BP Castrol
Donald Trump
real_estate_industry.docxREAL ESTATE INDUSTRY 13
The near zero marginal cost society and the real estate industry
Name:
Date:
Institutional Affiliation:
Running Head: REAL ESTATE INDUSTRY 1
The near zero marginal cost society and the real estate industry
In the eyes of many experts, the third industrial revolution is now firmly set. Most people are realizing that things are changing in the economic and financial worlds. Capitalism, which has for a long time been the dominant economic system in the world, is now slowly being replaced by a technology driven marginal cost society. Capitalism has had a long run, and after a few decades, the new system is already evident in the way people live and organize their lives and activities. The new economic system is attractive because it offers people the chance to handle such problems as sustainability challenges, income inequality and the creation of a democratic global economy.
The third industrial revolution continues to affect life, but this does not mean that capitalism is completely dead. Instead, in most parts of the world, things have developed into a sort of hybrid economic game, where the older capitalism continues to affect and influence the newer third industrial revolution, and the newer system also changes capitalism indifferent ways. While capitalism, which has been in play for several decades now, is in decline, the third industrial revolution, being driven by the near zero marginal cost society, is still anecdotal in nature, with experts saying it will take several more decades for it to firmly set in (Rifkin, 2015).
Understanding capitalism and the near zero marginal cost society
In light of the claims made above, it is important to understand what exactly this near zero marginal cost society is, and how it is affected by capitalism. To do this, it is important to understand what capitalism is. Capitalism has been relatively short compared to other economic systems of the past, but it has had perhaps the biggest impact of them all. Ironically, it is the success of capitalism that is now leading to its downfall (Rifkin, 2015).
Capitalism basically means all the aspects of human life are brought to a global marketplace where they can be exchanged for one another as goods. Looking back, almost all aspects of human life have been involved in the capitalistic way of life, from food to social interaction and relationships. According to the father of capitalism, Adam Smith, capitalism works much like gravity. Gravity is guided by the laws of nature, which suggest that for every action, there must be an equal and opposite reaction. In capitalism, supply and demand will lead to a balance that eventually has prices set at an acceptable level for everyone. When the demand for prices goes up, then the prices will go up, but if they rise too high, then demand falls and this forces the prices to be caped or dropped. Another effect of capitalism is that once a product is created, it almost always opens up markets for other products. Producers will always look to develop cheaper products produced with cheaper technologies. These cheaper products will free up resources for the consumer, which will then enable them to afford other things (Rifkin, 2015).
Suppose this system of producers coming up with cheaper, more effective goods and technologies goes on. A situation arises where there is extreme productivity, as competition leads to better and better technologies. This results in every new produced unit being so cheap that it comes at near zero marginal cost. The cost of producing every new unit becomes so low that it becomes essentially free. Capitalism is based on the fact that profit is marginal, and with marginal cost now being near zero, then capitalism will be dead, ironically because it worked so well (Rifkin, 2015). Today, people are already able to produce their own content using cell phones, or write their own content in blogs and websites, providing them to the consumer at a low cost, or even for free, and these are just some of the simplest examples of the near zero marginal cost society (Rifkin, 2014). Think about companies like Uber, AirBnB, YouTube and Facebook and how they are disrupting the traditional transport communications and housing industries. These are some of the most common examples of the near zero marginal cost society.
Global warming
But the world today and the shift away from capitalism is driven by more than just economics. There is a complex interaction and interchange between the effects of free trade capitalism and climate change. Some experts believe it is the exploits of free trade that have resulted in the adverse effects of climate change, and the fact that many of the steps taken to correct the situation have failed do much in the past (Klein, 2014). The perfect example of this in action is the globalization wars of the past century. According to many, these were driven by the free trade system and international laws. The intentions were good, but the results were negative, especially as far as green initiatives were concerned (Klein, 2014). Initiatives that were expected to lower or reduce the effect of global warming were being rejected based on international trade agreements between various countries. In fact, the world’s biggest and most respected bodies, like the world trade union, were seen as being at the center of such rejections (Klein, 2014). Globalization wars have also included the biggest countries in the world, countries that, on one hand, continued to fight each other’s climate change initiatives, yet are often seen at the forefront of international trade summits (Klein, 2014).
In the information age, more people are now learning about the adverse effects of capitalism, especially its relation to global warming. In some ways, even governments seem to be responding to this, as seen by the signing of the climate change agreement in Paris in 2015 (Harvey, 2015). Even then, more people are realizing that if they do not take matters into their own hands, then the planet might be headed to peril.
The global climate change-capitalism debate has also been influenced by some of the biggest scandals in the past few years by the world’s largest corporations. Scandals like those from WorldCom, Enron, the BP oil spill and now the dieselgate scandal are seen by many people as the pursuit of profits, one that is promoted by free trade capitalism, being seen as more important as the state of the planet (Eurotax, 2015). People are seizing power back, looking to live a life for themselves and for the future of the planet too (Seretny & Seretny, 2012). It is a combination of factors, including the fact that trust in science and research has generally waned (Peel, 2005). People are now prone to a more precautionary approach than ever, especially with the gift of hindsight (Ahteensu, 2007). The marginal cost society has emerged from the effectiveness of its predecessor, but a lot of what drives it, and people into its hands are the failures and negative effects of capitalism.
The real estate industry
The real estate industry has, like most other industries, been affected by the growth of the near zero marginal cost society. Businesses have always been looking or new technologies and ways through which they can increase productivity and reduce the cost of production and the distribution of their goods and services. The general push for these is the need to lower prices, to attract customers and to increase the profit and market share. What many companies did not anticipate is the fact that the near zero marginal cost society would have such a huge impact on their fields, lowing the cost of production while making energy, physical goods and services basically free. The marginal cost society has especially had a huge impact on the information sector. For instance, most people now share music through file sharing systems and such online streaming sites as YouTube. Knowledge is shared for free on Facebook and sites like Wikipedia and through free e-books. Students are enrolled in free, online courses, being taught by some of the world’s top experts, essentially receiving college level information for free.
The impact of the near zero marginal cost society has been obvious on the information sector, but not many expected it to affect other, more ‘physical’ brick and mortar industries like it has. New technologies have been created that enable customers to share physical products and services at very low cost (Rifkin, 2014).
Sharing economy and real estate
More people seem to be transferring elements of their economic lives from capitalism markets to the near zero marginal cost society in many ways. One of the trends that this has brought up is the sharing economy, or the economy of collaborative commons. Instances of people sharing their homes, vehicles and even clothes are on the rise. It is estimated that in the US, almost 40 percent of people are living in a sharing economy. Hundreds of thousands of people today share vehicles, eliminating a huge percentage of the need for personal vehicles (Rifkin, 2015).
In the real estate industry, the emergence of the sharing economy has been a huge disruption. There are millions of people sharing their homes with travellers, using online platforms like AirBnB and couchsurfing. According to official statistics, there were about 416,000 people who stayed in houses or apartments while travelling that were not their own between 2012 and 2013. The cost of this in terms of loss of revenue on the hotel industry was about a million room nights lost. Exchange value, as dictated by the capitalistic way of life, is now being replaced by shareable value. Capitalism still exists in many ways in the real estate industry, but nobody can claim that it is the only, or even the dominant, system or controller of economic life (Rifkin, 2015).
Apart from the sharing of accommodation in the real estate industry, another new trend that has slowly come up as a result of the sharing economy is that of co-working. Co-working is driven by attitudes towards work rapidly changing, technological advancements and a growing popularity of the sharing economy. Many people now have or are looking for more options on how, where and when to work. Working from home, telecommuting and especially the idea of sharing workspaces has been on the rise in the recent past.
Co-working is not a new concept. In the past few years, enabling technology has been a big driving force behind its growth in popularity. Technology has made it easier to communicate, disseminate information and increase control of individual’s lives. In the past, the cool worker image was the coffee shop entrepreneur, migrating from their home to the nearest coffee shop. Today, the new breed of workers recognizes the need for creative and functional workspaces, and is going out of their way to achieve this through co-working. There is a growing consensus that economic growth is driven by innovative minds, nationally and globally (Jarrett et. al., 2015). It is because of this perhaps that funding for startups has generally increased. With such huge sources of seed capital available especially for tech startups, the inclination towards leveraging this enabling technology to set up co-working spaces has been huge. For instance, in New York alone, about 3.3 billion dollars went into funding startups, an increase of about 33 percent from the previous year (Green, 2014).
Co-working has revolutionized the commercial real estate industry. The workforce is evolving, and this places it in direct conflict with the traditional office structures, creating a gap in demand that co-working spaces are continually filling. The startup cannot rent out the traditional office space since they might not have the manpower or capital. They, however, require scalable space, and the only option for this would be to have co-working spaces. The problem is that not many landlords have recognized the need for this. Larger companies, traditionally requiring huge commercial real estate are also slowly reducing their footprint, in order to lower operational costs while maintaining a productive workforce.
Understanding co-working
There are three general categories of co-working; creative, entrepreneurial and executive. Executive co-working seems to be the most established of the three. In the past, those in commercial real estate were more concerned with the maximization of office space and the different floors that could be turned over and rented by many people. Companies that saw the growth of the co-working trend in executive office spaces are now benefitting. One of the examples of this is Regus, which is a Luxemburg based agency. They were one of the first to start the co-working trend as far back as 1989. As of 2014, they had over 40 co-working executive spaces in the city alone, with more locations in the pipeline (Green, 2014). The very fact that a Luxemburg based company is providing executive real estate solutions in New York is testament to the huge growth of the real estate industry.
The fastest growing of the co-working sectors is the entrepreneurial one. Demand and supply is rising in this sector, with many real estate agents no offering more than just the typical packages that include classes, lectures, networking and business services. Operators serving the entrepreneurial real estate industry are only just realizing that hosting events and lectures is one of the easiest ways to raise revenue. Entrepreneurial co-working providers recognize the importance of both location and the service they provide. Their services involve the new sharing aspects as well as elements of the traditional real estate like landlord-tenant relationships, leasing, marketing and various operations (Green, 2014). The creative market is small, with co-working spaces generally catering to individuals and a small surrounding community. Most of these creative co-working spaces are normally informal arrangements.
Depending on tradition, culture, demand and enabling technologies/funding, the availability of co-working spaces vary from one city to another. However, they have changed the traditional real estate trends such as tenants having their credit checked, long term commitments or needing large down payments to get in. this makes them attractive to startups. Even then, there are various methods through which prospective tenants are vetted.
Going into the future, co-working and the sharing economy will continue to shape the real estate industry in many ways. In a classic example of how capitalism and the near zero marginal cost society are still intertwined, one of the biggest issues facing co-working is the fact that it is a very vulnerable business model. It is low margin, and removes many of the sources of revenue that traditional real estate offered. Most co-working service providers do not own the buildings they work in, meaning the service is very risky. There are some aspects of the business that still have not escaped the hold of the traditional business model. For instance, with lease agreements depending on the nature of the overall market, sometimes landlords might increase rent when the lease ends. This might leave a business that was thriving barely able to survive (Schneider, 2016).
Going into the future, another rend that will affect both companies that offer co-working spaces and the landlords is the need to improve the quality of service. As it firmly sets in, competition will not be on the basis of space per-se, but on the basis of quality of service. Companies will focus on other factors that enhance the quality of the co-working experience, giving it an edge over, say, working at home, the traditional office or even the coffee shop. Already, there are companies planning such expansive service offerings as health clubs, spas, dry cleaning and many such options.
Technology has always had a strange relationship with real estate. Currently, the capitalistic past and the near zero marginal cost society are still embroiled in a struggle, often leading to sharing or a hybrid system. For instance, many commercial real estate or office managers will lease out extra office space depending on the fluctuation of their needs (PWC, 2015).
Conclusion
The effects of the near zero marginal cost society on real estate do not just exist in the economic bubble, though. There are other social implications of embracing such change. For instance, Airbnb, one of the most famous symbols of the sharing economy in the real estate industry, continues to face various challenges as it grows. One would think that the growth of AirBnB listings, which allows locals to rent out their homes to tourists, would be a good thing. However, as the listings grow, city authorities are becoming warier and looking to rein the service in. The disruption in the real estate industry because of this is unconventional, but is a problem nonetheless. In cities big and small, authorities are worried about the huge influx of tourists. For instance, in Paris, the listings grew from 20,000 in 2014 to 40,000 in 2016. Officials in the city are worried that the city is becoming deserted, and is now only being filled with tourists, enabled by such services as AirBnB (Slee, 2015).
The startups rocky relationship with authorities in its origin city of San Francisco is also testament to the general trend where clash between the old economic system and the new sharing economy is being shaped by policy and law enforcement. This is something that has been a huge problem to the Uber taxi platform. In San Francisco, a new rule in February 2015 called for Airbnb hosts to register with the city. Over a year later, and with only a small percentage having done so, the city started shifting responsibility to the company, fining it 1000 dollars for every new listing that the company could find. There are similar laws and restrictions in New York and Chicago (Slee, 2015).
References Ahteensu, M. (2007). Rationale for Taking Precautions: Normative Choices and Commitments in the Implementation of the Precautionary Principle . University of Kent. Eurotax. (2015). Dieselgate: What it Means for the Automotive Industry. Eurotax. Green, R. (2014). Collaborate or Compete: How Do Landlords Respond to the Rise in Coworking? Cornell Real Estate Review, 52- 59. Harvey, F. (2015, December 14). Paris climate change agreement: the world's greatest diplomatic success. Retrieved November 14, 2016, from The Guardian: https://www.theguardian.com/environment/2015/dec/13/paris-climate-deal-cop-diplomacy-developing-united-nations Jarrett, M. H., Chandler, C. G., Hagen, E., & Sharrin, A. (2015). Prosecuting Intellectual Property Crimes. Office of Legal Education Executive Office for United States Attorneys. Klein, N. (2014). This changes everything: capitalism vs. the climate. New York: Simon & Schuster. Peel, J. (2005). the Precautionary Principle in Practice. Sydney: The Federation Press. PWC. (2015). Emerging Trends in Real Estate. Washington, DC: Urban Land Institute. Rifkin, J. (2014, May 15). Say goodbye to capitalism as we know it. Retrieved from market Watch: http://www.marketwatch.com/story/say-goodbye-to-capitalism-as-we-know-it-2014-05-15 Rifkin, J. (2015). The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism. New York: Palgrave Macmillan. Schneider, A. (2016, january 12). The Future of Coworking. Retrieved from The Huffington Post: http://www.huffingtonpost.com/amanda-schneider/the-future-of-coworking_b_8950140.html Seretny, M., & Seretny, A. (2012). Sustainable Marketing -A New Era in the Responsible Marketing Development. Foundations of Management, 63-76. Slee, T. (2015, July 11). Airbnb Is Facing an Existential Expansion Problem. Retrieved November 14, 2016, from harverd Business Review: https://hbr.org/2016/07/airbnb-is-facing-an-existential-expansion-problem
