Everyone has a story about money they wasted on technology. When buying new gadgets (just like with new software), it is often hard to know what their real value will be, which features will be used, or how difficult it will be to learn or to make a habit of using them. Some of this stems from the fact that many people see technology as a cure-all pill, to be swallowed without thinking, blindly trusted as a sure fire way to fix all of our problems. When it comes to software, particularly enterprise software, the best technology integrators realize that the tech is just one piece of the puzzle. It needs to fit into a larger landscape that includes team dynamics, corporate culture, and workflow processes.
This is a problem which the companies that create technology think about a lot. Pushing out a product, or a version of a product, that isn’t able to get traction is the slow road to failure. Good design can make the difference between applications that get installed and ones that actually get used. One of the first steps in the design process is understanding overall design constraints and nothing can be more constraining than (sometimes irrational) human behavior. So it makes sense that some of the most rigorous research into how work gets done comes from the enterprise software providers that build products to help.
Altus Group is one such company creating technology for real estate investment firms. Their enterprise software, ARGUS, is one of the most trusted in the world for understanding the valuing of income generating properties. Since the valuation process is one of the most important tasks for any real estate investor they have spent a lot of time learning how acquisition teams evaluate and decide on which properties to buy and projects to fund. Over the course of a few months, they spent hundreds of hours on calls and in meetings with some of the world’s top acquisition teams. This process gave them some interesting insights into how teams work and which ones have been able to make the transition to a more sophisticated, digital workflow. It also informed on how they designed their new ARGUS Acquire acquisition software. “It was important for us to look objectively at how the industry was incorporating technology into their daily tasks rather than point them out as Luddites or dinosaurs,” said Tom Hazeldine, one of the project leaders for the ARGUS Acquire design team.
They learned early on that deal management was only a part of what acquisition teams do. Tracking a deal through the pipeline is the easy part. The real work comes from the rigorous modeling that is the culmination of a long due diligence process. In order to understand the impact of changes in the assumptions, most acquisition teams will create ten to fifteen different models and compare their outputs. These usually get curated into three options: a “base” case and the best and worst scenarios.
So to help analysts keep track of all of their models, the Altus Group team designed their ARGUS Acquire application to bring KPIs like present value, IRR, NOI, and cap rate into one place no matter whether they originated—from their platform or an Excel spreadsheet. This way, a quick glance can help see the different outcomes of each forecast model. They also discovered that some of the most common addendums to an investment package were cash flow and rent roll forecasts, so they created a tool that can generate those reports automatically within ARGUS Acquire.
It is important not to understate the role Microsoft’s iconic Excel program is to investment firms. Some analysts are incredibly sophisticated and blindingly fast at creating models in Excel. With that knowledge, the Acquire designers knew that rather than trying to force everything into a separate application, they needed to allow easy integration between Excel files on analysts’ computers and the Acquire platform.
Many of the teams that conduct this process have a similar workflow: analysts would do the work of creating, testing and curating the models and then would present them to an investment committee. The researchers learned that these committee meetings are the most pivotal moments in the entire process. The committees are usually comprised of senior-level managers or partners at the firm. These executives are always incredibly busy so they need to be able to have a high-level overview of all of the different investment options (and all of their models) in order to make their decisions in a timely manner. If they are not satisfied with the evidence they might elect to pass on a project. Tom and his team found out that this part of the process created the most anxiety for analysts. “Teams will usually put between three to ten hours into each one of these deals so they don’t want them to get passed for lack of analysis,” Hazeldine said. For this reason they created ARGUS Acquire with the ability to quickly change assumptions in models and learn the implications on a property’s value in real-time. “Over half of the analysts we surveyed said that the ability to recalculate models during the committee meeting would definitely help them make their case.”
To get a sense of how teams used this ability to adjust models to their advantage I talked to someone doing just that. Jamie Minckler is an analyst at Matan Companies, a real estate agency out of Ballenger Creek, Maryland. They are a full service shop – they manage, broker, and invest, so they are a good example of how numerous regional commercial real estate companies work. “We don’t have an ‘acquisition team,’” Minckler explained. “The leasing team, the analysts, the managers, the principals, all of us are looking for projects. Depending on the climate we might be doing a ton of deals, or none.”
Opening the pipeline up to their entire team gives them more eyes on market, each with their own expertise. Importantly, the matchmaker’s involvement didn’t end after the introduction. Minckler said, “whoever brings the deal in becomes its champion, its cheerleader, if you will.” This means that they need a way to explain what they saw in the deal in the first place. “What is helpful is that anyone from our team, even if they don’t understand the discounted cash flows as well as our investment managers, can get into Acquire and talk the team through it, and figure out what will happen if the projected rents or cap rates change.”
During the process of building ARGUS Acquire, Altus Group found that while there were a lot of similarities in how commercial real estate acquisition teams work, there was also quite a bit of variation in how they think about each deal. Many organizations use their own internal knowledge such as comparable leases in their own portfolio to construct their assumptions. Others find creative ways to understand where the local market is headed. The art of analysis will always be the secret sauce for an investment team but creating ways to bring structure to the process and increase visibility of the work being done for the entire team helps investment companies do more of what they do best.
Altus Group looks at what they are doing as more than just creating real estate software. Successful real estate investment teams have the ability to create massive amounts of value for their shareholders and for the cities in which they invest. They want to be able to empower these teams to make their most informed decisions in the most efficient way possible. To do this they conducted extensive research and implemented the lessons they learned to make their new ARGUS Acquire software the most comprehensive in the industry. They plan on continuing to use the feedback they receive to create a tool that responds to actual pain points and integrates seamlessly into the property industry’s workflow, rather than trying to change the way successful teams have been doing their business for decades.