Cost versus Value: Adapting Real Estate Products to the New Normal
Updated: Nov 24, 2020
by Joel Luna.
The contraction of demand in the property industry was immediately felt in varying degrees across multiple sub-sectors during the lockdown. Reviving these sectors as the quarantine is eased requires product adaptation to the requirements of the New.
An oft-repeated question at webinars that discuss adapting places and buildings to the New Normal is “won’t the adaptation increase the cost to build?” As the once benign physical space suddenly became threats to our health and safety, retrofitting the spaces we occupy to ensure distancing, minimal contact and higher hygiene standards became immediately important, particularly as we slowly ease into regular activities. The need to “future-proof” planned living and working spaces to purposefully mitigate health threats and address new behaviors and preferences is now a topic among architects, planners and developers. The challenge is creating environments that go beyond creating barriers, but instead address the broader need of focusing on wellness and well-being. How should streets and cities now be planned? How do we design the future offices? The future shopping centers? The future hotels. And amid the numerous ideas generated, the question is inevitably asked: “Won’t that cost more?”
The property sector came from a decade of high growth where demand has outstripped supply. With Covid, we enter a buyer’s market. Consumers are holding on to cash and are more deliberate in their purchases. Large expenses such as buying a home are being re-evaluated. In the meantime, developers are trying to increase liquidity by moving existing inventory and tempering expenses while demand for office space and shopping centers has shrunk with the shift to remote working and on-line retailing.
The issue of cost is a valid and timely question, particularly because the pandemic is causing a global economic turmoil that has severely affected businesses and left many enterprises closed or on survival mode. Bringing down the cost of production is a smart approach in these times. However, the issue of cost should also be viewed from the perspective of the buyer. It is a question that should ultimately be framed within the broader concept of value. Cost is just one dimension of the value equation.
In its simplest form, the value equation consists of two interrelated variables: the delivery of consumers’ desired benefits (often qualitative) and the cost needed to produce such benefit. Achieving the right balance is tricky and elusive. However, the underlying principle is that value creation is all about generating benefits for the customer. Focusing on cost can compromise the delivery of the desired benefit, more so if the reason for focusing on cost is simply to maximize profit (value extraction). Covid has revealed what customers value and which benefits are now considered essential.
The cost equation should also be evaluated with the impact of non-intervention, i.e., “What is the cost of NOT adapting products to the new normal?” The Covid crisis forced us to overturn our interaction with physical space. Distance is a shield. Contact is the threat. Spaces need to be equipped with measures that will make users to be safe and to feel safe. Retrofitting space is an immediate and necessary response. Doing so will generate trust that will encourage a hesitant public to enter establishments again. The value judgment of businesses will need to revolve around reestablishing trust in their products and brand through their ability to put customer safety first.
As we look forward beyond the immediate need, we also need to move away from tactical approaches. The more stringent consumer requirements and the necessity to create more responsive and resilient environments demand innovation rather than band aid solutions. The crisis presents the chance to imagine new places and new configurations of spaces and to allow new products to emerge based on what is essential and of real value in our new context. The most challenged spaces, such as hotels and resorts, events and conferencing, exercise gyms, dine-in restaurants, shopping centers, transit stations, streets, will need new formats and will need to evolve. People will still need to shop, dine outside, interact with others, travel and move around and places need to encourage them to do so. The activities of people will remain the same but the emplacement of these activities will need to transform. More broadly, the socio-economic paradigms that shaped these spaces will need to transform.
From a long period of profit-maximizing capitalism, we are at the edge of new possibilities: crafting spaces that do not singularly pursue wealth accumulation and consumerism but instead put the wellbeing of people first. We may be looking at entirely new types of product categories that can address real needs and shape markets. Doing so requires innovation and innovation requires experimentation. And yes, potentially all these will entail cost. But innovation’s primary aim should be geared towards achieving the user’s desired benefits based on what customers value. And in this New Normal, the future will be shaped by those who will focus on delivering the changes that will benefit the many and not by those who will focus on bringing down costs.