The Real Market With Chris Rising – Ep. 35 Dror Poleg

Chris Rising: 00:00:49 Welcome to The Real Market with Chris Rising. I’m very pleased to have Dror Poleg on the podcast today. Dror has written an unbelievably impactful book called Rethinking Real Estate. He is the co-chair of ULI’s Tech and Innovation Council in New York. He is a, I guess, a former developer of malls and residential, who’s become now one of the key thought leaders on technology, prop tech, and where we are in real estate. So, Dror, really pleased, and thank you for being on the podcast.

Dror Poleg: 00:01:23 Thank you for having me, Chris, and thank you for this beautiful introduction.

Chris Rising: 00:01:26 Well, we’ve gotten to know each other via Twitter, so I think that shows you where we are in the world today. We did not meet in an office building. We’ve not met physically in person, but we’ve had some pretty engaging back and forth on Twitter and around WeWork. But I think that, that in and of itself, says how different the world is today. And when I look at the title of your book, Rethinking Real Estate, Technology’s Impact on the World’s Largest Asset Class, I think that’s also reflective of a world in 2019 that is certainly not the world of 1990, but what gave you the inspiration to write a book? And by the way, I think our audience should know it’s not just a book on one asset class within real estate. It’s covering the major asset classes. So, what drove you to say, or inspired you to say, “I want to write a book about what’s happening in real estate today.”?

Dror Poleg: 00:02:24 So, throughout my career, I’ve been an accidental real estate executive and never planned to go into real estate. Maybe the things that draw people into real estate were never things that I was interested in too much. But I found myself sucked into the industry through my work in the beginning, in China, working as a partner in an advertising agency, actually, doing consumer research and design and marketing activities. And I found myself working more and more for large real estate developers or real estate-related companies such as hotels, firms, or large retailers.

Dror Poleg: 00:02:59 And one of those developers kind of sucked me into their business, and I ended up overseeing all of soft aspects of our development in China, so about 30 million square feet of [inaudible 00:03:14], and then really overseeing leasing, overseeing acquisitions and dispositions. So, even though I became a proper real estate person, my entry was always from the kind of the customer side, thinking about how people behave, how people work, and, particularly in China, working in a very dynamic market where you don’t have benchmarks. You don’t have any service providers that can give you clear answers or data. So, you have to think very creatively and draw on all sorts of different disciplines in order to make assumptions about what the market actually wants. And also working in China, technology was always a big part of what we were doing, particularly on the retail front, and over the past few years, I realized that the whole market for real estate, not just in China, is becoming much more dynamic than ever.

Dror Poleg: 00:04:04 And people don’t really have clear benchmarks or a clear path to look ahead to as they try to understand how the mass of different assets is changing and also that technology itself is becoming very relevant to people. And a lot of the things that I learned in China are suddenly relevant, not just to retail in the States or in Europe, but also to office and apartments and logistical facilities. So, I started writing more and more about these topics, first, just as a hobby, posting stuff on LinkedIn or on my website. And the interest in it grew so much, and I realized that there’s so much to say, that, at some point, I figured, okay, I have to write the book, so, yeah.

Chris Rising: 00:04:47 Well, I have read quite a few real estate treatises, and I will tell you, I think this is, if I were teaching a class of real estate at Columbia or at USC or some of the major real estate schools, this would be required reading. I think the way you break down the real estate industry from the beginning and outline for people how the real estate industry works, I think it’s a tremendous, tremendous read. And I encourage all of my listeners to buy the book from Amazon, but I thought it’d be kind of interesting if we kind of broke down some of the chapters and talked in a little detail about some of the asset classes. One of the things that- Dror Poleg: 00:05:26 Yes.

Chris Rising: 00:05:27 Terrific. One of the things I like that you highlight is that, for anybody who started in the business in the ’80s or ’90s, real estate was not, it was not an asset class. So, when you would go to a major pension fund, it barely even fit into alternatives, and it was really the insurance companies that would make real estate bets. It was pension funds, one off, but the fund business really didn’t get born until the early ’90s, the RTC being a big driver of that. But what I like about how you lay things out is that you kind of get to the core of the more modern real estate business, which started, in my opinion, in the ’90s, when rates became big, and real estate became very institutionalized. Now, what I found interesting is you chose to start in the asset class of retail when you started the book, and my sense, from reading it, there’s a lot of things happening in retail that are very transformative. Is that why you started early in retail as opposed to maybe hitting industrial, which has also changed, but you spend a good portion of the book really zeroing in on what’s happened in retail and what’s changed. Why is that?

Dror Poleg: 00:06:47 I think I started with retail because, first, change is most obvious there. So, I mean, everyone knows that retail is being disrupted, and malls are dying, and stores are closing. So, I wanted to start easy with people and something that’s on a premise that they accept before I tell them all sorts of things about what will happen to apartments or offices or more stable assets. I thought I’ll start with something where we all agree, and at the same time, something that everyone seems to know about and understand but that I thought there’s a lot more to say about and a lot more to dive into that, maybe to show people things that they haven’t considered before and to put it, as I do in all the other chapters, in historical context, so to kind of understand why things are as they are to begin with, not just why are they changing now, but how were they ever different and how even the things that we assume to be stable and normal, even those things haven’t been around for so long and were shaped by previous technologies. So, that’s why I chose retail.

Chris Rising: 00:07:53 Makes a lot of sense. I think it’s almost 10 years now since Marc Andreessen said that software is eating the world, but it’s amazing. We talk about on the office side, how every profitable large company today is really a tech company at its core, and then it has its products and services. But retail, what I found amazing about what you zero in on is, retail was heavily affected by location and then by the automobile. And now, we’ve come almost full circle in that the American mall, which really defined retail investment in the United States, is now very much out of favor. Can you talk a little bit about how retail evolved really in your eyes from maybe the ’70s and ’80s to where you see retail going today?

Dror Poleg: 00:08:50 So, the shopping mall, especially the American shopping mall, is really a symbol of the 20th century, and it is shaped by all the things that shaped the 20th century, which are mass media, mass manufacturing. So, the mall, in its purest form is really a cookie cutter thing that looks the same in hundreds or thousands of locations, has the same tenants selling the same goods, marketed across the same channels, reaching a really broad strata of the population, which is really shaped by all of these technologies of the 20th century, which enabled mass manufacturing, which enabled sending the same message through a huge amount of people relatively cheaply, on TV or a newspaper. Now, the century before the 20th, and our century, the 21st century, are both shaped by technologies that are much more fragmented.

Dror Poleg: 00:09:49 So, to start with what we’re familiar with here today, I mean, today manufacturing is much more easy to customize. At least, the core of many products is the same, but people expect much more customization, so they don’t want all to buy the same thing, and the media landscape of course is even more fragmented. I mean, we all basically consume news that is personalized to us and entertainment that is personalized to us, so this idea of a single ad blasting to 200 to 300 million people who then buy the same product is disappearing. Now, in the 19th century, manufacturing, and maybe we’re much more fragmented just because there was no easy way to consolidate them yet and also because there was no real large middle class yet in the U.S. and even in Europe. So, I mean, there was a thin layer of kind of urban upper-middle class, or upper class people, who were the real customers of department stores and retail.

Dror Poleg: 00:10:53 And then, there were working people who did not get into conspicuous consumption and would just buy for utility’s sake, so a lot of advertising wasn’t relevant for them yet. So, yeah, so in the retail chapter … it’s becoming a long answer. In the retail chapter, I’m actually kind of going through the evolution of department stores and how they emerged because of all sorts of technologies in the 19th century, whether it is trains or even the ships and general international trade that started to bring all sorts of interesting goods into Western markets, and then how they evolved. And they’re all in kind of, how, a lot of what they did right 120 years ago is very relevant to where retail is headed now, in terms of becoming more experiential, in terms of becoming much more curated, and less about having everything, but more about having the something that is relevant for me because everything is already available online. I don’t need to go to the department store for that. In terms of the services that are available, in terms of the even progressiveness of its social attitudes and the things that it allows within its spaces that maybe are not allowed elsewhere. A lot of these things used to define department stores in the 19th century, but then, across the 20th century, the department stores became anchors of malls, and they became very bland and similar and gradually not very exciting places to visit.

Chris Rising: 00:12:27 Well, I think some people would make the argument, once Wall Street got involved in funding all these malls across America, they all became cookie cutter and no experience, but that may be a different conversation. But what I find really interesting, and you pointed out in the book, is you make an homage a little bit to Selfridges, which is really the first department store in London, and the idea, the concept, of providing credit to customers came out of that time. But it was really a high level of service that we saw lost in a lot of the ’80s and ’90s. I mean, I still remember going to Best Buy, and you couldn’t find … the client service people were not motivated on commission or anything. They’re paid just a basic wage, and you couldn’t get anyone to help you. And, now, you go to an Apple store, and they’re flooded with people who will give you any kind of help you need. So, it’s amazing how we’ve circled back. But I guess my question would be, is, do you think there are things about technology that are unique that has allowed us to come back full circle to where the experience is really important to the success of a retail operation? Dror Poleg: 00:13:41 I do, yes. I mean, one, just because, I mean, technology provides alternatives, which means that people don’t really have to go to the store anymore in order to buy most things. So, if you want them to go to the store, you have to provide something that cannot be provided online, which means some sort of personal attention, some sort of ability to touch things and experience things, even an element of surprise, to go somewhere in order to see whatever is new and in order to experience it without even knowing that you’re looking for it, so an element of discovery. [inaudible 00:14:17] and Amazon, in particular, is very good at intent. If you know what you’re looking for, you’ll find it. But if you want to be surprised and inspired, I mean, Amazon is pretty good at that as well, but I think the offline world still has an interesting role to play there.

Dror Poleg: 00:14:31 And fourth, I think even the idea of being seen and being around others and seeing how others look at things and what they think about it, I think, is still very meaningful, and I think, increasingly valuable to people because, in our world, where personal relationships are mediated by technology … as you said, we met on Twitter, and it’s probably easier to meet people on Twitter today and to share common interests than it is in the real world. So, there’s something good about it, but it also means that we actually don’t know how to meet people offline anymore and how to connect anymore. But we still have a yearning to be with people and around people, and the way to kind of bridge that gap between what we’re able to do and what we want to do is to create these structured social experiences and spaces where people can come together in an environment that is safe, and they can, not necessarily create an amazing community … they’re just going shopping, but at least see how other people behave and be around them, feel a little closer, feel a little human. So, I think technology is driving us to value these things.

Chris Rising: 00:15:41 Well, there’s a couple of things that you’re talking about that really hit home for me. I have twin 14-year-old daughters who are going to their first formal Christmas dance this weekend, and I came home about two or three weeks ago, and there were a variety of packages of dresses that they had both bought, and they didn’t buy just one. There were … I was freaking out about the credit card bill, and they would say, “Don’t worry, Dad. We’re just going to try them on, and we’ll pick the one, and we’re going to send everything else back.” And I said, “Okay, that makes sense.” And then, about two hours later, they said, “Hey, Dad, could you take us to the Americana?” which is a lifestyle mall in southern California. And I’m like, “Wait a sec. You have eight dresses here that …” “Yes, but we also want to go into a store and have that experience and try a bunch of different sizes on.” And I said, “Oh my God, this is a really different world.” I think, as an investor, you want to categorize it, right? You want to say it’s either going to be all online, or it’s going to be all in a mall, and I think what this generation is saying, no, we’re going to do it both ways. So, that’s a real world experience. Yeah.

Dror Poleg: 00:16:44 You mentioned, I mean, Mark Andreessen. I just listened to a rerun of one of the Andreessen Horowitz podcasts with a fellow … I forgot his name, but he wrote a book called Box about the history of the container and basically about the logistics networks, and he made a point about modern retailers, where people kept saying, “Okay, retail is going to move online. All these offline companies will become online companies and create all sorts of new efficiencies.” And while half of this story came true, the lives of retailers, even those that are online, became much harder than people predicted because they’re not just online retailers. They have to operate offline stores as well, and they have to deal with logistics, and they have to deal with reverse logistics and returns, so actually, in many ways, their businesses become less efficient because of technology, because they have to keep the old stuff running and to deal with all these new things and to finance both of them. So, yeah, it’s not as clear cut or as simple as many people would think.

Chris Rising: 00:17:43 Well, and I know at some point … so, I have a good relationship and really have a great respect for Sophia Amoruso, who started Nasty Gal, and I think she’s a tremendously bright businesswoman. And she got caught in that. She started online. She started basically on eBay. She would go to thrift stores and put together outfits and sell them. And then, they got very popular, and she grew her business. She took VC funding, and it grew and grew. And I think the flaw in the business was she wasn’t designing from scratch, and as it grew, it scaled so quickly, it became uncontrollable, and that is a brand that, it’s still around, but it’s not Sophia leading it. But that, to me, is an example of you can’t just grow for growth’s sake. You can’t lose sight of who your customer is, and you’ve got to be able to control all your costs. And so, and I don’t think anyone has figured out … I think Amazon is going a long way to try to lead the effort, but Amazon is not a brand that people look to, to feel hip or cool, so it’s not going to be a lifestyle brand. So, I think there’s a lot to go. I think the story on retail is not yet told. I think, when you look at the success of lifestyle malls, there’s clearly some interaction, experiential interaction, that is vitally important between what works and doesn’t work. And I think also, technology, and in your experience, how you use technology there, is extraordinarily important.

Dror Poleg: 00:19:09 Yeah. And I think, I mean, like you said, I think there’s different halves of the … like some companies are really good at delivering things, but they’re not very good at creating big brands that really make a deep connection with people. And on the other hand, you have all these emerging direct-to-consumer brands, and some of them have great engagement for customers, and customers love them and are very loyal to them. But it’s very hard for them to make money because of the delivery and the logistics and these aspects of the business. So, definitely, I don’t think there’s a very clear model that has emerged yet. And I think the model might be kind of holding companies that own a portfolio of multiple, 50 or a 100, brands, but the [inaudible 00:19:53] infrastructure and a lot of the tools and also a lot of the management overhead and-

Chris Rising: 00:19:58 Well, I think there’s a company out there that’s probably one of the most valuable public companies in the world, the Louis Vuitton company, that has a bunch of different brands. And that may be an example. I mean, certainly if you look at what Walmart’s done and how they’re trying to accumulate brands and target as well, those are models that you just described.

Dror Poleg: 00:20:18 Yeah, and another, to bring it back to real estate, I think one of the interesting roles that landlords or operators of retail assets can play is to basically reduce the transaction costs for these smaller brands. So, to allow them to integrate into logistics networks and to allow them to do deliveries or to provide them with a storefront in different malls, but to provide a comprehensive solution that allows me, that someone who created an amazing brand and maybe has 100,000 or a million followers on Twitter, to really operate in a viable manner without having to build everything from scratch every time I want to go into a new city or a market, which is what department stores were actually doing for manufacturers and brands back in the 19th century, but at a much smaller scale.

Chris Rising: 00:21:07 Well, you just hit on something. I mean, the original Neiman Marcus was really a collection of different store brands, and you would come in there and have that experience. And it lost its way, usually because a private equity firm bought it put too much debt on it, and you lost the soul of the company. But I think there’s a lot, if you look back at what makes those lifestyle malls that are really working, I think they’re employing a lot of the same high touch, high interaction that we saw at the end of the beginning of the 19th century. But before we go too much further, I think it’s really important that our listeners know that in what I thought was so unique about your book is you really take the time to outline not just the real estate investment side of it, but this new word, and there are several of them, but this new world of prop tech. And you do a very good job of outlining where we are today and how traditional real estate investors or developers have created their own venture capital. There’s a variety of different venture capital funds now, all funding towards how you work with real estate, how do you improve it. Can you talk a little bit about the VC impact on the world today and how this term, prop tech, is leading so much change.

Dror Poleg: 00:22:26 Yeah. So, I mean, the most famous example that everyone was fascinated with over the past few months is WeWork, and the huge investment that they’ve received from SoftBank, both before its valuation collapsed and after its valuation collapsed. Now, when people look at something like SoftBank, a $100 billion fund that finances ventures, finances very risky companies that are losing money indefinitely, the easy way to understand it is just to say, “Oh, there’s this crazy Japanese investor with money from the Saudis, and they’re crazy, and they’re throwing away money.” But actually, SoftBank is a symptom of a much broader phenomenon or trend, which is the fact that there’s just an abundance of capital in the world at the moment, created over the past 10 years with QE and loose monetary policy, and generally with both large private investors and even large companies sitting on a lot of money and not investing and waiting for opportunities that generate higher growth.

Dror Poleg: 00:23:29 Now, these opportunities are very limited these days in the world. If you put your money in the bank, you basically have to pay the bank in order to take your money and lend it to someone else. The stock market and all the traditional avenues might still be going up, but they seem very expensive by traditional measures, so these companies, large pension funds, insurance, endowments, software and [inaudible 00:23:56] funds. It’s managed trillions of dollars. After they’ve allocated most of their money to more traditional things, like stocks and bonds and even hedge funds and private equity, et cetera, and real estate, they still have a lot less that is allocated to venture, and that amounts to a hundreds of billions of dollars at the moment, and that money has to be invested.

Dror Poleg: 00:24:19 So, it’s funny to think about it, but there’s some people in the world whose sole job is just to get rid of money as quickly as they can, because there’s more money coming next quarter, and they have to get rid of that as well. And when you need to get rid of money and such large amounts of money, everyone obviously wants to invest in software companies that have 80% margins and no balance sheet and have 50 employees and $10 billion in revenue. But most of these software companies are very small, and even those that are not very small, they can’t really deploy a lot of capital, just because they don’t have what to spend it on. Here’s, you’re looking to invest $ 100 billion in something that might grow fast …

PART 1 OF 3 ENDS [00:25:04]

Dror Poleg: 00:25:03 Invest $100 billion in something that might grow fast, that is risky but might grow fast. Real estate is one of the few places where you can actually look for these type of companies that are innovating and doing audacious things. And that’s how you end up with WeWork getting all that money and with Opendoor and with generally, I think, $15 billion investment just this year in real estate tech and in companies that are trying to revolutionize the industry. Now, parts of that are going to what we call proptech, which is technology for real estate itself, which is all the things that you install or use inside the building. And part of it is going, and I think the more interesting part, to these new types of operators, to companies that are not just trying to help the landlord or help the investors but are trying to almost replace the landlord and investor and to make it irrelevant, companies such as WeWork and various coliving companies, and even Airbnb as a separate example. Companies that are trying to reinvent the whole structure of the industry, not just to make incremental changes to how it is currently operated.

Dror Poleg: 00:26:11 And whether WeWork comes back or not, I think we’re just going to see more money flowing through the industry because it doesn’t have anywhere else to go, and there’s just so much growth left in real estate and so many things that can be improved and done better.

Chris Rising: 00:26:28 Well, you know what- Dror Poleg: 00:26:28 I think investors will continue to come in. Chris Rising: 00:26:30 … Yeah. I do. I hear you. I think the pent up demand for return, I agree with you, is what led to certain decisions that I think with a little more reflection, people would go, “Maybe things aren’t really a technology company with the margins that justify the big bets.”

Chris Rising: 00:26:49 But one of the things I find interesting, whenever I speak on this subject of technology and real estate, is there seems to be… maybe it’s generational, and you make a very good point that we’re at the first time in history where we have five generations all in the work place, and that’s got to create collisions.

Chris Rising: 00:27:07 But there are times I chuckle because I’ll have gone to a Bisnow retreat or something like that and hear people talk about things as though they’re new. What’s going to happen in real estate is a company’s going to come along, and they’re going to run the whole building for an owner of real estate. And I want to go, “Yeah. It’s called C&W Property Management. It’s called CBRE Properties.”

Chris Rising: 00:27:29 These things have been around, and they really became popularized in the RTC days in the ’90s where you raise a big fund, you want to go buy something. You didn’t want to have the employees on your balance sheets, so CBRE took it over. And so sometimes I chuckle because I don’t think the world’s changed that much.

Chris Rising: 00:27:46 I think what’s changed dramatically is what we expect out of our personal lives in our homes, we expect out of the office space or out of the hotel experience or out of the retail experience. And so I’d like to talk a little bit later when we go deeper into office about WeWork and Convene and some of these others.

Chris Rising: 00:28:05 But when you look at the landscape of proptech, which I think is more important to me, since we’re very focused on carbon reduction and health and wellness and having an impact in our projects, and technology has really made that possible, but then there’s the customer experience, which has been something we focus on over and over again and the limitations of technology. But the fact is, and this is probably the point, I’m a little long winded here, is that almost every week, I get two or three new people pitching our team on ideas on how we create a customer experience.

Chris Rising: 00:28:42 And so there’s clearly so much VC money coming in here and driving people, and I think we have to recognize that the VC world is a 90% failure rate. And so we’re going to change, but I think it’s more likely that a CB is going to ultimately acquire a Convene and make that part of their property management experience, or a Brookfield is going to put the money behind- Dror Poleg: 00:29:06 Or vice versa. Maybe Convene will buy CBRE one day.

Chris Rising: 00:29:09 … Yeah. But the reason why I don’t think that’s going to happen is the same reason I’m a pessimist on WeWork, is I think ultimately, the owner of the real estate is in a much better position than the provider of services. He who has the gold makes the rules. And s-

Dror Poleg: 00:29:28 Yes, but you said a few things there. I’m going to try to unpack them-

Chris Rising: 00:29:34 … Okay.

Dror Poleg: 00:29:34 … One by one, or just unpack one or two of them. One, about this notion of, okay, someone owns a building. He brings in CBRE or Cushman or Jones Lang to manage it for them. Definitely is not new.

Dror Poleg: 00:29:49 But what I think is interesting today, particularly when you look at office and industrial and multifamily, is that we’re starting to see the dynamics that exist in the hotel world where it’s no longer enough to just bring in a manager. You also need a brand. And more importantly, you need to make changes to the assets based on who the manager and the brand are.

Dror Poleg: 00:30:10 The asset is no longer fungible. It’s no longer, I just bought this building, and I bring in CBRE, and next year I can replace them and bring in Cushman. I don’t need to make any major investment in the asset or take any big risk.

Dror Poleg: 00:30:23 What we’re seeing in the office world today is that you have to make these trade offs and to adapt the build out itself and the building itself to specific groups of customers and to the needs of a specific operator or brand, which is something that is relatively new in the office world [crosstalk 00:30:40].

Chris Rising: 00:30:39 Well, now, let me challenge you on that, because when I worked for John Cushman and we represented big oil companies or we represented big finance companies, they would lease space, and they would make the space very unique to their needs and their wants, and they’d spend lots of money to do it. And that was the culture that that big company wanted.

Chris Rising: 00:31:04 What I saw at a WeWork was, and as a landlord of WeWork, was, okay, I would very much like to do short term leases because I hear tenants come to me all the time and say they want it. But my lender won’t let me do that. They fundamentally will not give me $100 a square foot to do a three year lease, because you can’t amortize it.

Chris Rising: 00:31:23 But, aha, WeWork with their balance sheet, putting up their letters of credit, they can go do it, and you know what? If they ultimately go under, I’ll take back the space, and I’ll operate it. They provided a unique experience, but so did Occidental Petroleum when they would take 100,000 feet and build it out just for them. I don’t see the di-

Dror Poleg: 00:31:44 Right, but the difference is that Occidental Petroleum would sign a lease for 15 years with the landlord directly, but the actual customers that are coming in today, they don’t want to sign a lease-

Chris Rising: 00:31:56 But wasn’t that a luxury?

Dror Poleg: 00:31:56 … Which is why you need a WeWork to come in between.

Chris Rising: 00:31:58 No, no, no, no. I’d say here’s where I disagree. It was a luxury for me to have a balance sheet where someone could put up the letter of credit and meet the needs of Nike, who wanted a three year deal. If SoftBank doesn’t fund-

Dror Poleg: 00:32:15 Of course. Yes.

Chris Rising: 00:32:16 … WeWork, that would never happen. The one part of your book which I wanted to talk about was there’s no discussion of the financing of office buildings or retail malls. And I say this over and over again. If I could do, like in Japan, most leases are one year leases. They also don’t provide many TI dollars. But if I could do one year leases just to meet the needs of a tenant, I would. My lender won’t let me do it. And the dollars are so big.

Chris Rising: 00:32:45 I don’t see a WeWork… by the way, I will say, as a landlord of them, they’re great. They’re doing exactly what they said they were going to do. We haven’t suffered yet, and hopefully we don’t. But I just don’t see that-

Dror Poleg: 00:32:58 Hopefully.

Chris Rising: 00:32:58 … Next group coming out with that kind of funding that WeWork had and saying, “Okay. I’ll take 10 floors, and I’ll do some enterprise space, and I’ll do some coworking space.” I don’t see it. Not that I have all the answers, but-

Dror Poleg: 00:33:12 So I-

Chris Rising: 00:33:12 … I don’t see it in my real world. Dror Poleg: 00:33:15 … No. You’re right, up to a point, where it will be hard for them. That’s what I mean. WeWork is currently kind of subsidizing landlords and helping them [inaudible 00:33:26] in their buildings that their own balance sheets and their own lenders are not willing to do.

Dror Poleg: 00:33:32 But all of this is not happening just because WeWork existed and WeWork was funded. What’s driving it is a change in the nature of demand itself and what tenants want. And I don’t think that genie is going back into the bottle.

Dror Poleg: 00:33:45 If WeWork is not going to serve it, and that’s actually one of the major points of the book, is that office is becoming more dangerous. It’s becoming a more volatile cash flow product, which doesn’t mean it’s becoming less valuable. It’s probably becoming more valuable, but cap rates are going to be higher, and income is going to be more volatile.

Dror Poleg: 00:34:05 Now, WeWork has actually been absorbing that risk, taking it on itself so far. If WeWork disappears, the risk itself is not going away, and it’s going to move from WeWork to the landlord itself. In a way, WeWork died for our sins. It didn’t even die.

Dror Poleg: 00:34:22 Now, to go back to a point you made a little earlier about the landlord remaining the most powerful entity because they own the building, if you look at the world of hotels and at the dynamics that are already set there, this is not exactly the case. In the hotel world, when an owner of the building wants to go to a bank and get a loan, often the lender tells him, “Hey. Go and sign a brand. Otherwise, I’m not even financing this building. I don’t care that you own the building. You go and find a brand. Once you have an operator in place, then I’ll give you the money to refinance the asset or to finance the construction.” It’s not so far fetched to imagine a world where the brands themselves and the people that can provide an amazing experience and attract customers have a little more power than the people who just own a building.

Chris Rising: 00:35:12 I-

Dror Poleg: 00:35:12 And it’s a balance of powers, and it’s constantly changing, of course. Stuff’s going to be-

Chris Rising: 00:35:16 … And I agree with everything. I agree in the power of the brand. And by the way, I think the chapters around WeWork and the change in office I think are unbelievably compelling. You point out Lisa Picard, who I’ve had on the podcast, who I think really zeros in on this same effect.

Chris Rising: 00:35:34 And I think it’s about the brand. I think the brands have to develop, or if a passive owner doesn’t want to get in that game, they’re going to hire, and either CB is going to catch up, or you’re right, maybe some well funded, newer version of property management, just like it happened in the hotel space. People have short memories. They forget the kind of fundamental changes Barry Sternlicht brought to the hotel business. And he created brands, whether it was W Hotel or now One Hotel.

Chris Rising: 00:36:05 And so I think people are going to continue to create brands around office. I agree with you wholeheartedly. I think some of the game changing things is going to be what technology offers and those who are willing to accept it. We focus a lot of our efforts on adaptive reuse, all of our efforts, really, and one of the things we point out is a third generation family really isn’t in a position to upgrade a building from a technological standpoint and a brand standpoint. And that’s where the opportunity lies for what we do.

Chris Rising: 00:36:35 But circling back, I could be wrong, but just I had enough conversations with the JPMorgans and the Nikes and all of them. They took the WeWork option because why not? It’s easier. Three years. I don’t have to have my name on it.

Chris Rising: 00:36:51 I read your book carefully, but we didn’t get into how leases now are accounted for and what would drive people to force shorter term leases because it has to be on their books. I think you said it right. I think WeWork allowed some change to happen. It just isn’t institutionalized yet.

Chris Rising: 00:37:13 I think the five year lease is going to be the norm. And people are going to devise space that can be moved around, whether with furniture or movable walls and such, where you’ll do three year leases, because what’s driving that is the lease term is the amount of TIs you put into it and how you amortize it over the term. I-

Dror Poleg: 00:37:29 And in Japan, as you said, I think leases there are shorter because the market is so transparent and so standardized that it’s much easier to kind of take things in and out of spaces. I have friends who buy office buildings in Japan. You can buy an office building in a single day because, as you say, it’s so standardized and so simple and so straightforward, and the risk is so reduce in many ways that you are able to create this liquidity without making things terribly expensive or volatile [crosstalk 00:38:00].

Chris Rising: 00:37:59 … I think-

Dror Poleg: 00:37:59 The US is much more fragmented. And also, Japan is really two or three markets. The US is much bigger.

Chris Rising: 00:38:08 … That’s true. I feel like I put you in a cannon and shot you off and went right into talking about your book, but I’d be really interested to know a little bit more about yourself, Dror. Where were you born? And tell us a little bit about how you end up in China and your educational experience. Let us know a little bit about that.

Dror Poleg: 00:38:30 I was born in Israel, which is a small country in the Middle East.

Chris Rising: 00:38:37 Eight million people, last I checked. Eight million people and an economy the size of Chicago. I think I’m [crosstalk 00:38:42].

Dror Poleg: 00:38:42 But we make noise like we’re 300 million.

Chris Rising: 00:38:45 Yes.

Dror Poleg: 00:38:46 When I was in China, we used to joke with the Chinese. We used to tell them, “Us, the Chinese and Israelis together, we’re a quarter of the world.” Yes. And they would sometimes believe us, but then they would think, “Oh, no, actually.” We’re barely a neighborhood in Beijing.

Dror Poleg: 00:39:04 I grew up in Israel, spent some of my childhood in Paris, France, and when I finished my military service in Israel, I went traveling, as many Israelis do. And I traveled around Asia and Australia and New Zealand. And I really fell in love with Asia.

Dror Poleg: 00:39:19 I felt that it’s so vibrant and it has a mix of both business opportunities but also some kind of cultural and even spiritual elements that I wanted to explore more deeply, and also a sense of freedom, a sense of a bit of a Wild West and a place where there’s many things left to build and where maybe mistakes are not as costly as in other places, that you can try something. If it doesn’t work, you can try again.

Dror Poleg: 00:39:44 I decided to stay in the region, but I guess I wasn’t ready to just move to China just yet, so I just traveled. But then I decided to study in Australia. I studied digital design, communications, and literature. These were my kind of concentration in my BA. Nothing to do with real estate or even with business. But I studied them because I’ve always been in business. Since I was in middle school, I was producing parties and night life events and promoting events and helping local businesses kind of design advertising and marketing campaigns. I went to school mostly to study what interested me.

Dror Poleg: 00:40:24 And in Australia, I worked at a small agency also serving local businesses, and I started working for a parliament member, first as an intern sent by the university, but then I had a real job working in parliament somehow, in his parliamentary office. Dror Poleg: 00:40:42 And when I finished studying, I was actually planning to just stay in school and do a PhD and be a professor and teach. But I also had an itch to continue to travel and to do business, so I just went to China without a job or without any clear plan. I just showed up at the beginning of 2005, showed up in Beijing, started learning Chinese, and met people in the city.

Dror Poleg: 00:41:08 And I met some guys who had an advertising agency that was serving some large companies, but they weren’t doing anything digital. China, at that point, had I think less than 50 million Internet users. I think only half of them were on broadband, and even broadband was kind of slow. It was very, very prehistoric Chinese Internet.

Chris Rising: 00:41:31 What year was this?

Dror Poleg: 00:41:33 2005.

Chris Rising: 00:41:33 Okay.

Dror Poleg: 00:41:35 In 2006, a funny anecdote. An Israeli business magazine asked me if I want to write something for them about the Chinese Internet. I actually interviewed some guy called Jack Ma who was operating-

Chris Rising: 00:41:52 Just some guy.

Dror Poleg: 00:41:53 … Not a small company, but about 100 [inaudible 00:41:57] divided by 400 from what it is today. I interviewed Jack Ma from Alibaba and kind of was telling readers in Israel about this company and what they’re doing. And this guy was an English teacher and now got the investment from the guy, from SoftBank, who has also been around for a while.

Dror Poleg: 00:42:14 But anyway, I arrive in China, start to work in advertising, and find myself doing more and more work with real estate developers who are our customers or hotel companies or retailers. And at some point, one of these companies sucks me into their business, first to help them with marketing, but very quickly helping them select sites for development and convince the bank to give us loans and convince our investors and analysts to support our strategy and to fund us, and kind of found myself overseeing all the soft aspects of our development. The branding of projects, the positioning, all of the assumptions that went into the models, and then overseeing the leasing, particularly of our retail project.

Dror Poleg: 00:42:56 After five and a half years in China, I took a break, went to London, did my master’s degree at the London School of Economics, a research master’s in economic and financial history. Then back to China for another five years with the same firm doing now only acquisitions or dispositions, building a pipeline of things that we wanted to acquire and selling pieces of our existing commercial projects to different types of investors.

Dror Poleg: 00:43:22 And four, five years ago almost, I decided to leave China after 10 years. I had a crazy idea for an app that I wanted to build, and the goal of the app was to help people in cities that are lonely to actually talk to each other and find nice people nearby. It was some sort of a location based social network, a bit like a dating app, but without sex [crosstalk 00:43:48].

Chris Rising: 00:43:51 I was going to say, the anti-Tinder.

Dror Poleg: 00:43:51 Yeah. A way kind of more pleasant and wholesome and dignified way to interact with people. I know sex is very important, but there’s other things that people want to talk to other people about. I try to enable that. And that didn’t go too well, but it did bring me here to the US, because we had a few tens of thousands of users, and we raised a little money.

Dror Poleg: 00:44:13 And as I was working on the app, I found that the only people who were actually interested in it were, once again, real estate companies or local retailers. Basically, anyone that owns a space that wants to create some social engagement within that space would reach out to me. And I realized that there’s no escape from real estate, and I also realized that there’s a lot going on at this intersection of software and physical assets and that actually, I know a thing or two about it because of my unique experience.

Dror Poleg: 00:44:43 And as I started digging deeper into it, at some point, the research itself became more interesting than the startup, and I started advising people and speaking about it. And here I am now.

Chris Rising: 00:44:55 That’s terrific. And you live in Brooklyn, and you’re married and have a child?

Dror Poleg: 00:44:59 I live in Brooklyn. I have a wife and a three month old daughter. Yeah. She’s not buying on Amazon yet, but we’re buying a lot of things for her every day, a lot of packages also moving in and out of the house. It’s crazy. Crazy amount of cardboard.

Chris Rising: 00:45:15 Well, one of the questions I like to ask my guests on the podcast is technology is such an important part of our lives, and it feels as though sometimes you can never get a break. How do you organize your life? You’re very busy as an author, and I know you do speaking engagements. But what kind of technology are you using on a day to day basis to organize your life and to bring sanity to your life instead of it overwhelming you?

Dror Poleg: 00:45:40 I have to admit it’s a constant struggle for me. I’m still negotiating my relationship with technology. I’m a big fan, and I love to try every new thing, and I’m eternally grateful for a lot of the inventions that we have today and the fact that now I can meet amazing people, including to connect with people and to share my ideas and to learn from other people so easily.

Dror Poleg: 00:46:08 And even while writing the book, I was amazed. I really thought that you can actually write a whole book about whatever you want without leaving home if you really want to. I met a lot of people and traveled, but I thought most of the work is just sitting wherever you are, connected to the Internet. Technically, I could have written a book about biology or something that I know nothing about and probably would come out with something decent.

Dror Poleg: 00:46:36 But in terms of my day to day, I’m trying these days to spend less time, like whole dedicated hours, without my phone. I’m trying to have whole days where I’m working more on paper rather than on the computer. As a family, we try to be offline from Friday night to Saturday night [inaudible 00:46:56] both a Jewish thing but also kind of a new lifestyle choice for us of we try both to be a little less connected and also to be more connected to one another.

Dror Poleg: 00:47:07 But, yeah. I don’t have any amazing technological tools that I think I can recommend. I think if anything, I can recommend the power of pen and paper. And even just before the podcast now, I went out for a very late lunch, so I left my phone in the office. I just went. I knew that I had an hour and a half. I just took a book with me, and that’s it.

Dror Poleg: 00:47:28 And when you do that, it’s amazing how many things spring into your head, both just reading the book but also just scribbling on the book all sorts of ideas that have nothing to do with the book I was reading. I think during the normal course of the day, just don’t have room to even come into my consciousness because I’m so busy on my phone and on my computer. It’s a never ending struggle.

Chris Rising: 00:47:50 That’s right. Those are great insights. A friend of mine in YPO wrote a book, Aaron Edelheit wrote a book called The Hard Break. He’s also Jewish, and he talks about how Friday at sunset to Saturday at sunset, he’s totally offline, and all the benefits of that.

Chris Rising: 00:48:09 I’ve tried it. I’ve tried to do it. I’m Catholic, so I try to do it on Sundays. I’ve had to use things like Freedom app because I was not self disciplined enough. And that caused its own problems, but I was able to get into a habit, and now I don’t check my email as much.

Chris Rising: 00:48:29 There’s a new email platform that I just love called Superhuman from the guy who created Spark. And I love Superhuman, and I love the idea that I can put a snooze on messages. But it’s a battle.

Chris Rising: 00:48:44 Well, let’s jump back into your book. We didn’t get into the hotels or the Airbnb as much. I want to go back to that.

Dror Poleg: 00:48:52 Yeah. We can talk for three more hours [crosstalk 00:48:54].

Chris Rising: 00:48:54 Yes. That’s right. And I’m hoping we can at least touch on industrial, but we might have to have you back, because I don’t think we’ll have time for anything around blockchain or crowdfunding or anything like that.

Chris Rising: 00:49:04 But I think it’s really important. What I really liked about your book, and I’m, one would think, maybe biased, because I’m in the office side of things most of my life, but I really learned a lot about the retail side and then the hotel side.

Chris Rising: 00:49:21 And we’ve already talked about how hotel operating companies are the new normal and that if you’re going to get something in finance with any level of rationality, you’re going to have to have a brand. That brand is going to require you to do a PIP, which means every three or four years, five years, you have to redo the public areas and the rooms. And so the brands are telling the landlords how they have to spend money.

Chris Rising: 00:49:45 But I also think that hotels have become just the testing ground for all of this new technology around interaction, and you talk about that in the book. You want to enlarge on that and how office and residential have all kind of come together in hotels?

PART 2 OF 3 ENDS [00:50:04]

Chris Rising: 00:50:02 … Residential have all kind of come together in hotels.

Dror Poleg: 00:50:05 Yeah. One of the interesting things that technology is driving, the blurring of boundaries between different uses and between what the zoning laws intended and what ends up actually happening. We’re seeing in hotels today, both the fact that they suddenly have coworking spaces and more and more event spaces and that they use technology to predict who’s coming and to change the prices constantly. I think yesterday I was touring a Sonder property, Sonder’s a new type of home sharing/hotel operator and they were talking about the revenue management platforms and I think, I don’t remember the exact number, but I think the rates for a single room can change up to 7,000 times during a single day, based on all sorts of things that it responds to. Whether it is the weather or holidays or what other people are doing in other parts of the property.

Dror Poleg: 00:51:04 This level is going to [inaudible 00:51:05] on the customer and on each individual customer and try to figure out how much he’s willing to pay, when is he going to decide, how to nudge him to the decide and then how is the create a good experience for him once he’s into property. It’s incredible how intense it is and for office and even for apartments so far most landlords don’t really know too much about the individual person within their buildings. They’re more concerned about the corporate entity that signs the lease and even about that entity they’re not too concerned. That they hope to speak to it every 10 years and renew the lease or to send the property manager if something is broken. In hospitality, you really have that more and more personalized view and understanding of the customer, which is now coming to all other property tax, including industrial. I mean the focus on talent and on attracting people into even working in minimum wage distribution facilities. Even there, there’s now competition for talent and people expect an individual focus.

Dror Poleg: 00:52:16 To go back to the first point that I was making, I think the boundaries between different uses are blurring and you see now hotels both today and also historically, when someone stays in a hotel for three months or for six months, at what point does it stop being a hotel and does it start becoming an apartment? Likewise with an apartment when someone is there on Airbnb or when 20 people are there on Airbnb and 80 people actually live there, what exactly do you call that building?

Dror Poleg: 00:52:43 Another thing with the Sonder building that I visited yesterday, the history of it is interesting. It’s in downtown Manhattan. It was actually developed as an office building 140 years ago. Then it became an apartment building and then it became a Sonder hotel and it could become a hotel not because it was designed as an apartment building, but actually because it was born as an office building. It was commercially zoned and it had a certain type of core and since it’s [inaudible 00:53:13] system, it actually enabled it to become a hotel. It could become a hotel much more quickly together with technology because Sonder has the ability to generate demand for it and brand it within a few months, which is something that Marriott would probably take a year and a half to do under the traditional model that also involves enough technology but involves a lot of other things that these new companies are doing it a little differently. Yes, I’m throwing a lot of points at you.

Chris Rising: 00:53:43 Yeah, no, but they’re all very relevant to the point of what the technology is allowed. I think there’s some even more fundamental things, not fundamental, but simpler. You can get your hotel key just by going to an app instead of having to wait in line to check in and that’s now moved over into the multifamily and it’s something we struggle with in the office. How do you provide the security that is important, very important in a workplace, especially in a country that allows guns in the way that we do, but still give people the ability to do things with their phone instead of a card key and all? I think hotels are driving that. I think the idea that… One of the most fundamental changes in hotels has been what we expect out of a room. I love the CitizenM hotel brand because-

Dror Poleg: 00:54:34 [crosstalk 00:54:35].

Chris Rising: 00:54:35 I don’t stay in my room long, where as my partner, Scott McMillan, he views a hotel room as a place to get work done and so he… It drove him nuts staying there. I love it when I go to New York, I have a whole routine with it because I’m spending only when I sleep in the room, otherwise I’m downstairs, working downstairs or I’m in the lobby or I’m out at meetings. That’s a fundamental shift from what people expected out of a suite at a Hilton, 10, 15, 20, 30 years ago. It’s changing the architectural build out of hotels. I think it’s going to continue to affect hotel… I think that is the proving ground for anything that you see that comes into multifamily and office, is what’s happening in the hippest and hottest hotels.

Dror Poleg: 00:55:25 Yeah. This touches on a very important point. CitizenM is a great example and I was about to mention it as well. Basically what they did is they didn’t think about what they provide in terms of space or how big is the room or what color are the walls, but they thought specifically about the jobs to be done of the customer. Why are people here? What is the most important thing? What is the second most important thing? Et cetera. They got to the conclusion that, okay, I need to have an amazing bed with a great mattress, good size, nice window and really, really nice shower, with really, really strong water pressure. Doesn’t have to be huge or fancy or marble, it has to have great water pressure and temperature. They got these two or three things right and they eliminated almost everything else.

Dror Poleg: 00:56:10 The room is like, half of it is the bed, a quarter of it is the shower and then there’s a little place to put on a suitcase and it works because they’ve leaned in on the needs of their customers. I think here if we can give the Japanese credit again, I think a lot of that thinking around the customer exists and has existed in Japan for many, many years. An average business hotel in Japan, I think gives you a better experience than a five star hotel in the US or elsewhere. Even though the room is much smaller, the bed is usually better, the shower is amazing, the ventilation, the temperature of the air quality is better and you have a feeling that someone actually thought of what the person is going to do in this room. In terms of where the light switches are located or the power… It’s a lot of little things that just come together to create an experience that feels effortless and kind of invisible in terms of the technology and the effort that one [inaudible 00:07:11].

Dror Poleg: 00:57:11 While here in the US… I travel often and I’m sometimes amazed by hotels, it can be so fancy but have so many issues that just keep recurring. The water is always flying out of the bathroom. There’s always too many things beeping and light sources when you’re trying to sleep. Also again, like a lot of little things that you really ask yourself, does anyone actually try to use this room and think of the customer journey and what I actually want and what I don’t want? There’s a hundred things in this room that probably cost someone money that I don’t need and there’s like three things that I need and they’re not here and I’m not unique. how come they didn’t consider it?

Dror Poleg: 00:57:58 Maybe the main point about it and you mentioned for example, access control, walking into a building using an app, is that while we all think about technology and amazing things that need to be invented, I think the biggest opportunity is still for landlords, especially in office, is to solve a lot of these very simple bread and butter issues. How can I walk into a building more easily? How can the elevator run a little faster? How can I get my lunch delivered a little better? How can the temperature be a little more convenient? A lot of very, very simple things that I think add up to a great experience without gimmicks or anything to-

Chris Rising: 00:58:37 Well, the issue that we confront is a really a generational issue. In order to provide a lot of the services you just described in an office building, people have to be willing to give up privacy. What I mean by that and people do it now and they don’t even realize it, but if they’re going to be willing to put something on their app it has to be that we can track them throughout the building, otherwise we can’t provide the ease of access. We need to move our security towards people who, to identify people who don’t and then we can focus our security on that. Generationally, we find it hard. There are still boomers who are running law firms and running accounting firms and running big businesses who think that that’s not of interest, not of worth.

Chris Rising: 00:59:19 The one that gets me all the time is parking, stray a little bit. You talked to the senior person who said, oh, we need lots of parking, we need lots of parking. Then you go talk to the office manager, they’re like 50, 60% of our people take public transportation. They don’t want a car fob for us to know you’re there, you want an app. These are just things that come up. I think that’s going to define the winners and losers over the next 10 or 15 years. I think we’re going to have a lot of empty office space, but it’s going to be old and dated and that’s going to provide opportunity for what we do because I just think that’s where the world’s heading.

Chris Rising: 00:59:59 I want to touch on industrial because I thought your chapters on industrial were really kind of what ties this world we live in today between retail and even office and hotels together. Can you talk just a little bit and give people a flavor of the chapters you wrote about industrial because I think they’re very important?

Dror Poleg: 01:00:24 Sure. With every section of the book whether it’s office, retail, housing, lodging or industrial, I try to include a lot of history and a lot of lessons that are relevant to all other types of assets. Even if you’re not interested in industrial, there are things there that are relevant for other assets. In industrial one of the key things is how the way things move, impact, the value of real estate and even regulatory framework around it. I started the chapter looking at the history of zoning laws and the fact that… Zoning laws are something that we take for granted, but actually the demand for them and the standardization of them came once trucks started moving around, I’m talking about small early trucks, not about the big ones that we have today. Those trucks suddenly liberated factories from having to be next to the end of a railway line or the end of the shipping line, which usually meant the center of city. Suddenly factories could move around and be located anywhere or located in the suburbs.

Dror Poleg: 01:01:29 Now the problem with the suburbs was that the suburbs were, at that point, only residential, kind of middle class, built along the railway line. When the suburban residents started to see the factories coming up next to their projects, the developers and the residents started lobbying the government and asking for zoning laws to prevent pollution or noise and also to prevent those people who work inside factories to have anything to do with the neighborhoods that were located outside of cities and a little bit along racial lines as well. The point of this is that a new technology, a truck, suddenly not just enabled new types of buildings to rebuild the new location, but it also changes the regulatory framework completely and created the zoning laws that today govern everything that we do in real estate.

Dror Poleg: 01:02:24 Now from there I started looking at how new technologies might change some of the assumptions that we have today and some of the things that we take for granted. Just like trucks liberated goods and liberated factories from being alongside railways and the port, we’re going to start to see flying things, maybe liberating goods from highways. We’re also, once shipping facilities and factories don’t need employees in them, they don’t necessarily need to be located along bus lines or highways or… They don’t have to be built a certain way, which means that they can all move around. Now, unlike offices or apartments, which I think are changing on the inside, but in terms of their location, they’re pretty safe where they are, most of them. In the center of Manhattan people are not going to disappear in 20 years. A lot of these industrial facilities that are located in areas that have no natural advantages apart from being next to a highway, once the highway becomes less important, these factories or these facilities can be built or moved anywhere, both further into the city and also farther into all sorts of other places. I think that their natural defenses are much weaker and I think it’s something that a lot of investors are overlooking today because everyone is flocking into industrial and they’re flocking into industrial because it looks more like traditional real estate than office and retail and residential these days.

Dror Poleg: 01:03:54 Industrial has these large tenants, they sign long leases, they don’t require a lot of build- out. The construction of the building itself to begin with is much faster because usually these are large structures and it’s a Greenfield development, but I think these industrial assets might prove to be more disruptable than all other assets. In 10 years it’s easy to imagine that goods will fly along completely different routes that they do today, using completely different transportation devices and stopping in completely different places. While for office and residential and hotels, most of the action will still be in the same place but will change differently. I think industrial is up for a much bigger disruption over the next five to 15 years for most people.

Chris Rising: 01:04:44 I agree with you. Part of the reason I agree with you is the cap rates have gotten so low, which leads to, I think people being lazy thinking this is it, this is a commodity, this is the way it’s going to be. If you really look at how industrial has changed and how the dock heights have changed and Amazon and logistic companies have brought robots into it, it’s now being shaped for a completely different worker and it’s not even a human worker for the most part. I totally agree with you that the need for mass distribution centers is most likely going to go away in the hyper-local-

Dror Poleg: 01:05:27 There’s two examples. Technology now, drones and robots that are being used inside industrial facilities, now allow you to build a four story structure where previously you could only build a one story structure because it was for humans and for trucks. Now that means, okay, great news. I can create four times more supply on the same plot of land. Amazing for me, but it also means that everyone else can silently create much more supply than you assume when you went into this business. We’re also seeing, if transportation becomes really, really cheap, much cheaper than it is today, suddenly tenants will have much more money to spend on rent, but more of it will go to the rent itself. Face value it sounds like a great thing. Okay. I own a shed, so I’m just going to charge more, but actually once customers are able to pay more, they’re actually able to rent space in a different location, maybe closer to the city, maybe inside the city and maybe your shed is not relevant anymore because just like with office, customers can rent in the suburbs and in office parks and pay much less. [inaudible 01:06:34] preferred to be in the center of the city for various reasons. If your main advantage is this is a little cheaper, that might not be something that saves you when the world changes.

Chris Rising: 01:06:48 This has been a terrific conversation. I do want to circle back. I highly recommend to our listeners that they read the chapters on industrial. I thought they were amazing. One area I skipped over, which I want to go back to because I think it’s really important has to do with Travis Kalanick and Cloud Kitchens and his city ventures as well. The basic concept I think is important. I think it kind of goes to a generational change that is, I’d say we’re at the beginning of because boomers are still a strong force in the workforce, but as my generation, the gen x-ers, start to age into the more senior age bracket and millennials become more senior and gen z-ers fill it all out, I think the concepts around what Travis is doing and others are doing around cloud kitchens and about where we store things that we don’t need on a day to day basis. I think that kind of wraps about all the technology that we’ve talked about. Can you talk a little bit about that and then we’ll give our listeners a break because I think at some point I’m going to have to have you back so we can go deeper on some other things. Talk a little bit about what Travis is doing.

Dror Poleg: 01:08:06 Travis Kalanick, the founder, the ousted founder of Uber. He’s now investing in a company called Cloud Kitchen, also called Dark Kitchen by some people. What that refers to is usually industrial facilities that have large kitchens, kind of like a we work for restaurants. They build the cooking facility, five or 10 or 20 different brands can go in there and create, make their own food, whether it’s Thai or Mexican or Indian or whatever. Then the restaurants and the food that they make in those shared spaces are marketed online in food delivery apps and online, they look as if this is a real restaurant. They’re virtual restaurants basically, but these restaurants actually don’t have any street facade or any street presence. They’re just located in an industrial facility. Could be second floor, fourth floor retail in the center of the city or even an office building. Could be a light industrial structure closer to a residential neighborhood.

Dror Poleg: 01:09:10 What that means is that all the turnover that used to exist, which treats retail restaurants, is now moving into these upper floors of much lower value buildings and because these buildings are integrated with the software marketing network and with those hardware delivery networks that can bring these goods into people, suddenly that unlocks a lot of value for the real estate itself. I think that’s one of the most extreme and beautiful and clear examples of how technology can really take a single asset and change the meaning of its location, the meaning of its accessibility, the meaning of it’s visibility, even its intended use is being changed, because it was supposed to be industrial, but actually now food is being made there and it’s basically a restaurant, but it’s in an asset that no one could have imagined would have been used in this way.

Chris Rising: 01:10:05 When I first started thinking about it, I was like, okay, now I get it. That’s where Applebee’s or Chili’s, they won’t have driver come to the store or to the restaurant and clog it up, those two were there. That was my first impression. Then I started to think about it in the sense as, this is almost like software for chefs. I mean it’s like, okay, you’re a young person who could never put together the money to lease space, to build it out, to meet all the health codes, but you’re really talented as a chef and you can go in and it’ll probably still have the same turnover as restaurants always do, but the friction costs are so much less. When I… Go ahead.

Dror Poleg: 01:10:45 Sorry. I mean these dynamics, we saw them first in digital media. Things like YouTube or like Spotify, which means that if I’m talented and I can create content, I don’t need to build a media empire in order to reach millions of people. I just need to create the content and someone else already built a distribution panel and the marketing networks and all sorts of other tools to allow me to edit the music and to package it nicely and design it and get in touch with other people to help me on demand. The digital media angle is very easy to see it happening, but we’re starting to see it in the physical world as well. Like you said, if I’m a chef or you find a fashion designer and I have a cool idea, today I don’t need to go and build a big company and I don’t need a lot of money, I just need to create my own thing and then there’s other platforms that distribute it for me.

Dror Poleg: 01:11:35 I think the same is even true for real estate content. Today on the one hand we’ll have these giant companies that will just continue to get bigger and bigger. If we look at hotels we’re seeing consolidation, Marriott’s and [inaudible 01:11:49] and everyone else, they’ll become bigger and bigger. On the other hand, as an independent hotel or someone that just comes up with a single property, today with the OTA and other tools, I can suddenly reach millions of customers and use really sophisticated marketing tools. Obviously I pay for them and they take a cut out of my revenue, but they allow suddenly thousands of new operators to exist that were not financially viable before. In the case of Airbnb, they allow millions of micro operators to exist. Everyone within an apartment and now compete with Marriott on the listings page of Expedia or Booking. These dynamics are starting to come to the physical world where giants on the one side and like a long tail of little people with cool ideas and the unique perspective or unique talents that are empowered by technology.

Chris Rising: 01:12:41 I think the challenge for owners of real estate is how do you encompass these things? Do you create places that are really easy to have that food delivered and the restaurant experiences people haven’t experienced there, but it’s five different restaurants delivering there? I just think, what I love about, finishing this conversation with it because it leads us to what we have to pick up on because your book goes through things like the economy that parents don’t know about, which is the economy within Fortnite and Roblox and you talk about so many other things that I’d love to dive into at a later date but Dror, I really appreciate your time and really appreciate you going deep on your book. As I said at the beginning of the podcast, I really, really would hope that people take the time to go to Amazon and buy Rethinking Real Estate, a Roadmap to Technology’s Impact on the World’s Largest Asset Class. Do you think it will be a Kindle book eventually or is it going to stay more of a hard cover book?

Dror Poleg: 01:13:39 I think that the Kindle version should be available by now and hopefully we’ll even do an audio version sometime in the next few months.

Chris Rising: 01:13:51 [inaudible 01:13:51] is I think a commercial use in a variety of other, other sunscreens in a class. I think where we’ve been and where we’re going and those things. Chris Rising: 01:14:07 Dror, thank you so much.

Dror Poleg: 01:14:09 Thank you, Chris. I enjoyed our conversation. PART 3 OF 3 ENDS [01:14:15]