Dear Friends
of TwinRock,

“The pace of change and the threat of disruption creates tremendous opportunities.” – Steve Case, founder of AOL, Revolution LLC, Case Foundation, Revolution Health Group

 

In business theory, disruptive innovation is one that creates a new market and value network. The disruptive innovation accomplishes this by disrupting an existing market or network of entrenched, successful businesses and replacing established market-leading firms, products and alliances with new ones.

In our first Quarterly Newsletter for 2019 we’ll take a closer look at how successful companies cope with disruption while others fail, and the effect that disruption is having on investment.

The Innovator’s Dilemma

Although the word itself has existed for quite some time, the term disruption surfaced in the business world thanks in large part to the book The Innovator’s Dilemma, authored by Clayton Christensen back in 1997.

In his book, Christensen introduced the idea of disruptive innovation. He used the phrase to describe two events: First, how companies could meet the current needs of their customers. Secondly, how small companies with little money could enter an established market and displace established companies – and in the process pocketing their customers and cash flows – by creating an entirely new system.

Disruption is a 2-way street

Disruption goes both ways. In today’s business world you’re either doing the disrupting or getting disrupted. If a company isn’t intentionally changing for the better, then it’s safe to say that at some point – and based on Moore’s Law probably sooner rather than later – another company will come along and make that change for them.

A recent article on disruption from Inc. observes:

“Right now, at this very moment, either your company is disrupting the marketplace, or you’re actively being disrupted. This isn’t meant to be fear-based, but it’s the reality of the situation. Between the pace at which technology advances and the rate at which ideas are generated, disruption is truly a natural cause of the times. If you’re comfortable in your business, you need to be thinking about who knows you’re comfortable and how they are planning to make you uncomfortable. There is a constant ebb and flow of disruption and being disrupted.”

Why some companies are victims of disruption

Complacency (mixed with a little bit of arrogance) is the #1 reason why companies get disrupted.

Some companies refuse to adapt, fighting change tooth-and-nail, such as the entrenched taxi industry vs. Uber and Lyft, or the hotel sector vs. Airbnb. Other times companies don’t see change coming or are simply too slow to react, as with IBM taking +20 years to adapt to competition from Apple and Microsoft.

In addition to being complacent, five other reasons companies allow themselves to become victims of disruption are:

  • Technological innovation is intimidating or confusing
  • Consumer behavior shifts before a business realizes change is taking place
  • Lack of agility due to bureaucratic decision making
  • Hiring people because they are “cost effective” vs. working with talent that can think creatively and strategically
  • Misalignment between executives where everyone is not on the same “innovation page”

How other companies disrupt themselves

Other companies would rather disrupt themselves then have somebody else do it for them. This proactive approach to disruption not only allows established players to avoid being victims, but also gain entirely new customer bases and create additional revenue streams.

Some of the ways that companies can disrupt themselves from within include:

  • Making strategic decisions that are user-centric and customer-centric instead of company-centric
  • Eliminating the mindset of scarcity and boosting the creative process by “going big or going home”
  • Focusing on staying lean and mean by avoiding multiple layers of management and hiring in-house experts allows change to be made on a dime
  • Experimenting with different pricing models, messaging, and marketing to think outside the box
  • Encouraging continuous employee education through webinars, conferences, and company-sponsored resources to quickly discover what’s hot and what’s not

Disruptive events that are currently taking place as we speak

Regular readers of our weekly email articles may have already noticed that disruption has been a consistent theme so far in 2019:

Disruptive innovations that are changing how time and space are used

Twelve years ago, Airbnb was founded as a couch-surfing business with no customers and no revenues. Today the company operates in almost every country around the world and was recently valued at $38 billion according to Forbes. Airbnb is helping to revolutionize the tourism industry and is battling the entrenched hotel industry head-on by applying the time-share concept to under-used living space to benefit both property owners and users.

Uber recently went public and at the time of this writing has a market cap of just under $70 billion. Founded in 2009, Uber is a ride-hailing company operating in 60 countries and 400 cities around the world. Similar to the way that Airbnb gives property owners a way to make money from unused living space, Uber allows vehicle owners to earn income from unused auto time. The company is disrupting the entrenched taxi industry and faces violent protests in some cities.

Coworking office operators such as WeWork and Knotel are revolutionizing the use of real estate from a fixed asset to fluid space as a service. In just a few short years they have changed the way that tenants view and pay for business office space, forcing property owners and management companies to become service providers instead of collectors of rent. WeWork is now the largest private occupier of Manhattan office space with about 5.3 million square feet under lease which has been converted into coworking space.

How a 27 pound, $500 electric scooter is disrupting transit oriented development

Transit oriented development (TOD) has been rapidly growing in many major metro areas. Real estate developers have been paying big premiums for land near mass transit locations for mixed-use projects. Residents and businesses have been paying top dollar to locate near rapid transit stops to avoid highway congestion and rush hour traffic.

But the TOD gravy train may soon be coming to an end thanks to companies such as Bird. The company provides shared electric scooters, bicycles, and shared transit vehicles that reduce the need for personal automobiles.

Along with Uber and Lyft, Bird is helping to reduce highway congestion and speed up travel times using lightweight, inexpensive electric scooters that are friendly to the environment without resorting to billion dollar TOD development. There’s no longer the same rationale for living near mass transit locations, which will likely reduce the premium value currently placed on transit oriented development projects.

Why parking lot companies just can’t find the love

Investing in parking lots used to be one of the purest coupon clipper investments around, perhaps second only to owning T-bills. But thanks to disruption, the safety of owning parking lots may soon be coming to an end.

Innovative transportation companies such as Uber, Lyft, and Bird have been steadily taking business away from entrenched parking lot operators.

Ace Parking Management is one of the largest parking management companies in the country. A recent article from the San Diego Union-Tribune reports that Ace Parking claims to be losing about 50% of its nightclub parking business and 25% of its restaurant valet parking business to these new alternative transportation services.

Parking lot companies are finding it difficult to feel the love nowadays. Consumers adore ride-hailing companies for the affordability and convenience. Municipalities are looking forward to replacing parking lots that generate little tax revenue with property development that contributes more to the economy and the environment.

How blockchain and digital tokens are disrupting real estate investment

Blockchain is the underlying mechanism or “protocol” that makes digital currency like Bitcoin and cryptocurrency work. Blockchain is also rapidly changing the way that real estate works.

The blockchain protocol is being used to verify data and transactions between two or more parties. It is making data verification simpler, efficient, and more transparent while at the same time keeping private data safe and secure. Some of the ways that blockchain is being used to disrupt and improve the real estate business include:

  • Automating invoicing and payments, lease reconciliations, and the collection and analysis of big data within multi-property portfolios
  • Shortening the verification of ownership and lien searches from weeks to seconds because blockchain data is immediately accessible and unchangeable
  • Eliminating the need for costly title insurance and title company fees to dramatically reduce the cost of every real estate transaction
  • Removing the existing barriers of access to capital by using digital tokens to make fractional ownership of investment real estate easy, affordable, and tradeable

It’s always better to be the disruptor

Disruption is a two-way street. Businesspeople today need to decide if they will willingly change and harness the new opportunities that disruption offers or allow themselves to be disrupted by an upstart competitor.

When a business is big and successful it’s easy to become arrogant and complacent. Traditional office space operators, the taxi and hotel industries, and parking lot operators are discovering the hard way what it feels like to be the one getting disrupted instead of doing the disrupting.

Please stayed tuned to learn how TwinRock plans to disrupt commercial real estate in the coming weeks…

 

We look forward to sharing our thoughts again in our next quarterly report. In the meantime, should you have any questions, we look forward to hearing from you.

Very truly yours,

Alexander Philips

Chief Executive and Investment Officer