It's been a quantum leap from back-of-the-envelope calculations to integrated software programs that can instantaneously crunch a number of variables and come up with a shopping center's value five years from now.
Software development for the real estate profession has generally lagged behind other industries. But it's finally catching up after some serious prodding by institutional owners and REITs that are demanding more complex financial analysis.
And with their need for percentage rent and CAM calculations, shopping center owners and managers face even more challenging concerns than managers and owners of other types of real estate when it comes to financial software.
Wall Street, the SEC and shareholders want "top-of-the-line financial reporting," says Bryan McGowan, executive vice president and CFO for Donahue Schriber, a Newport Beach, Calif.-based private REIT. "They demand it. If you don't have sophisticated financial reporting, you won't have access (to capital)."
Now that REITs are active in retail, "all of a sudden, the reporting requirements with being a public company have been thrust onto an industry that, heretofore, has been the wild west of entrepreneurs," McGowan says. "The people used to doing calculations on the back of an envelope now are faced with a room full of young analysts with laptop computers. There is nothing quite so painful."
The industry, however, is catching up fast, adds McGowan, whose company became a REIT two years ago but began partnering with public companies nearly a decade ago. "It's being driven by changes on how real estate is being held," he says.
Driven by client demand, the industry is responding to the challenge, says Liz Jacobs, product marketing specialist for Beaverton, Ore.-based Timberline Software Corp. "Real estate managers generally have been a little less demanding about technology than the insurance or banking industries."
An increase in software development for shopping center owners and managers actually started during the last downturn in the real estate industry, when banks began requiring more information.
"The banking industry has always been ahead of the real estate industry in technology, and lenders began to require more due diligence of property owners," Jacobs says. "It wasn't as easy to obtain capital; bankers were looking more stringently at portfolios."
And because the real estate industry was a late-comer to the public markets, it didn't attract much attention from the larger software companies. "The evolution of software has been very slow and usually has been developed by very small, privately held companies," says Todd Zeldin, president of Atlanta-based ACG Professionals Inc. and CEO of ACG Software.
Another push for development is the need to share data among users as well as various financial analysis, accounting and property management systems. More emphasis is being put on importing and exporting data to other sources and converting to Windows-based systems. As various functions become connected, a shopping center owner can make a change to a lease once, eliminating the need to re-input the information into each program.
In the past few years, information has become increasingly easier to access across an entire portfolio of shopping centers. Graphic interfaces allow users to click on a tenant space in a diagram of a center and pull up all types of data.
Projections and values Software that values shopping centers and makes projections is being used by more and more owners. Consultants to the retail industry agree that PRO-JECT was one of the early leaders in financial analysis software for shopping centers. In recent years, ARGUS and DYNA were introduced as more user-friendly systems, able to provide more complex calculations.
"These three products are used by 95% of the industry," says Zeldin, whose company works with clients on all three systems. Last year, ACG consulted with more than 100 regional malls and completed $28 billion of analysis using these tools.
The systems analyze such factors as how tenant improvements or a change in vacancy rate will affect a center's value and which factors will maximize the value.
Dubbing these variables "what-if" scenarios, McGowan would like to see their use increased by property managers as well as owners. "If property managers can get more real-time information on the performance of their properties, they'll have the flexibility to do their own what-if scenarios," McGowan says. This technique would help, for instance, in deciding whether to renew a lease.
As property managers move into the role of asset manager, technology is keeping pace with their new responsibilities. Their ability to do long-term financial analysis has increased, says Tom Cosgrove, director of the real estate software division for Novato, Calif.-based AccountMate, which has developed a variety of software tools as well as a client/server product for the real estate industry.
"Property managers are expected to understand the financial investment side of the business more than they did before and have a greater role in managing the portfolio," he says. "Now they can analyze the last five years and project for the future."
The ability to "slice and dice" a portfolio has become increasingly important, adds Terri Dowen, vice president of sales for Santa Barbara, Calif.-based Yardi Systems Inc., which develops, sells and supports real estate accounting and asset management software.
"A lot of times people want portfolio-level information and not just property information," she says. "You can look at expiring leases in a certain region or available space across an entire portfolio to maximize leasing up that space. Every time you set up a lease in a system, it builds a portfolio-level view."
The ability to connect "Right now there are a lot of disparate systems. A company has one for job costs, another for accounting and property management, and another for work-order/maintenance," says Andrew Rains, worldwide industry marketing manager for real estate for J.D. Edwards World Solutions Co. TheDenver-based company produces enterprise-wide software, including applications f or retail real estate.
J.D. Edwards offers a fully integrated package that connects all of these systems and complements ARGUS, PRO-JECT and DYNA. "Then one transaction flows through the system," Rains says.
Clients are demanding a greater ability to share data among users, according to Jacobs of Timberline, which offers an open database format to export and import from other systems. "This is especially necessary when you get into large portfolios," she says. "It's difficult to find one system to meet every need."
Timberline has developed its real estate products to focus on the lease rather than the unit or tenant. "We put the lease at the center because everything revolves around the lease," she says.
Yardi Systems started in 1982 to serve boutique managers, but with Cushman & Wakefield as a client has evolved into products for larger users, according to Dowen. With feedback from clients, Yardi created an open database system, global posting, more sophisticated query tools and greater flexibility in creating reports.
"Larger corporations are much more demanding," she says. "We're their programming arm wherever the industry is going. It's very client-driven."
Larger corporations also have a greater need for regional offices to be able to dial into one centralized database. "You literally can get a portfolio report on a daily basis if you want," Dowan says.
Choosing the right system For financial reporting, Donahue Schriber uses MRI from Cleveland-based Management Reports Inc. because it is required by major institutions, according to McGowan. "We're waiting for a rollout of MRI for Windows the first of next year," he says. For multiple-year projections and in making acquisitions, Donahue Schriber uses ARGUS.
"More of the sophisticated investors are moving toward ARGUS software," he says. "We use it for all our what-if scenarios, such as how remodeling a center will affect share value, cash flow and taxable income." Donahue Schriber also uses a detailed, Excel-based financial model that extracts financial data from MRI, incorporates projections from ARGUS and combines it into one model.
"It's just amazing what these systems can do," McGowan says. "It took us six months to develop, and we continue to refine it."
While selecting the right system requires considerable research, one factor that can't be overlooked is cost - in both software and training.
"Often the cost of training and implementation is a bigger consideration than the price of the software," Zeldin says. "You might spend $2,500 for software and $7,500 to put a regional mall on that software. One product may require only a day of training, while another may require two days."
Another variable is market share. "If you want to distribute files to as many people as possible," Zeldin says, "you want to choose the product that has the largest market share."
User-friendly programs While some programs are still making the transition to a Windows-based product, others, such as Visual AccountMate Real Estate Manager, are providing graphics-based products that feature a center's floor plan, which can be clicked on to provide data about individual tenants.
Vancouver, B.C.-based Landware Systems Corp. has refocused its efforts from investment analysis software for the real estate industry to a color-coded floor plan software package called ColorCoder.
Importing data from systems such as ARGUS, Timberline and Excel, ColorCoder creates a detailed plan of the shopping center, complete with tenant information as well as store logos and photos, says David Atwater, Landware president.
The tenant spaces can be coded by lease expiration dates, base rent or sales volumes, and can be made accessible toor shareholders. The system works with Windows 95 and Windows 98 and can be used on the Web.
AccountMate has found a niche combining property management software with other commonly used tools. "There was a need for a program that integrated with more popular products like Microsoft Office," Cosgrove says. This allows financial data to be merged into letters, spreadsheets or graphic formats.
Another trend is the move from LAN systems to client-server applications, which allow a developer or property management firm to run on a more secure platform, according to Cosgrove.
"If you have a lot of information that an employee can get to and take to the competition, it's not a very good system," he says.
Client servers began to be more affordable about three years ago, according to Cosgrove. "They were very expensive, so small businesses could not afford them," he says. "Now they can act as if they're an enterprise-wide company. In the past, that was not possible with a PC LAN system."
Wave of the future The Web is serving as an access tool not only for tenants and owners but also for investors.
"Internet reporting will be the hot ticket, especially for institutional clients and investors," says Dowen, whose company developed an Internet reporting tool called Voyager. "Investors can dial up any time of day or night and run their own reports, but they can only see what you want them to have access to."
Rains of J.D. Edwards says the Web can be used for everything from tenants providing monthly sales reports to work orders. Currently, most monthly sales reports are faxed or mailed.
ColorCoder allows mall owners to publish a floor plan on a Web page with each tenant having a hyperlinked area with data available. This feature gives brokers instant access to square footage and even photos.
"It has been difficult for people to get hyperlinked graphics in a timely manner," Atwater says, adding that his company will continue to focus on the Web. "That's where we're going. It's huge."
Breaking: After this issue went to press, Houston-based ARGUS Financial Software announced it was acquiring DYNA Software & Consulting, Clearwater, Fla. The transaction was to close early this month.