Are the Robots Bringing Humans Together Again?
Much has been made of advancements in AI and how it will displace or augment humans, but is it possible that the machines are bringing us closer to each other?
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The Poker Table
I’m going to start with an analogy about poker, a game I love. But don’t worry, even if you don’t care about the game or know how it works, this will still make sense. Poker, and specifically the most popular version, No-Limit Texas Hold’em, was named such because it started in the backrooms and saloons in rural Texas. This was in the late 19th and early 20th century. Cowboys, gunslingers, politicians, and soldiers would gather around a table with a deck of cards, and off they went into the night drinking and gambling. If you’re imagining a scene from an old Clint Eastwood western, then you pretty much have the right idea.
In the late 1960s and 1970s, the game was popularized as some of those Texans moved to Las Vegas and began playing in casinos on the emergent Strip. In the end though, it was technology that brought poker to the mainstream, in two waves. First, was television, which turned the game into a spectator sport as fans watched their heroes battle it out, with their hands on display for the audience. Then, came the internet, and the creation of online poker. This made the game accessible to anyone with an internet connection, not just those who had access to a physical poker room. The result was a poker boom that started in the 2000s and has lasted until now. Today, poker is an $80B a year business, projected to grow at 12-13% annually to nearly $300B in the next decade.
Then, enter the robots. As artificial intelligence evolved it started solving strategy games that had fascinated and flummoxed humans for centuries. Take chess, as an example. In the 1970s and 1980s there were famed battles between computers and grandmasters, or teams of them. Beth Harmon types would duke it out against the best computer program at the time, and for a while it was competitive. By the early 2000s? Checkmate. The computers would regularly crush the humans with ease, scoring near-perfect ratings while the mere mortals struggled with their… being human-ness.
If you want to read more about just how good computers and AI have become at solving strategy games, you can read the story of Google DeepMind’s AlphaGo. This was a program that studied games of Go played between human masters, and soon thereafter was beating the masters itself. Then its successor, AlphaZero, did the same without ever studying previous games played between humans. Just give it the rules and, “go”. For added flare, it could also teach itself chess and shogi when given the rules, and beat human masters. DeepMind could have stopped there but thought, hell, why not also create MuZero. A subsequent version which no longer even needed to be taught the rules of the game. Just give it a game, and it will be beating the best humans in the world, in no time at all. It’s worth emphasizing at this point that all of this happened in a matter of two short decades. The first computer beat a chess grandmaster in 1997. MuZero’s conquests were documented and published in 2020. Wild.
Back to poker. Similar computer program’s had solved Limit Hold’em and several other variations of the game around the same time that chess was solved. But No Limit Hold’em, due to the essentially infinite range of decisions it allows a player to make at any point within the game, was harder to solve. Even today, there’s still a debate whether or not the game has been “solved”. In 2017, a team led by one of the best players in the world Doug Polk, beat the best computer program at the time. A couple years later, the computer won against the same team, minus Polk. Nevertheless, the game was changed forever. Today, the majority of professionals online use some form of software to assist them, and whether or not that software has a perfect solution for each decision in the game, it's still a massive advantage. This can make it almost impossible for an unassisted human to win with any significant edge, if at all. Online poker has changed from a game of who has the better skill, to a game of who can most effectively deploy the better software. On some popular poker websites, there are even allegations of rampant AI bot farms, which make it an unfair fight for any human that wants to compete.
All of this has led to widespread skepticism about online poker, and a renewed interest in playing live poker, the old-fashioned way, in a physical poker room. Take a look below at what the Seminole Hard Rock in Tampa Bay looks like on a Friday night, or in fact almost any night, on a regular basis.
After a COVID-related reduction in the total number of physical poker rooms across America, the number of active rooms has come surging back. Large entertainment companies like Caesars Entertainment and BetRivers are renovating old rooms and building new ones all across the country, with states and municipalities more conducive to granting licenses. Celebrities from Hollywood, Silicon Valley, and social media fame like Kevin Hart, Chamath Palihapitiya, and Mr. Beast have been regularly found around poker tables on various shows. The shows themselves, some of which are reboots of old formats from just before the dawn of the internet poker age, have also gained in viewership.
Anecdotally, in Romania where I’m currently residing, online poker came first; live poker has been an advent of the last 5 years, and it’s growing rapidly. Live poker is also growing rapidly in the UK, France, and Czech Republic.
Intermission
Ok, Ehson. This is interesting but what in the world are you getting at here? And what does this have to do with real estate?
I’m really glad you asked, because I was just about to get to that.
Digital Weariness
The business world has a term for this general aversion toward computers that our poker analogy encapsulates, it’s called “digital weariness”, and it’s pervasive across various mediums. Increasingly, people are choosing to spend their time and money in offline channels, resulting in the outsized growth of brick and mortar retail, travel, and other versions of what’s sometimes broadly described as the experience economy. Let’s go down the list:
e-commerce vs. brick and mortar retail
In 2Q2021, brick and mortar sales growth outpaced ecommerce sales growth for the the first time ever
That momentum carried over to each subsequent quarter, and for the full-year of 2021, physical store sales grew at 18.5% while e-commerce grew at 14.2%
This continued in 2022, albeit more modestly, with brick and mortar growing at 8% while e-commerce grew at 7.7%
Total ecommerce share of retail, which had peaked at nearly 14% in 2020, has been steadily declining since
Acceleration of experiential retail
Experiential retail, which involves “next-leveling” traditional stores, is also on the rise. See an example below of an Adidas store, where they’ve created a “Dance, Dance, Revolution” type game for customers:
Another example is Casper’s New York “Dreamery”, which is a far cry from your local Mattress Firm store. Anybody, even those not shopping for a mattress, can participate by walking in and buying a 45 minute nap for $25; while trying a Casper mattress of course. The beauty of these types of experiences is that they’re not only cool for the brand, and memorable for shoppers, they’re also profitable.
Experiential retail is now a top 3 priority on average for consumer brands worldwide, according to a survey by payments company Klarna, and they are booming, in various formats. One popular format, the popup store, is projected to increase to $95B of annual revenue by 2025, up from $80B today, according to Capital One
Growth of travel and tourism
Travel and tourism spending represents about 9% of the global economy, and 11% of the US economy. That’s trillions of of dollars, and its growing in its overall share of both US and global GDP.
Ads going offline
To adjust for consumers increasingly turning their attention offline, advertisers have also shifted their focus to offline channels. Ad spend on sports and events sponsorships and shopper marketing has increased. Even some advertising mediums previously considered obsolete, like broadcast television and direct mail, are back to growing again:
Synergy of Online & Offline
The re-analogization of advertising is baffling to me, especially considering the fact that digital ads are powered by and personalized with the same type of powerful AI technology that can beat humans in chess (with both eyes closed). When you switch from your phone to your computer, and see an ad for the supplement brand you were just texting your friend about, that’s not a coincidence. Same story when you scroll Instagram and see reels of Caitlin Clark because you were just talking to your friend about her at lunch, next to an ad from Nike who sponsors her. Starting in the early 2000s, most companies started adopting this model of “customer obsession”, a phrase sometimes attributed to Amazon’s Jeff Bezos. If you feel like your computer and phone know you, it’s because they do. They are specifically programmed to develop an intimate profile of you to optimize ads; and yet brands are finding just as much value in mailing you a pamphlet or putting up a billboard. Ecommerce giant Shopify’s President Harley Finklesetin, while emphasizing the importance of their offline strategy, was quoted on a recent earnings call as saying “in order to discover new customers and build deeper connections with existing ones, you need to be online, offline and everywhere in between.”
Finklestein brings up a good point. There’s a balance and symbiosis between online and offline channels. Increasingly, consumers are influenced online, toward offline experiences. To extend the poker analogy from before, Youtubers like Mariano and Rampage made a name for themselves by documenting their offline journeys through online channels, and brought thousands of new players to poker tables. Similarly, social media influencers have been an engine for the growth in travel and tourism. Southwest Airlines, Alaska Airlines, Marriot, Hilton, and The Ritz Carlton all have influencer marketing partnerships and strategies, and are joined by countless other cruise lines, airlines, hotels and restaurant chains.
The digital platforms have as much influence as ever, but they’ve started pushing people back together again in physical spaces. In addition to the categories in the prior section, larger-scale, analogue entertainment options have gained in popularity as well. Dave and Busters, which acquired rival Main Event in 2022 and grew same store sales at 54% that same year, is guiding to over 20% growth for each of the coming years. TopGolf, which is growing at a similar rate, currently has 95 global locations with plans for 55 more; and has the ultimate goal of surpassing the traditional game of golf itself. Lastly, sports franchises which used to roughly match the growth of a standard index like the S&P, have far outpaced that level of growth over the last decade.
Impact on Real Estate
As we've seen in the retail, gaming and travel sectors, there's a growing demand for in-person, human-centric experiences. The demand is then further supercharged by what people consume online. Monkey see, monkey wanna do. This has a massive impact on the real estate landscape. In 2023, despite high interest rates which left several asset classes struggling, the retail sector demonstrated resilience, with vacancy rates at their lowest in a decade and rent growth in key urban areas.
Retail isn't just surviving; it's pivoting with vigor towards an experience-driven model that fuses shopping with social and cultural engagement. People are buying into experiences that they can’t just click and have delivered through a screen. The latest data from real estate giants like JLL and Colliers indicates that experiential retail spaces are experiencing a surge in foot traffic. On the larger end of the spectrum, gaming venues and sports stadiums are also poised to benefit from this analog shift. Deloitte's 2023 Real Estate Industry Outlook highlights a significant uptick of investment in mixed-use developments that incorporate entertainment experiences.
Also potentially related is the growth of real estate that supports the advancement of computers and AI. Namely, data centers, which have been a major subject of discussion on real estate giants’ earnings calls for multiple quarters in a row; as
and I have covered in .The through-line in all this is the intrinsic human desire for connection and community; something that, no matter how advanced our technology becomes, cannot be replicated or replaced digitally. Real estate investors and developers that tap into this fundamental human need, offering a space where people can come together in shared experiences, are the ones poised to flourish. As we dial back into the analog, retail real estate and specialty venues that can host, entice, and engage communities will not just survive the digital wave; they will ride it to new heights.