Nearly every industry is trying to figure out how to get on the “data-driven” bandwagon with its promise of untold value locked away in mountains of data. However, not only is the real estate industry lagging in the adoption of advanced analytics technologies, it’s lagging in much more fundamental areas of data management and computing as well. The influence of highly disruptive cloud-based business solutions will pose a significant challenge to many top players in real estate. As an established industry employing largely traditional “human-powered” methods for activities like modeling, real estate (and particularly commercial real estate) will become increasingly vulnerable to disruptive forces the more its workflows stay stagnant as other industries are openly embracing Silicon Valley’s and Silicon Alley’s technological innovations.
In some ways, the commercial real estate industry has insisted that the way it’s doing things is just fine. After all, over the years the industry has created an estimated $50 trillion in wealth with minimal reliance on technology. Convincing an industry with as much long-run value generation as commercial real estate that it needs a substantial overhaul in the way it handles information and how it values assets is a tough sell.
Another component of commercial real estate’s lack of tech adoption is that selling and leasing property could be viewed as an evolutionarily static activity, with a natural ceiling on how quickly business can be conducted. Regardless of any advance in technology, human beings will still need land to build offices on, offices to work in, industrial warehouses to store things in, retail stores to purchases goods within, retail stores to explore experiences, and apartments in cities to live within. The industry believes that there’s no reason it can’t continue to perform that function according to the old rule book. However, companies that hold this belief do so at their own peril.
The Mainframe Days
PropTech in particular has remained resistant to adopting new technology, continuing to rely on methods for modeling that have their roots in the 19th century and made their last major advances nearly 25 years ago. Amazingly, the spreadsheet in the form of Microsoft Excel paired with a high level of experience, training, intuition (and long hours) of the industry’s underwriters remains at the core of much of today’s financial modeling for real estate. Today’s electronic spreadsheets have undergone a gradual evolution since their introduction in 1969 with the LANPAR spreadsheet software. This technology was itself designed as a digital rendering of the age-old accounting worksheet.
At the end of the day, modern Excel modeling is really just a sophisticated evolution of centuries old accounting technology, and retains many of its fundamental problems.
At the end of the day, modern Excel modeling is really just a sophisticated evolution of centuries old accounting technology, and retains many of its fundamental problems. Long hours of labor have been reduced, but aren’t even close to being eliminated, and most critically, data sources remain limited to what the user can collect and input themselves into ledgers. The day to day tedium of this traditional spreadsheet or “ledger”-based approach may be taken for granted by many underwriters and analysts, but it is by no means a necessity.
About 25 years ago, underwriters and analysts gained access to specialized software that goes one step further in making the life of the average investment professional a little easier, while still retaining the main limitations of the spreadsheet-based approach. This is about where the innovation stopped. As Rick Sharga of Ten-X recentlynoted, “Transaction-oriented aspects of the business are still overwhelmingly handled in-person or through paper trails, as was done traditionally.” Companies are still modeling with legacy software that features data coming from very limited sources that is siloed within different departments and can’t readily be shared. While this approach may be passable at this moment, it offers no insulation against potential competitors leveraging innovative business models that leverage the cloud to unsilo data and incorporate many data sources, effectively offering a much more data-informed and automated way of making decisions.
While so far many in commercial real estate have been stagnant with their use of technology, residential real estate is offering a glimpse at what kinds of technology disruption may soon begin to unseat its hold on the market.
Welcome to the Internet
The commercial sector of the industry has continued to lag technologically but residential real estate has adapted much better to the pressures of today’s technology and industry-disrupting business strategies. Consumer-oriented platforms like Zillow and Redfin aggregate market information from a number of public sources and even use algorithms to estimate property values, provide ways to get financing and facilitate broker representation. Airbnb and VRBO have significantly disrupted the consumer rental and hospitality market, bypassing traditional hospitality offerings, creating new space segments, and putting technology directly into the hands of owners to offer space on a short term basis.
These disruptions underline the premise of the sharing economy: that owning property could be more valuable if it is used as a rental property vs. as a home a family lives in full-time. And, that the value of data that is supplied in “real time” about locations and properties may be where the real gold lies. Firms should be ready for the same kind of sharing economy-focused disruptions in the future. While these disruptive business models are likely inevitable, there is a lot that real estate professionals can do to prepare themselves to maintain their market leadership and industry dominance.
Rather than fall victim to disruption from outside players, the commercial real estate industry has a tremendous opportunity to precipitate disruption on its own terms. Increasingly, within board rooms, large commercial property firms are coming to the realization that the age-old strategy of “let’s put more people on this” isn’t a scalable strategy. Spreadsheet focused business processes offer the best opportunities for automation and the benefits of the cloud. Aside from the need to innovate to stay ahead of disruptive competitors, there is also a tremendous amount of untapped value in the information commercial real estate firms already have, and a tremendous amount of information in the market that they could be accessing to enrich their financial modeling and decision-making processes beyond a short list of comparable data points.
“Increasingly, within board rooms, large commercial property firms are coming to the realization that the age-old strategy of “let’s put more people on this” isn’t a scalable strategy.”
Cloud-based replacements for current approaches have the advantage of pooling a wide range of data in a single place. The commercial real estate sector has long relied on intuition and a tribal knowledge of real estate value along with 3rd party data sources created from their own and industry competitor’s sales data to inform their decision-making. But, with the cloud, the potential to supplement this intuition with real-world empirical data sources from right within a form’s own data repositories is enormous. Even an expert on the factors that determine value can’t be in a location 24/7, but technologies being deployed today are providing a wealth of data that individuals would never be able to collect and manage on their own. With a wider range of information sources available which can be integrated into cloud based financial modeling scenarios, there is enormous potential to augment and increase the accuracy of expert intuition that is not currently being tapped.
Cloud-based software can also offer features like simple user interfaces built on rich automation and heuristic analysis technology. Currently, underwriters and analysts spend vast amounts of time preparing and auditing models and usually do not find mistakes in the model until after it is completed. Analysts take 6-12 months of training to become effective, and spend 20-35 hours per week modeling, with an average of 195 minutes dedicated to fully audit a model. Much of these intensive activities could be enhanced by smarter software automation which free up analysts and underwriters to evaluate more properties and deals than they currently are able to.
Serving a one-two punch to disruptive threats
The economies-of-scale with the current approach to financial modeling are unsustainable and lack scalability on many levels, but the time spent on mundane tasks by highly trained and experienced professionals is perhaps the most significant. The human capital and opportunity costs in this area are enormous, and by taking such fundamental steps as moving financial underwriting and valuation analytics software to the cloud can help real estate firms and professional break down data silos and enhance the frequency and accuracy of critical financial analysis and reporting. Today’s players in commercial real estate have the opportunity to serve a one-two punch to disruptive threats: increased efficiency and productivity alongside modern easy to use cloud-based software which can unlock and manage data across a variety of analyses.