Almost a year into a global health crisis that devastated the world and propelled the nation into an economic recession, the effects of the coronavirus pandemic continue to echo through businesses that thrive at the intersection of people, places, and experiences—an intersection that very much includes commercial real estate.
COVID-19 accelerated already rapidly growing trends in the commercial property industry to mitigate the immediate challenges brought on by shelter-in-place mandates and work-from-home restrictions. Now, we’re starting to witness the advent of enhanced technology to address the longer-term, market-wide questions and risks that companies will face in the coming years.
Building on communication
Take the development community, for example. Development and construction firms suffered a substantial loss in 2020, with non-residential construction starts falling 24 percent in the first 10 months of the year compared to the same period in 2019, according to Dodge Data & Analytics. Social distancing restrictions that limited the number of professionals on-site at one time were delaying project delivery, leading to potential cost overruns and putting developments at risk of going in the red.
In response, many real estate teams proved resilient, innovative and were quick to pivot. Development firms and construction professionals whose projects have been disrupted by the pandemic continue to move away from traditional, manual processes, turning instead to advanced technologies that employ automation, artificial intelligence and data analytics in order to better understand their current and forecasted performance.
AI, automation and data analytics have put actionable insights and intelligence into the hands of users that would not otherwise be available. It is not uncommon for developers to work with 100-plus vendors on a single project. With data on each vendor, from invoices to contracts and change orders, collected on every project, over time trends buried in that data begin to emerge. Technology can now help reveal patterns such as consistent overages compared to what was initially quoted by a vendor, a disproportionate number of change orders compared to other vendors, and which vendors have proven to be the most efficient in light of new operational protocols such as social distancing.
These solutions are also instrumental in managing projects with more efficiency and transparency by tracking any shifts that may arise in development strategies such as switching asset classes or project programming which can require an extensive amount of information in order to meet market demands and requirements.
Before the pandemic, development and construction professionals seldom invested in technology because the industry as a whole favored in-person meetings and handshakes to Zoom conferences and digital signatures. It’s true that the industry has made significant strides in modernizing its processes over the past decade, but the COVID-19 crisis was an accelerant, forcing many to consider the value that software offers in project management, advanced reporting and remote team collaboration. According to JLL’s State of Construction Tech 2020 report, much of the new venture capital funding that flowed into construction startups last year was invested in companies that experienced increased adoption as a result of the pandemic, such as digital collaboration software. The report states that digital collaboration tools that streamline communications between onsite and remote workers are now considered essential. This technology allows entire teams to problem solve without requiring every individual to be physically present for walkthroughs and in-person discussions.
“Digital collaboration tools have changed from ranking as a primary impact technology to now be considered a foundational technology,” the report says. “This change was made for two reasons. First, digital collaboration tools have become a near requirement during the pandemic, to keep projects moving forward even as teams are not able to meet in person. And second, these tools have developed, by growth and acquisitions, into unified platform hubs designed to be the core tool to enable all other technologies to connect.”
An added bonus of digital collaboration tools is the ability to internalize institutional knowledge about clients, specific projects or investments, vendors, and much more in one place. Most property firms today rely on the memories and instincts of individual employees for critical project information. Many teams lack a centralized database in which to store and access insights. As a result, when an employee departs from a company or is out of the office and unavailable to provide real-time information, that institutional knowledge used for benchmarking or decision-making purposes is also unavailable. Modern teams equipped with the proper software to simplify information access and improve collaboration avoid this risk and are able to maintain their knowledge base, never skipping a beat.
Real estate has always had recurrent periods of growth and stagnation requiring firms to reduce staff to minimize costs during slow seasons. To add to that, commercial real estate also is a highly competitive industry when it comes to top talent, so it can be expected that some of the most knowledgeable and experienced team members will switch firms each year, and bring their insight with them. Having a central repository for project-related data, plus software that can analyze and draw insights from this information, not only prevents the loss of institutional knowledge amid staffing changes, but also makes the information being collected more valuable and actionable.
It’s expected that development professionals, including development firms, internal real estate teams and their various collaborators, will continue to invest in new digital solutions as they start to witness firsthand the efficiency, flexibility and value that they provide. This momentum is predicted to outlast the pandemic, according to MetaProp’s Mid-Year Consumer Confidence Index.
Understanding your investment
Commercial real estate investors and asset managers are also grappling with depressed asset values and global market volatility as people confine themselves to the safety of their own homes.
Real estate fund and asset managers whose portfolios were negatively impacted by the pandemic are experiencing extreme volatility in various segments of the market, especially the retail, hospitality, and office sectors. In the third quarter of 2020, U.S. hotel occupancy fell by 37.9 percent year-over-year, according to data from CBRE. Hotel occupancy during Thanksgiving week alone fell to 36.2 percent, its lowest level since May, according to hotel data and analytics provider STR. Demand for retail space continues to decline with negative net absorption totaling 15 million square feet in Q3, the largest decline in net absorption since the first quarter of 2009, according to data from CBRE.
Asset managers challenged by the current market are in desperate need of insights that allow them to assess the performance of their properties in real-time—unlike the historic and monthly reporting that they have relied on in the past. There are countless sources of commercial real estate market and economic data that investors refer to on a daily basis. The problem is, those sources are often separate from one another. In a stable economy, real-time insights may not be completely necessary because your portfolio’s performance is more consistent. But as seen in 2020, an unstable economy exposes investors to incredible risk.
One of the best ways to make confident, data-backed decisions is by referencing up-to-the-minute insights on the performance of your assets and the market overall. Standardizing and consolidating data in one place allows investors to overlay and manipulate data to reveal more actionable insights. Our current market volatility is pressuring fund and asset managers to find new ways to make more informed analyses across a portfolio, to specific geographic markets, asset classes, or even individual tenants. This movement is driving up demand for software tools that clean, analyze and depict live data like real-time rent roll data, arrears reports, and lease agreements.
Money on the sidelines
Investment volume in U.S. commercial real estate took a notable dive as a result of the pandemic, falling more than 50 percent year-over-year in Q3 2020, according to Newmark’s third-quarter United States Capital Markets report. Though commercial real estate is typically known as a safe haven for long-term risk-adjusted returns, the unknown impact of this world crisis makes it difficult for investors to anticipate the long-term effects of COVID-19 on real estate fundamentals. This also complicates the process of underwriting appropriate risk measures into deals.
This is where the true value of data comes into play. For investors, data that is translated into digestible, actionable insights can inform future investment strategies and invoke confidence in a transaction, as opposed to endlessly waiting for a dynamic market to return to “normal”. Though investment volume slowed, investors who are leveraging their data (and better yet, enhancing it with secondary-source market data) are able to better assess risk and pinpoint advantages for any given deal that would be otherwise invisible using static spreadsheets or human intelligence.
More data is the only way to source more accurate insights. Having the ability to compile data on past, present and future deals to help inform investment strategies is paramount, especially for international teams that need to collaborate remotely. For transaction teams specifically, this data can be referenced to keep track of deal introductions, investment pipelines, or information about specific properties (proximity to major roadways and public transportation, square footage, tenant data, etc).
Using software that can report on market fluctuations and the performance of a given asset class within a specific location allows commercial property professionals to better evaluate their portfolios’ exposure to risk. With a more comprehensive understanding of the market, investment teams can pivot as needed without losing time.
According to MetaProp, startups and real estate tech investors expect the coronavirus to accelerate PropTech adoption long-term. The commercial real estate industry realized the value of purpose-driven technology in 2020 but with a vaccine approved, sustaining this momentum once customers are able to return to the office is not guaranteed. Widespread adoption will depend on each technology company’s relevance, practicality, and ability to adapt quickly to a dynamic market, not just a world crippled by crisis.
