Embarcadero Center above the list of tangible attributes that leads to the check-off mentality of many office lease negotiations. We were hoping to find that most critical component of a successful brand: that single highly motivating attribute that was truly different than any of its competitors. These tenant interviews yielded interesting results:

Tenants talked about the Center like it was already a brand, about the values they shared with the center and the benefits it brought to them. Tangible amenities like views were important but secondary to the Centerâs intangibles that they felt added to their productivity.

Though these tenants could feel the benefits of being at Embarcadero Center, they couldnât prove a direct causal link between the Center and their bottom line. What was the tangible benefit to being in Embarcadero Center? Why shouldn’t they move to another location if a better deal came along? The value of being at the Center needed to be made explicit, to be reinforced.

Peter Victor, Manager of Leasing for Embarcadero Center, was the one to do just that. He implemented the Embarcadero Centerâs branding program, and his team not only successfully developed the story behind the office tower and now uses that story with current and prospective tenants.