Nine Four Insights

COVID’s Spotlight on Hardware-enabled SaaS

COVID has made everyone rethink where and how they work, and as a result, there are looming questions about how the office environment is changing. What does this mean for commercial office owners, corporate tenants, and the employees that ultimately occupy those spaces? We’re seeing cities begin to open up and some firms appear closer to opening their offices (record breaking COVID cases aside). However, the “office-of-new” will likely be different in that there is a renewed emphasis on health and employee safety. The challenge is that enabling a safer work environment where employees feel comfortable working and where their health isn’t being put in jeopardy is difficult, because in the age of “software is eating the world”, the office environment is physical – it’s the heart of what creates trillion-dollar industries and is the reason why we focus on understanding the nuances of the built environment and intersections with the digital world. It feels like a very unique spot for PropTech investors because, as horrible and challenging as COVID is for the world, it’s created a catalyst to adopt many products and services that many have felt should’ve been adopted years ago.

Threading a needle and finding a single-source solution for commercial office stakeholders to solve these problems doesn’t seem to exist yet, but solving the problems starts at the bottom, with the employees. Firms must understand what their employees need in order to do their jobs to the best of their abilities and ultimately create the most productive, best-performing companies they can. As they say, “it’s all about the people”. It’s clear that people, and governments around the world, are concerned for their safety and public safety, and health concerns need to be addressed. Employees need to feel comfortable where they work.

There are a plethora of re-opening guides and recommendations being created by everyone and anyone, which are great, and focus on procedures and better hygiene: redesigning the office to spread out employees, increased sanitization (hand-washing, deep-cleaning, hand sanitizer), dedicated spaces vs hoteling, etc. However, there’s a bit of a catch-22 with non-process-based elements of reopening: how can landlords and corporate tenants assess and respond to health risks without data? What can be done to reduce any physical transmission of COVID or the like? The answer starts with hardware, which is being put in the spotlight across all real estate asset classes.

To reduce physical transmissions, it’s important to reduce physical contact with shared surfaces, especially at public access points such as exterior and interior doors, elevators, common areas, and check-in stations. Much of that existing hardware is not software enabled nor is it responsive, and it currently requires physical contact. However, that’s changing. Ideally, doors will open and access will be provided to appropriately credentialed employees in a touch-free way, up to and including into an office, conference rooms, or kitchens in tenant spaces. Landlords and corporate tenants will need to invest in this new, responsive hardware for their employees to be safer, thereby creating a catalyst for the companies and startups that are currently offering these products.

That said, the landlords and companies that are purchasing these new devices are learning that the purchase process and pricing for these new pieces of hardware is different: it’s not like buying a door knob at a Home Depot, installing it, and forgetting about it. All of this hardware requires software and sensors, and the continued use of that software service requires a recurring subscription. This feature fits selling to a company that occupies space more so than a landlord – companies are comfortable with SaaS (“software as a service”) models, landlords are looking at property-specific costs and doing the math on a building-by-building basis. If they can capitalize costs, it’s a better fit than taking a regular hit to NOI regardless of how small.

Something Nine Four wrote about earlier is the fact that in the COVID world, although there are higher costs to implement and train, the alternative to not making these purchases and technology upgrades is jeopardizing your employee’s confidence and/or health. The risk of not adopting this tech is therefore monumental for companies that wish to keep offices and stay open for business.

The next, more sophisticated layer of technology that can reduce risks and inform corporate tenants has to do with optimizing the workplace and understanding where employees work, interact, and how space is used. If an employer understood how many employees were in their offices over time, where they worked, or how conference rooms are used and/or booked, for example, they could understand and optimize the size of the floor plate they’re paying for, the design of the office to optimize for productivity (perhaps turning conference rooms into desks or workstations), and understand the ‘flow’ of people and their interactions. This would also include visitors and other third parties that would interact with office space. If employers are finding that their spaces are conducive to higher-risk behavior and interaction, they could make changes.

Both access and higher level data for workplace optimization require hardware and software to complement each other. From a cost standpoint, purchasers will need to pay for both. Over time, it’s been challenging for enterprise consumers to understand this and get over this hurdle. If consumers can purchase a Nest thermostat, for example, and not have an ongoing cost, why would an office need to with smart locks, thermostats, or sensors? The long and short of it is that hardware needs to be told how to react, and software does that. Cloud-based mobile and desktop software, more specifically. Developing, maintaining, and expanding software product lines requires time and engineering dollars, and it isn’t a one-time cost for companies. SaaS companies are more valuable, and everyone wants to own those recurring revenue streams, so the rest is history. For some types of consumers (especially landlords), getting over the hurdle to pencil in ongoing SaaS costs can be challenging, and even more questions arise if a building is sold. Will the next owner want to pay that? Will they underwrite those costs into their deals? In some cases, the hardware costs can be looked at or bundled into customer acquisition costs.

Aside from a new cost structure, the data itself can pose meaningful privacy and security risks. Boston banned its government from using facial recognition, for example. Facial recognition could be a layer of access security for a building or workspace. Will employees be comfortable with omnipresent security watching their every move? How could that data compromise someone? Could that data be packaged and sold to others? In an age where we’re expecting to see increased hardware use and new data captured about our physical movements and environment, privacy should be a huge area of emphasis. Perhaps startups in this space will be the fast-followers of the companies optimizing the workplace.

Privacy and security risks aside, COVID appears to be a catalyst for hardware-enabled SaaS companies. If or when a vaccine is developed, the challenge will be how long the memories are for companies and landlords. In the near term, the size of the workplace optimization market – and all of the hardware associated with it – is growing at a meaningful clip. If/when COVID passes, hopefully sooner than later, the next challenge will be in understanding how sticky these products are. Access hardware is challenging to rip out: tenants need to interact with it usually via mobile app, and moving tenants from a potentially software-based access system back to keycards is challenging, not to mention the costs for hardware are sunk. Data on space and people optimization is a bit more fluid. One-time optimizations for larger ticket items (reducing footprint/size of space, for example) are welcome, but if the consistent monitoring of people in space isn’t required, there could be pressure on sales and growth there.

Overall, we’re bullish on the space, but capital intensity and unit economics can be a hurdle to get over for some companies that are approaching this space with proprietary or expensive hardware that restricts the potential use of those products elsewhere. Commoditized hardware that kicks off data for customized and robust software to interpret and respond is more ideal because it has cheaper upfront costs and provides customers flexibility, but in the same breath, that also means switching costs are lower and could result in more unwanted competition by the startup world. There are a lot of dynamics at play here, but one thing does seem clear – hardware-enabled SaaS appears primed to shine.

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