Narrator: You’re listening to WeirTalking Leasing, an eight-episode podcast series from WeirFoulds LLP’s Commercial Leasing Group, educating landlords, tenants, and property managers on today’s commercial leasing landscape in Ontario. Our legal specialists will be discussing everything new and interesting from lease terminations, office sharing, unattractive properties, cannabis and so much more.
David Thompson: Hi, you’re listening to David Thompson, partner in the leasing group at WeirFoulds and I’m here with Lisa Borsook, our executive partner and leader of the group. We’re talking about PropTech and real estate. You wouldn’t think that property technology and commercial leasing would have much to do with each other, so Lisa, can you help us out and first of all, tell us a little bit about what is PropTech?
Lisa Borsook: PropTech is new technology that specifically targets different areas of the real estate industry. So there is an easy one because we all have PropTech already in most of our buildings, and that is technology that affects how we use and measure the HVAC. So in a lot of buildings, each of us now has ability to monitor the use of HVAC within our own offices or within our own space, and that effectively is PropTech. It’s a technology application that building owners acquire and sometimes they pass along the cost of that acquisition to their tenants, and what they’re doing is trying to find ways to use their real estate in more efficient, in more technologically superior ways to attract tenants and also to reduce their costs. In 2018 alone, I think there were 6,000 companies that either recently started or are operating within different aspects of real estate to provide PropTech to real estate.
David Thompson: Wow. You’ve talked about heating and air conditioning, but if there’s 6,000 companies, there must be a myriad of things that they do, so do you have some other examples of what these companies do?
Lisa Borsook: Oh, there are so many examples, we could probably spend the entire rest of this podcast just talking about what different aspects of PropTech are, but let me try and give you just a flavour of the kinds of things that PropTech is doing. So, there’s easy ones to understand which are like commercial property search engines, or co-working search engines, or pop-up shop search engines. There are other kinds of PropTech that give you virtual reality interactive floor plans, with the ambition of streamlining ways to lease premises so that you can visualize them, you can visualize them unbuilt, you can visualize them renovated. Then there are just technologies that are going to facilitate landlord-tenant communication, enable you to, for instance, manage the maintenance and the other service requests that you make on a fairly regular basis, obviously manage ways that you pay your rent.
Lisa Borsook: If you’re in a shared work environment, they can assist you in organizing bookings. For a landlord’s perspective, there are PropTech applications that enable you to track leasing activity and that’s perhaps from a landlord perspective, one of the most important things that PropTech can do for you, if you can track leasing activity, if you can track building occupancy, if you can track your tenant relationships and use those relationships in conjunction with other industry data that you can get your hands on, then it’s bound to enable you to analyze and advertise for the best end-users for your real estate. And then of course there’s just PropTech in the nature of making your building a smart building, connecting the building to the internet, collecting and analyzing data relating to lighting and temperature, parking; parking management systems are a huge part of PropTech.
Lisa Borsook: And then there’s the more challenging aspects of PropTech where they use sensors to track movements and there was a big hoopla about companies that were doing it, for instance, in shopping centres, using facial recognition software without asking for permission. So there’s all different kinds of PropTech, I mean we really could discuss these various types for hours.
David Thompson: So in your view, what do we want out of it? Out of this field of PropTech?
Lisa Borsook: Well, I think what we want, whether we are a landlord or whether we are a tenant, is innovation. We don’t want PropTech that disrupts how we do our business. So we want to find applications that are going to enable us to connect with one another better, eliminate inefficiencies, and in some cases, provide cost efficiencies that can be passed on to us in what is a very competitive and expensive real estate environment. So if landlords can offer a more tailored suite of property management services to their tenants, that’s what tenants want to get from their landlords and if landlords in conjunction with that could collect data on how their properties are being used, then that’s bound to also improve their own efficiency as landlords, that may even drive increased rents if they discover that their buildings are actually much more desirable than they knew before.
Lisa Borsook: And at the end of the day, some would say, perhaps not in the downtown metropolitan area, but in other more outlying areas of larger cities, that it’s a great way to differentiate your building and your management of that building from other buildings. It might be a great way to build a brand that you could actually sell to people so that when they say, “Well, I’m going into this company’s building,” people know that that’s a building that’s going to be efficiently managed, well managed using PropTech and then that there are responsive landlord and then tenants are going to be more interested in leasing in their building.
David Thompson: So Lisa, I want to focus on some of the things that have been in the news lately about PropTech and maybe you can give us some of your views on them. So the first one would be real estate fracking, what the heck is that?
Lisa Borsook: Don’t you love that expression?
David Thompson: I know.
Lisa Borsook: I love the term real estate fracking. Basically, what it is is using technology to take your real estate asset and find new ways to monetize it, to make money out of it. So I’ll give you an example, if you have a building that has conference rooms and the conference rooms aren’t ever used, they’re half empty all the time, then you can find a way to monetize those conference rooms through a property tech app. The same thing would probably be true with respect to parking spots, if you have parking spots that consistently are unused, you can find a way to find a property app that’s going to make sure that your parking spots are used. So it’s a way to monetize your building
David Thompson: by separating out different components of the assets and finding ways to drive efficiencies out of those different types of assets within a building.
David Thompson: So in the press, especially in Toronto, there’s been a lot about Sidewalk Labs. Can you give us some of your views on that?
Lisa Borsook: Well, I actually think Sidewalk Labs is a really, really interesting initiative. I do understand the challenges that coincide with the deal with Sidewalk Labs, but yet it’s hard not to be interested in it. What it is is a subsidiary of the Google parent, Alphabet, was selected by Waterfront Toronto to develop a smart community if you will, using approximately 12 acres on the Eastern waterfront in Toronto. And their objective, the objective of Sidewalk Labs was to create a digitally connected neighbourhood of the future, and it was going to become a test location for these new PropTech technologies. So they were going to try and create a greener neighbourhood, a more inclusive neighbourhood. They wanted to be a mix of office, retail, residential, affordable housing using design details and sensors and buildings powered by PropTech so that they would be able to reduce energy costs.
Lisa Borsook: They were going to have underground transportation facilities for freight and waste and they were going to construct their buildings in some way to double daylight hours. I mean they had a lot of great new initiatives built into the concept of this community. What are the objections to Sidewalk Labs? Well, nobody was perfectly clear as to who was going to get to use that data, and people are really, really sensitive about data privacy and cybersecurity. So, without getting into a discussion about regulations relating to data protection or what we do if there’s a breach, it goes without saying that the data that would be realized by this smart community needed to be secured. Everyone wanted to know what was going to happen if there was a breach and then everybody wanted to know who gets to use the data and who’s going to be able to monetize that data, and there were concerns that the contract that was entered into with Sidewalk Labs didn’t articulate with enough specificity what was going to happen in conjunction with that data.
David Thompson: Right, because I was thinking, when I first heard about it and they talked about garbage, I thought if somebody wants to automatically or more efficiently take out my garbage, that’s fantastic, but if they want to know what’s in my garbage, I’m not so happy about that. Same thing with transportation, if there’s a big influx of people at a certain time and we can more efficiently move them and that’s fine, but I don’t want people knowing when I’m leaving my house or when I’m coming back, that’s a security
Lisa Borsook: That’s a perfect description. A perfect description about the concerns associated with these smart communities and with a contract with Sidewalk Labs.
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David Thompson: So you and I the other day took an Uber somewhere, and there’s Lyft and other ride sharing services, and we were talking about how it impacts the real estate industry. Other people might not know how it would, they just think it’s just a way of day-to-day life. So how do you think it is going to impact real estate?
Lisa Borsook: Well, I wouldn’t describe those applications as PropTech per se, but there’s no question that those kinds of applications affect how we use our real estate. If you take a look at the zoning restrictions in the city of Toronto, you’ll find that they contain parking requirements for virtually every development that goes up, and yet in this new environment, people aren’t buying cars who live in downtown metropolitan areas, so what’s the point of having a parking ratio prescribed by a zoning bylaw for your real estate if your actual end users of your real estate aren’t going to have cars?
Lisa Borsook: So, there’s no question that things like ride sharing are going to impact the real estate business. It’s going to impact the way we build our developments, the way we operate them, and we’re also going to have to think about how it impacts the revenue that’s driven from a more traditional parking model. And I just think that generally speaking, these new kinds of ways that we move around our cities, the new kinds of ways that we use our community spaces and things like that, these are all things that are going to impact how we use our real estate.
David Thompson: So instead of having a bus loop, we could have a ride sharing loop or something like that, well, it’s just like bicycles now, bicycles are becoming more popular in Canada, so, it’s not like Denmark.
Lisa Borsook: You’re exactly right. In new buildings that are being built, they’re allocating within what was previously the parking facilities, huge areas for bicycle storage.
David Thompson: So PropTech is an extremely diverse wide area. So can you give us some ideas how you would change your leases or your real estate documents to take into account some of the issues?
Lisa Borsook: Well, for some of our more institutional clients, we’ve already done that, particularly for landlords. They are now including clauses in their documents that relates specifically to data, they need to make sure, because of legislation, that they get the proper consents that they need, they need to be careful who has access to the information that they’re collecting, how they store their data, how they share it, how they protect people’s privacy. They want to make sure they don’t get too much information so that they trip over regulations that impact on that. They need to find ways to de-identify the parts of the data that they are collecting. So there’s a whole range of things that are being built into documents that deal with data collection. From another way of looking at it, they also want to deal with the risks associated with data in their leases, so they’re including covenants that impact their tenants on compliance with applicable laws regarding data and privacy.
Lisa Borsook: They’re including right into their documents, specific guidelines for collection and use and storage of data and the third parties who can access that kind of information so that they don’t bump up against these new regulations. They’re requiring compliance with specific privacy policies that they’re including right into their documents and in a lot of cases, some of these larger institutional landlords are actually designating a staff member as their privacy officer to make sure that they and their tenants remain in compliance and they’re taking a really close look at their insurance policies to make sure that they have the coverage that they need in the event that there’s a breach, which could have significant financial implications for them and for their brand.
Lisa Borsook: From a tenant’s perspective, there are also concerns that should be dealt with in the documents. I mean, if you’re bargaining for a company to have smart tech in your building and you think that you’re paying for some of those applications that a landlord is purchasing, then you might want to stipulate right in your document, “You told me that we were going to have cost-saving HVAC, I want to know that I get the cost-saving HVAC, I want you to measure it, I want you to live up to the representations that you made to me when I entered into this arrangement with you.” So those are things to think about, particularly as a tenant if you’re counting on PropTech savings.
David Thompson: So generally speaking, Lisa, what do you think are the main risks to PropTech?
Lisa Borsook: I think one of the principal risk is that the efficiencies that you were counting on when you made the expenditure for PropTech are never realized. So you certainly want to know that if you’re going to spend a fortune for PropTech that you’re going to get the efficiencies that you counted on out of it. But then the other risk, the risk that I’ve already mentioned, is the risk associated with security breaches. I mean, the impact on companies of security breaches, you’ve seen it already, it’s damage to relationships, it’s loss of opportunities, there’s financial loss, there is reputational risk. I mean, there’s a whole bunch of things associated with data breaches that are important for you to think about in conjunction with PropTech and the data that’s generated by it.
Lisa Borsook: So you want to make sure at the end of the day that you have really strong cybersecurity practices so that you can determine whether or not you have system vulnerabilities, whether or not you need to patch up system vulnerabilities, but more than that, you want to look at the contracts that you’re entering into with the suppliers of PropTech to make sure that the responsibility for those risks is properly allocated in those contracts, and that you’re dealing with an entity that you can rely on not just today, but 10 years from today, because real estate is forever.
David Thompson: Thank you for listening. It’s been Lisa Borsook and David Thompson from WeirFoulds. If you enjoyed this podcast, please check out our other podcasts and subscribe, rate and review.
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