We interview the brightest minds in Canadian Innovation about how they’ve adapted to working in a global crisis and what they predict the office landscape to look like in a post-pandemic world.
This special episode is with John Ruffolo, Founder, OMERS Ventures, and Co-Founder, Council of Canadian Innovators. The Canadian innovation leader gives us his unique perspective on the Commercial Real Estate industry, and the opportunities afoot due to COVID-19.
This transcription has been edited for clarity and may not read exactly as the interview
To start things off, can you tell us a little bit more about yourself and also what’s topical for you as we’re all working remotely today.
Thanks, David. I’ve been involved in the innovation and entrepreneurship landscape for the past 30 years. I guess you could call me a grandfather in that perspective. The best part of it is that things never change. The whole COVID situation is fraught with fear from a health perspective, but it’s clear there are some incredible opportunities from the vulnerabilities that we’re seeing as a society right now.
Let’s talk a little bit more about the COVID situation, from your perspective. CBRE Forward and #MovingForward is geared around the innovation sector. A lot of our viewers are founders and entrepreneurs. I want to start by asking you a question about a piece that you recently co-authored called ‘A Path Forward’ which summarizes a lot of your views about the COVID-19 situation. I’m sure some of those views have changed since you put that piece out, but I thought I would lead with a quote from that article where you said that ‘This must transform our country and our economy for the better in ways that we haven’t seen for generations because the next time, none of us are going to be able to say that we didn’t see this coming”. Can you expand on this thesis and bottle up any important ingredients you think are essential for the sector to not only survive but also thrive when the other side of this situation?
What you’re referring to is that the article, that I co-wrote with Eric Hoskins, had a three-phased approach. You’ll see a lot of similarities with the Ontario government in their three-phased approach. The third phase is really the reconstruction of the economy. That would be the time following when we’re ‘fully’ open the economy (whatever that really means). My estimate is that will be the early fall, around September. I do think that we’re going to go into a recession for the next 18 to 24 months starting around September. It will likely come out in a j-curve manner. When I look back and I see some of the great investments that I’ve made over the years, many of the companies arose during the worst possible times. It’s a little bit of that adage “necessity is the mother of invention”. I think this is a unique opportunity and when we start to roll out of this, there will be a tendency to try to restore our economy to the way that it was.
As an example, let’s talk about the energy sector, which is near and dear to our hearts in Canada. We’ve now seen our brothers, sisters, cousins in Alberta go through the 5th or 6th boom and bust since my school days. Focusing in on an industry where you have zero control oversupply, production, pricing refining capacity etc, is a terrible way to manage your future from an economic perspective. Our first reaction would be to give billions of dollars to restore a carbon-based energy sector, but for what? For them to go through this hellish time again?
If many folks in Alberta are uniquely qualified to understand the energy market, is there an opportunity to invest that money into the renewable energy sector? Something that we see as a very long-term slope to it. A great example of what we should not have done is in the 2009 financial crisis: Canada put $13 billion into the auto sector and only 5 years later it was basically wiped out. I suggested to that government not to do that, and instead, invest it into an electronic vehicle plant instead, and to become a world leader. You must have the guts to invest – not where the current votes of the country belong to today – but rather where we’re going into the future.
How do you try to sustain existing ways of doing things, like driving a gas vehicle, while still trying to drive something innovative? Car sales could surge in the next couple of years because people are fearful of public transportation. How do you deal with something like that, while reinvesting the knowledge of people in that kind of sector or what you might think is a slightly less relevant sector going forward?
The auto industry in Ontario has been in decline since the auto pact was signed. It was a very important & critical industry for Ontario, and now look where it’s at. We have a comparative choice. If the secular trend is transportation for the next number of years, there’s nothing to say that we shouldn’t be focusing on electric vehicle production right now. We just saw Elon Musk freaking out on the closure of the Fremont factory plant and threatening to move it to Nevada. We’re not going to stop using gas-powered vehicles overnight. But if we don’t place those bets right now, I can guarantee it’s never ever going to happen.
So, you see this as a time to reset and not allow ourselves to make the same mistakes again?
Another industry that I see this in is our vulnerable food supply. What would happen to us in a situation where the United States and Mexico wouldn’t cooperate with us? Maybe it’s time to really think through that? Indoor agriculture is starting to become a trend in some other places around the world. Maybe it’s time for us to do it from a large-scale infrastructure perspective. We could achieve a ‘100-mile’ type of diet.
Take the critical supply chain for manufactured goods in the healthcare sector. The fact that we had to rely on ventilators or other healthcare equipment outside of Canada, really exposed our vulnerability. Should we allow that to happen again? Now we have a trade-off though. Of course, you may say it’s going to end up being more expensive as you can’t do it as cheaply. Perhaps that is a fair trade-off? These are the questions that we should be asking. We are probably going to continue our deficit spending – so let’s be very strategic and place our investment bets in the right place.
You are an innovation champion, but at the end the day you’re also an investor. What kind of company do you think a 20-year-old should go out and try to start tomorrow?
When I launched Omers Ventures back in 2011, for the next four years investing in the technology sector was hot. When I say the
technology sector, it is very defined as the toolsets that are being used by the broader economy and traditional industries to make their businesses cheaper, faster and better. Starting around 2015, we started to see the use and application of those technologies across the chasm. Over the last couple of years, we started to see every other industry realize – ‘if I don’t embrace technologies, it doesn’t mean I need to be a technology company, but if I don’t use it, I will eventually be out of business because my competitors will be cheaper, faster, better and have greater insights.’
I spoke to a couple of bank CEOs who were thinking about some transitions from a technological perspective. They were planning things over the course of a few years. When COVID hit, they were able to transition the application of technologies in a matter of a couple of weeks. It’s stunned them and made them realize they jump way faster than they thought.
If I was a young person looking to start a business, I would think about what the impact of technology and innovation is going to have on that business and on the business model itself. If you don’t, you will be left out very quickly. In particular, in the time of the recession when, at least historically, capital and investing is far scarcer, the pressure hit product-market fit as fast as will be on over the next two to three years.
It ties into that article you wrote for us called Technology Is Eating the World. You called it the Fourth Industrial Revolution. You’re saying that technology is going to proliferate itself through every single type of business if it hasn’t already. In fact, COVID fast-tracked some of those changes.
Absolutely. We’re on zoom’ today. Maybe if we had this interview, 3 months ago I’d be in your office, doing the same thing. Perhaps we’re realizing that this is just as effective. Maybe not all the time, because we like the human interaction. But it’s also not a bad solution – your interview opportunities and subjects might increase because you don’t necessarily have to be in front of everybody anymore.
When we think about the future of work obviously commercial real estate plays a role in that. Over the last couple of months, the commercial real estate world went on hold. But now we are starting to see early signs of transactions. I am a real estate broker and I work with a wide variety of companies, some of them in the technology sector. There’s a lot of opinions out there about what the future might look like. Twitter has said that its employees can perpetually work from home. Google and Facebook have said that remote work is going to happen until at least 2021. I want to ask you some questions on this change. Before I do, I think it’s important for me to frame why I think that you’re good to answer these questions. You’re in a unique position as it relates to this Landlord and Tenant paradigm – which I hope eventually starts to shift towards being called something like operator and customer. You were closely affiliated to OMERS real estate arm, Oxford Properties. You founded OneEleven. You get the proposition of leasing space long and you also get the proposition of leasing it’s short. You understand the enterprise dynamic, and you understand the startup dynamic. What do you think the opportunities are in the commercial real estate sector to respond to new customer demands? How would you go about suggesting solving those problems?
David, when we first met a few years ago, I went on a bit of a diatribe. I found that the real estate industry is the only remaining industry (maybe that’s a bit of an exaggeration), where it never took a customer-centric view. It takes a supply-side view. By that, I mean if you had a capital advantage, you could build a building and (let’s ignore pre-leasing and premarketing for the moment), but you’ve done your homework and you can build it. Then you just hope that customers will come, and you’ll make money. Then somebody would buy another one, and another one, and maybe eke out some shared cost savings. That was the traditional real estate model as opposed to virtually every other industry that I was involved with. Other industries ask the question first to the customer – ‘what is it that you want? How is it that you want to work?’ It’s not ‘hey I have some space available in this building I really think that you will love it’. You haven’t even asked your customer what they wanted in the first place!
Take the example of a financial institution. Say that bank comes to you and says “I have people and operations in these four countries. I have a call centre, and IT centre, and front-facing staff. Based on my geographic and competency perspective, I think these are what my needs are. Can you solve this problem for me?” That problem may be solved by some real estate that they own and some they don’t. Some of it might be permanent long-term and some of it might be temporary and flexible.
COVID has accelerated this customer versus tenant disconnect. The WeWork supply and demand model actually resonated with customers. That is exactly what I did at OneEleven. What did it [for WeWork] was their horrible business model! I don’t think that people are going to stop working in commercial buildings, and I don’t think it’s going to go crazier than ever. It’s just like retail, we are going to see an omnichannel world. If your employees are just as productive and happy working from home, corporate customers will say ‘if you’re happy at home, and I’m making more money – knock your socks off. I don’t need as much of a footprint.” Over the last 30 year, companies have decreased their density. Maybe because of COVID, we’ll go back up to a greater square foot per person. When you offset the increase of people that are working from home with not squeezing out every last square foot of density, perhaps it will balance itself out. The point is, companies have been demanding choice. If you want to be a smart commercial landlord, you better not be arrogant in thinking you can give customers only one choice. If you don’t supply exactly what they want, they’re just going to go somewhere else.
I agree that we need to work towards more customer-centricity in the commercial real estate world. But I think we have two underlying problems that make that more challenging. One is how we lend and how we value properties. Currently, it’s a paradigm that doesn’t really benefit a short-duration lease contract. It has an adverse effect on building value. If you turn to a different sector, like hotels as an example. There’s a completely different way that they go about evaluating that proposition. That’s one issue that needs to be solved. The other is – take WeWork as an example. The way that they were invested in forced them to expand exponentially, the same way that a company that had a stronger technology underpin to their value proposition would. At the end of the day, WeWork was a company that responded to customer demand and has an arbitrage between what they’re paying in rent with what they’re charging in rent, with a backbone of technology that’s maybe you know more advanced than another building. To me, those are the two problems. How would you go about trying to suggest solving those? Because if we don’t do that, then I don’t see how we’re going to proliferate what customers want.
This was the thinking behind the business model of OneEleven, and where WeWork had it wrong. The best analogy to use is the telecom sector. I used to be a big telecom advisor. You could see this in the late 1990s – all everyone was doing was building capacity. Fiber was being laid everywhere. It was all about getting on to the information superhighway from a physical infrastructure perspective. Back then, all the telcos were getting very highly valued as a result of owning the control to get onto the internet.
Then post the dot-com crash, a number of innovative companies said ‘now that it’s all built, why don’t I ride along the highway and offer value to my customers”. And so, companies like Google, Facebook, eBay and Amazon were born. They wouldn’t have made $1 if it wasn’t for the physical infrastructure that was built. I warned the telecoms about controlling the service layer, and the value-added layer on top of you will be disintermediated and all you will be is a big dumb fat pipe.
So let’s use this analogy with Real Estate. If all you’re focused on, is putting bricks up into the sky, you will become a big dumb fat pipe, earning an appropriate infrastructure-level return. What you need to do is add the relevant services to make those businesses successful. When you see how these businesses are working and operating in the building – why was there 12 cafeterias? Why is there a whole bunch of different gyms? Why is they’re different printing and IT? You have all these individual businesses recreating all their own infrastructure because they believe that was critical to have that infrastructure. The same thing happened prior to Amazon Cloud before it became pervasive in 2008. When people were raising money from VC’s, the first thing they did was they bought computers and they bought infrastructure. Nobody does that anymore. It’s the same sort of thing.
The real question, and what WeWork said they were going to do but never executed upon it, was all the service delivery around it. The truth of the matter was that they were getting so much capital, it could not scale fast enough. What did scale fast enough was more and more physical infrastructure. That’s the problem. The arbitrage ultimately doesn’t work. The moment there’s a downturn, the whole thing collapses upon itself.
As you know, companies like Convene, and some others, were trying to add on a service layer and are starting to act like Google or Facebook on top of the infrastructure. These are the companies that will be more critically important to the ultimate end customer.
I am admittedly more of a fan of Convene than any of the others. They have tapped into that whole ecosystem of a building. It’s not about just delivering space, it’s about technology and everything else.
Let me ask you one question. When you are providing a service to your clients, who want to get some space in the city do they ever ask you in advance “Can you make sure that property is owned by XYZ or ABC?”. Is that ever the first question?
You are one of my clients, and we are out there right now looking for space. The answer is no – you have never once asked me that question! If you were to take out your crystal ball and determine whether the existing brands that operate buildings will take more of a backseat, or do you see some of them becoming front-facing brands like Google, eBay’s or Amazon? Which direction do you think it’s more likely to go in? Or is there a third that involves a situation like Convene and the landlord? How do you see it?
I’ve been using analogies, let me use one from the retail world. I use the term omnichannel. The big question always was, and I was asked this question starting 20 years ago, who ends up winning? The businesses that start off on the online world or those who start off in the physical world? We all knew at the end of the day the right answer was an omnichannel world of some sort. Does one an advantage over the other? The online world had the advantage because they weren’t going to be encumbered by legacy physical assets that are no longer strategic.
Amazon is a great example. Their physical space is unbelievably huge, it just happens to be in very cheap warehouse locations. They were, therefore, able to be extraordinarily nimble and iterate very rapidly. When they wanted to make into food competitively – and they couldn’t, they ended up buying Whole Foods. I could see that same thing here. I think the advantage is to the online version of this unless somebody on the physical side is willing to take a risk. The problem is this is a classic innovators dilemma. When you take a risk, do you kill the Golden Goose? The irony is you might but if you don’t take that risk, you’ll just die a slow death anyway. The real opportunity is for those who see it, who are solely focusing on the physicality of the infrastructure, they need to start layering this on now.
What if you’re an innovation company, and you had to address your real estate during a crisis, what type of real estate strategy would you be would you recommend to that company over the coming years?
The first thing to understand is the needs of your business and the people that you’re employing. Do all of your people need to be in a single physical infrastructure? The answer is not clear for every industry.
If I was a young technology company, I would make sure that I don’t lock myself into a situation too far into the future. Particularly as the company is scaling. You might employee engineers who want to be near each other. You may hire a team of customer care, who may not need you to prioritize where they work. Don’t pre-commit to space too far into the future.
The great thing is this combination of making employees happy with what they really want. (Before COVID), a lot of people really wanted to work from home but were negatively viewed by the organization. I hope that is going to go away. When I see companies like Twitter or Salesforce making these announcements, I do think it’s a little bit of a promotional tactic. But if they really believe that, it is wonderful for those employees. I am really excited about this, and it’s something I’m thinking about too.
CBRE Forward was created to showcase the success of Canadian innovation, but also to support it. In light of that, what’s your advice to ensure that Canada keeps going on the journey of global recognition in the post-pandemic world?
There has been a lot of negative news over the last couple of months, and a lot of people are extremely worried. Certainly, the issue around people dying is troubling for everyone. But we’re slowly reversing course. By the fall time, I do think we will go back into whatever the ‘new normal’ economy is. I would simply say, this is when the opportunities are as broad as possible. By the time we roll out of a recession in a couple of years, we are going to see the next round of winners coming out of the Canadian economy. I think this is a time to be bold. I know it’s scary, but this is when you see the separation of the adults from the children. I would encourage everyone – go for it if you can!