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The Problems Keeping Us From Tapping Real Estate’s Full Potential

From 2011 to 2016, I worked at the micro-apartment design and development startup, LifeEdited. While we never brought units to market, with our own TED talk and a number of major media features, the company did garner some good media attention. Perhaps our biggest hit came after a low-budget documentary about minimalism we were featured in was added to Netflix. It’s been about five years now of late-night texts, saying, “you’ll never guess who I just saw on TV.” 

In the documentary, I speak to the need to design and develop real estate that’s responsive to data. Most of my thoughts on this revolve around research from the book Life at Home in the 21st Century: 32 Families Open Their Doors. Written by a team out of UCLA, the book recorded how people lived and used their homes circa 2010. One part of their research overlaid red dots on one home’s floor plan, with each dot representing a spot a household member spent ten minutes or more. The rough estimate is that 60 percent of the floor area of the home being studied went unused. I spoke to the lead researcher Jeanne Arnold, who said this house was representative of most of the 32 homes they tracked, and that the diagram didn’t include the houses’ yards, basements, top floors, and garages. 

In that interview and subsequent research, I connect the dot-free areas to a myriad of problems. In order to accommodate single-family homes that make up roughly 80 percent of U.S. housing stock, cities have sprawled outward. With greater distances between homes, workplaces, amenities, and social relations, today’s average American spends fifty of their most stressful minutes a day in a car, often alone. This car-dependent, sedentary lifestyle feeds a population that’s increasingly unhealthy and isolated. 

Fellow minimalist writer Dave Bruno once said, “Stuff is not passive. Stuff wants your time, attention, allegiance. But…life is more important than the things we accumulate.” This attention and allegiance applies to space as well. The average American man and woman spends 1.6 and 2.4 hours a day on housework, respectively. Pile that housework on top of the average eight hour workday, an hour in the car, and the average three-plus hours of screen time, and there’s little time left for, um, life. 

These costs are not reflected in the way we think about real estate. Property valuation is often determined by theoretical uses , not actual ones. Extra bedrooms and other design elements meant to increase asset value are in fact liabilities when costs of ownership are factored against their infrequent use. Most of America’s real estate has been largely unresponsive to decades of demographic and climate shifts. Household sizes and fertility rates are at historic lows, yet the size of single-family homes remain the same. In 1970, the average new single-family home was 1,500 square feet with a household size of 3.14. New homes today average between 2,200 and 2,500 square feet, while household size has shrunk to 2.52 people. Maintaining and heating/cooling unused spaces will be increasingly hard to justify in a world defined by rising commodity and energy prices. 

In my interview, I asked what would happen if real estate were designed around only the red dots , the used, useful, “productive” spaces for data points? At LifeEdited, we designed and built a few prototype apartments to answer that question, including my own home. In our newsletter, I likened our homes to microchips, where higher levels of circuit compression permit greater processing speed (productivity) without more space and power. The intent was to have every cubic foot be as productive as it could be as often as it could be.

We believed we could revolutionize real estate. Our main team, me included, came from innovation and tech backgrounds, and the term “real estate startup” wasn’t really a thing in 2011. A 2016 McKinsey report found construction had the lowest level of digital adaptation of any major industry except for hunting and agriculture, and real estate wasn’t much better, especially when compared to advanced manufacturing industries. With startup exit cash, a TED talk, and plenty of hubris at our disposal, we saw no shortage of ways to optimize every aspect of the design and development process.     

We never got beyond those prototypes, with micro-apartment buzz peaking around 2013. For us, the high point was New York City’s adAPT micro-housing RFP. Designed as a showcase for compact, affordable housing solutions, it was really a showcase for the outgoing Bloomberg administration . At the end of the contest, the city had one building with 55 expensive studios and no changes to the density controls that stop micro-apartment buildings from making financial sense. It wasn’t just New York that thwarted micro-housing, of course. Successful micro-apartment developments across the country were also being regulated out of existence by NIMBYism, giving little hope compact housing could be developed at a meaningful scale. In the end, the unit total from the micro-apartment buildings that did get built  were a rounding error compared to the hundreds of thousands of poorly designed, bloated, as-of-right, commodity-grade single-family, multifamily, and mixed-use buildings that went up at the same time.

I’ve been involved with an unholy number of RFPs, including adAPT. In each case, the barrier to development wasn’t technology or even regulation, but complacent or scared capital. The majority of developers can’t be bothered tackling regulation to deliver a superior real estate product because they get bumping returns on generic, poorly designed assets. Most developers and investors I encounter do what they can to not change product design, lest it not conform to standardized capital market commodity values. 

RIP: Real estate product innovation     

I left LifeEdited in mid-2016 to start an innovation consultancy, Hothouse. I focused on innovative, market-based solutions for bringing affordability and sustainability to the real estate industry. During this time, I built a network of folks using innovation and tech to fundamentally change and improve how real estate is designed, constructed, and operated. Applications included modern methods of construction (modular, prefab, robotics), co-living and co-working, Passive House and building efficiency tech, adaptive reuse, and novel asset types like micro-apartments and ADUs.

Like LifeEdited, many in my network failed to solve the problems they thought they’d solve, usually undone by restrictive regulation, scared capital, and founder and VC hubris. Co-living operators  (Ollie, Starcity, HubHaus, Collective UK, Common) never delivered flexible, affordable housing at scale. Most folded, were absorbed, or continued with uncertain futures. Co-working operators  (Convene, WeWork, Knotel, Breather ) fitted out millions of square feet of office space for markets that only existed in a pro forma. Social Construct, FullStack Modular, and Katerra didn’t disrupt the construction industry. I would argue that Katerra’s failure even set it back a bit. Housing is more expensive than ever from a consumer standpoint, driving America’s affordability and homeless crisis. Construction labor productivity has barely improved in decades. Real estate design and economics are as broken as ever. 

While many of the initial real estate product innovation startups tanked, process innovation startups thrived. OpenDoor, Zillow, Zumper, and others brought appropriate levels of process efficiency  to the real estate industry, removing many of the arcane, analog ways assets were traditionally transacted. These startups delivered improved returns without costly design, regulatory, or financing changes. As these platforms became more established, real estate product design moved even further away from innovation and towards standardized commodity value. The speed with which these platforms can provide deal flow is why every U.S. city and greenfield lot is being blanketed with single-family housing tracts, five-over-twos, and other as-of-right, asset-grade real estate.  

In order to explain the threats and opportunities that our current construction design presents, I like using an analogy of an imaginary smartphone market. Smartphone technology in this imaginary market is as advanced as our own, but 80 percent of smartphones are legally limited to two applications because having more would offend the market. The other 20 percent of smartphones are split between expensive models jammed with useless apps, are built primarily for their tradable value, and left unused for much of their lives. 

The absurdity of developing advanced technology like a smartphone for such limited purposes is less ridiculous than spending billions of dollars and countless other resources developing single-purpose, limited purpose, or unused commodity real estate. Real estate owners and operators can limit asset performance to its capital productivity, but why? Why not make smartphones with a usable suite of apps that take advantage of that phone’s processing potential? Why not design real estate to have as many red dots as much of the time as possible?

I generally frame unused real estate as a liability, especially as it relates to energy, upkeep, social isolation, and sprawl. But unused real estate also means untapped potential.

The great compression 

I generally frame unused real estate as a liability, especially as it relates to energy, upkeep, social isolation, and sprawl. But unused real estate also means untapped potential. The unused living room was always a home office, the unused bedroom a short stay rental, that overstuffed garage an ADU for grandma. As described above, real estate economics included , and often depended on  separate spaces designed to be used sequentially: people are urged to leave their homes vacant all day to fill roads, automobiles, offices, restaurants, shops, schools, and other capital market-backed asset classes. 

The office real estate was never that efficient. Now, many workers and organizations are realizing the huge productivity losses that come from long commutes, and uninspiring spaces. A May, 2021 research paper found workers reporting 65 percent improved work satisfaction since going fully or partially remote. Large companies like Amazon and Facebook are going hybrid, and others like WordPress, Github, and Shopify are saying good riddance to bad real estate altogether. PropertyShark reports Class A Manhattan Office was renting at $954 a square foot in the fourth quarter of 2021. The remote organization doesn’t need to pay that, sign 10 year triple-net leases, make FFE upgrades, or pay for desks that sit empty while employees travel. Remote work is spurring a real estate apocalypse. 

Offices are just the beginning: fast-casual restaurants, business apparel retailers, car manufacturers, gas stations, strip malls, and myriad other office-dependent industry sectors are dying in droves. Entire cities and regions are hollowing out, and others are filling up. Workers are moving from expensive, crime-infested places to smaller, safer ones they can afford. Others have decamped permanently to places they used to enjoy only on vacation. 

For most of 2020, I was pushing a design, research, and development supergroup, the Change Order Group, until I gave up. I realized that until the capital flows stop mass-producing unsustainable, inefficient-by-design real estate, there’s no point in developing the good stuff. It’s not enough to make a difference, and like the micro-housing hype, it may even obscure what’s really happening in the market.  

I’ve come to realize most people, investors and developers included, are the victims of their own real estate. They are the stressed out real estate users who drive, eat, spend, and consume far more than they need. They don’t build it better because they don’t know better. In response to this experience gap, my latest venture, a real estate operating platform called Run Haus, is once again attempting to change real estate by developing a new breed of real estate user. 

To a large extent, single-purpose, commoditized real estate has produced populations of single-purpose real estate users. Because of their enormous time and financial requirements, people’s identities often melded with their real estate assets . Humans became renters, homeowners, workers, students, shoppers, because that’s all they had time for. Fortunately, this busy-work culture is rapidly dying with widespread adoption of remote work, which permits people to design their lives around their diverse needs and interests, not their work schedules and traffic patterns. I am confident that when we create efficient, economical, diversely-programmed spaces, an efficient, economical, and diverse population will continue to grow.

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