Opportunities for B2B e-Business in Real Estate

Last May Chicago-based General Growth Properties, the second largest owner, operator and developer of shopping malls in the U.S., announced an ambitious venture. The company said it would deploy a broadband cable network in partnership with Cisco Systems, the Internet networking giant, to wire together most of the 137 malls it owns or manages in 13 cities around the country. The goal: To give General Growth Properties’ retail tenants an “unprecedented competitive advantage by increasing their productivity and operating efficiency.” For example, with high-speed broadband connections at the malls, merchants could approve credit card transactions faster, resulting in shorter checkout lines during the holiday shopping season. “Investing in this technology gives us an opportunity to educate our tenants about how they can increase their productivity,” says John Bucksbaum, CEO of General Growth Properties.

The alliance with Cisco forms part of General Growth Properties’ e-business strategy, which Bucksbaum explained last month at the Fall Members’ Meeting of the Wharton School’s Samuel Zell and Robert Lurie Real Estate Center. Today, although the stock market’s honeymoon with e-commerce has ended, and many dot-coms are closing shop, Bucksbaum still believes that real estate developers must take e-commerce seriously. “Older people may think online shopping is different than shopping in a store, but young people don’t differentiate between the two,” he says. “To them, it’s just shopping. As e-commerce becomes normal, we had better be part of what is normal rather than outsiders looking in.”

Bucksbaum’s own ephiphany about the potential—and potential threat—of e-commerce came in the summer of 1998, when Time magazine ran a cover story exploring how the Internet is changing the way people shop. Online shopping had just begun to take off, and upstarts like Amazon had market valuations matching those of Fortune 500 companies. The Time article—titled “Kiss Your Mall Goodbye”—predicted a dire future for brick-and-mortar retailers. Seeing the article as a wake-up call, Bucksbaum soon brought together a group of executives to devise an online strategy for General Growth Properties.

The company has spent the past two years investing in technology that integrates the Internet into its operations. “We look upon the mall of today as tomorrow’s e-mall,” he says. “I see no reason to kiss the mall goodbye. I’d rather kiss the mall hello.”

General Growth Properties is using the Internet to change the way it deals with its customers and tenants, as well as to increase its own efficiency. Although this is an expensive exercise, it will pay off in the long run, according to Bucksbaum. In fact, all real estate companies must adopt this approach if they want to survive in the future.

Bucksbaum believes that when real estate companies try to integrate bricks and clicks, “the most important issue to focus on is what you are trying to do. In our case, the most important question was, how do we increase traffic to our malls.” General Growth Properties has always tried to “give customers what they want, when they want it and where they want it,” notes Bucksbaum, but the arrival of the Internet has changed customers’ expectations. Shoppers now want to choose between shopping online or offline. “We went online because we wanted to sell more,” he says.

In developing its e-business strategy, General Growth Properties learned crucial lessons from dot-com firms, Bucksbaum explains. “If you buy a book from Amazon, the company uses that opportunity to form a relationship with you,” he says. “The next time you go to that website, it will recommend similar books. In our case, although we had 35 million customers visiting our malls each year, we knew very little about them. We knew that the average customer comes to the mall more than 40 times a year, but we knew nothing about him or her. We learned this from e-tailing.”

General Growth Properties is betting on its view that investing in high-tech infrastructure will help its retail tenants become more efficient. In addition to speeding up credit card approvals, high-speed cable connections linking more than 100 malls will offer retailers opportunities to do things that would have been difficult in the past. When a music store in one mall plans a concert, for example, it will be able to offer it by video at other locations. “Using technology to increase the efficiency of retailers helps us strengthen our relations with our tenants,” Bucksbaum says. At present, he adds, not one retailer in the U.S. has e-mail that connects all its stores around the country.

Bucksbaum believes that broadband connections at malls will be enhanced by wireless connections over the Internet. For instance, as a customer is walking through the mall, it will be possible to send a message to her cell phone or Palm Pilot about a special on Nike products at the shoe store around the corner. “That is why we have made a big commitment to broadband,” he explains.

In addition to using the Internet to redefine its relations with customers and tenants, General Growth Properties is using technology to improve its own efficiency. Once the malls are wired together, Bucksbaum says he plans to eliminate the company’s long-distance phone service. “We’ll move to voice over Internet,” he says. “That will cut our phone bills by $500,000.”

Although General Growth Properties is not quite paperless, Bucksbaum is encouraging lawyers to negotiate leases electronically and architects to review plans and blueprints online. The company is also moving towards introducing an Internet-based accounting system. “People have become very innovative,” he points out. “These steps will add to our productivity.”

Following Bucksbaum’s lecture, other sessions at the meeting focused on issues ranging from demographics to entrepreneurial activities.

Demographic Trends and Real Estate

Dougal M. Casey, managing director of Clarion Partners, Adele Hayutin, chief economist of the Fremont Group, and G. Ronald Witten, president of M/PF Research, discussed demographic challenges and opportunities facing the real estate industry. Joseph Gyourko, director of the Zell/Lurie center, moderated the discussion.

The panelists pointed out that ratios of working population to dependent population (defined as those below 15 and above 65) is changing all over the world. In countries like Japan and Germany, the working age population is shrinking, while the dependent population, especially those older than 65, is increasing rapidly. In such countries, absolute population declines are likely. In countries like the U.S., South Korea and Sweden, the workforce is growing, but more slowly than the dependent population. In contrast, young developing countries such as China and Brazil have a fast-growing working population, which outpaces the growth of the dependent population. The conclusion: Think differently about work, the panelists said. “Importing workers will become much more competitive in the future, and worker productivity will become increasingly important.”

The panel also discussed the impact of demographic trends on housing demand. They pointed out that age is an important driver of housing choice, and people in their 20s and 50s contribute substantially to demand for rental housing. In the U.S. between 1990 and 1998, the population of single adults grew significantly, which has “favorable implications” for the rental market. The panel also pointed out that during the next five years, all major household growth in the U.S. is expected to be childless. Another major trend, which has been widely discussed for years, is the aging of the baby boomers, which will create massive demand for senior housing.

Forces Shaping B2B E-Business

In his keynote presentation, Lorin Hitt, who teaches in Wharton’s Operations and Information Management department, spoke about “The Forces Shaping B2B E Business.” Hitt pointed out that fear and opportunities for gain have generated a lot of interest in business-to-business (b2b) e-commerce. The formation of at least 25 major b2b consortia and 700 online marketplaces was announced by last May. Venture capitalists in the U.S., until recently, were aggressively pumping capital into this business. “B2B investments represent 40% of all VC investments, and investment in b2b ventures has grown faster than total investment in venture capital,” Hitt points out.

The lure of b2b e-commerce stems from its ability to connect massive markets. “All commerce is $47 trillion worldwide, and 60% of that commerce is among businesses. That’s the motivating argument,” says Hitt. Starting from such numbers, those who launch online marketplaces believe that if they can move just 10% of these transactions online by 2005, they should be able to capture enormous value. Such entrepreneurs assume they will be able to charge a fee of 1% to 2% per transaction, giving their online marketplaces billions of dollars in revenues. Hitt dismisses this argument. “People sometimes forget that 99% of transactions take place on the telephone,” he points out. “The phone companies get zero transaction fees for these deals.”

The real value of b2b e-commerce lies in the ability of online marketplaces to offer potential for cost savings. Most of these are achieved by squeezing suppliers through such techniques as reverse auctions (where suppliers bid against one another to meet customer demand). “This doesn’t represent an increase in productivity; it is just a redistribution of value,” Hitt observes. Online marketplaces also face several challenges. For example, non-standard or hard-to-describe products may be hard to trade through online exchanges. In practice, Hitt warns, although b2b commerce offers the promise of large potential gains, realizing these gains is extremely complex and risky. “B2B e-commerce may also be fundamentally incompatible with some products,” says Hitt.

Peter Linneman of Wharton’s real estate department moderated a panel about b2b e-commerce in real estate. The participants included Andrew Florance, CEO of CoStar; David A. Hefland, executive vice president of Equity Office Properties Trust; Devin Murphy, managing director of Morgan Stanley Dean Witter; and Scott Rechler, co-CEO of Reckson Associates Realty. Asked whether investors are interested in real estate web ventures, the panelists observed that real estate is well positioned to benefit from the Internet. It is a highly fragmented industry, and as such, b2b markets that aim at overcoming inefficiencies—such as information asymmetries—do have potential. Incumbent real estate companies, which have strong customer relationships in place, are better positioned to exploit this potential than upstart newcomers.

Real estate does face challenges in implementing b2b strategies, the panelists pointed out. For example, while other industries may be able to eliminate intermediaries, in real estate eliminating brokerage firms is hardly easy. “The issue is not eliminating brokers from a real estate transaction, or saving a couple of pennies on a deal where a tenant is paying you $50 a sq. ft., but bringing information efficiencies into the industry,” one of the panelists said. The panel also addressed the complicated question of valuing e-business ventures. Their view was that valuation of private companies always involves a negotiation and is fundamentally more an art than a science.

The final panel, moderated by Asuka Nakahara, associate director of the Zell/Lurie center, dealt with entrepreneurship. The panelists said that while technology certainly will play a role in the future of real estate, it will not change the major players in the industry. As such, entrepreneurs should expect technology to bring about an evolution, rather than a revolution, in real estate.

How, then, will value creation in real estate change as a result of technical or demographic changes? Demographics are crucial because they point to emerging opportunities. For example, developers of senior housing are preparing to serve the needs of millions of aging baby boomers. But opportunities abound in several areas, ranging from resorts to affordable nursing homes, the panelists said. Such businesses offer great opportunities in the long run.

Before real estate companies can exploit these opportunities, they face another major challenge: recruiting and retaining their employees. Though the number of those leaving traditional businesses to join dot-com start-ups has waned, real estate still faces a bitter war for talent vis-à-vis other industries. Steps such as offering equity positions in projects or stock options to employees can help nurture an entrepreneurial mindset. “Most real estate projects involve big dollars, and you can’t afford to make mistakes,” the panelists said. “Offering an ownership stake certainly helps to sharpen your focus. It is a big attraction in recruiting good people.”

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