In subtle and sometimes sneaky ways, a I dramatic, new technological revolution has created a near crisis situation in business organizations of all kinds. No industry has been spared, including the real estate industry, and no executive has been given the freedom to ignore it or become totally conversant with it.
Everybody thinks they know all they need to know, given the enormous media coverage. But, the intricacies of its penetration into the daily, hourly, minute-by-minute life of the corporate executive are still inadequately recognized or understood. Using the real estate industry as a case study, we propose to introduce a far higher degree of awareness and knowledge of what is now in being - totally.
Independents and institutions
Historically (and that word suggests the magnitude of the problem we are addressing), the real estate field has been comprised of a large number of independent properties and portfolios competing in various local markets. Ownership of these projects long remained equally fractionalized in the hands of individual developers with diverse characters, goals, styles and idiosyncrasies.
In the late- 1970s and early- 1980s, however, institutional owners began acquiring more and more real estate interests, particularly large projects. The trend accelerated in the 1980s as syndicates, pension funds, life insurance companies and other institutions picked up properties from coast to coast.
Then, major crisis! With the recession of 1990, oversupply met undercapitalization, nd real estate properties of all types, including entire portfolios, fell into institutional hands at an unprecedented rate. At the same time, declining values and diminished liquidity prompted investors to spread their risk through REITs, REMICs and other forms of security.
Thus, a paradox made its unpleasant reality felt. \Wile real estate ownership consolidated, asset and property management remained localized. The reasons are obvious and apply to the present day. Every market has its idiosyncrasies, and asset managers must know every nuance to make their properties compete successfully. There is an apparent and potential-unmanageable conflict between macrocosm and microcosm, national vs. local, the general vs. the particular. And it is a paradox which must be mastered, or else!
Complicating matters was the emergence of other problems - knowing how to succeed and showing that success. With the rise of institutional ownership, real estate managers, accustomed to operating independently and with little disclosure, suddenly had to communicate reams of financial information. Adding to the demands was an increased emphasis on real estate performance. Providing ownership with information and reassurance meant producing a broad range of in-depth market research and competitive analysis plus detailed financial statements, budget analysis and valuation reports on each property every month.
Moreover, securitization placed real estate entities under the watchful eye of the Securities Exchange Commission, while rating agencies and analysts continually scanned property and fund performance reports. As an investment class, real estate performance came to be compared to all other forms of investment, and the tools of measurement had to stand up to equal scrutiny. This is the current state of affairs, one which is demanding, compelling and potentially disastrous unless there is an appropriate response.
Because of this state of affairs, real estate companies needed, and still need, sophisticated information systems, but most firms have not invested in them. Their reluctance to sink cash into computers was understandable. The capital outlay for comprehensive computerization seemed excessive for the small to mid-size firms typical of the industry. Besides, in most cases, developers and owners already had hands-on knowledge of their markets and properties. Even some of the "national" development and property management companies have found themselves deficient in both the equipment and the expertise required to produce the new, intensive property reports plus market and valuation analysis.
While all of this was going on, the information industry underwent its own transformation. The 1960s to the 1980s marked the dawn of the Information Age, when hardware and software developers focused on gathering, sorting and maintaining bases of information. By the 1980s, the effort had succeeded to the point of overkill. Analysts had data, data everywhere, but couldn't stop to think. Increased technology had created a circumstance in which decision makers were often unable to see the forest because of the trees.
Midway through the decade, data management focused on filtering information and identifying information that was relevant to a particular decision. At the same time, information technology jumped from the mainframe to the desktop and, most recently, to the network. Emerging technology enabled, and enables, analysts to collect, customize and communicate vast quantities of information with colleagues around the world.
In the real estate industry, Pc-based reporting packages made their debut during the 1980s, just in time for the first wave of institutional owners. By the early-1990s, more sophisticated management, accounting and reporting packages had evolved, along with a steadily growing array of analytical and evaluation tools. Today, all the packages in common use feature solid accounting and financial reporting modules, excellent payables and receivables tracking functions and fairly flexible report-generating capability. Some are now offering distributive processing and more advanced communication capability.
But, trouble lies ahead.
The next wave
The simple fact is that right now information technology falls short, signaling the urgent need for further progress and a deep awareness of the necessity. Over the next five years, advances must and will center around emerging capabilities which every element of management in the real estate industry must be aware of and must plan for, including:
* Performance management systems that will enable asset and property managers to monitor each property's critical variables in real time, evaluate changes and take immediate, effective action to enhance performance;
* Variables being monitored will include market and other trends critical to the future, in addition to traditional historical financial data;
* Integration of information systems and databases with analytical and modeling systems for improved decision making;
* Multimedia support allowing the user to view graphical elements, such as CAD drawings along with numerical, legal and technical data;
* Networking capabilities that link properties with one another as well as with centralized support services and ownership; and
* Automated administrative assistants or electronic agents that remind property management of key dates and deadlines, track specified information and even perform predetermined analytical functions, including the capacity to generate standard letters and reports.
Tomorrow's information systems will provide more flexibility in transferring data between applications and greater smoothness among accounting performance analysis and modeling functions. Using advanced technology, market analysts should and must be able to crunch the same numbers in different formats for different clients, without rekeying the statistics every time.
Additionally, data systems will offer both wider accessibility and tighter security, by making particular files accessible only from certain Internet addresses, for instance.
The good news
Assuming full awareness, understanding and resolve to apply what must become available, evolving information systems will give real estate firms more sophisticated tools to strengthen client relationships and differentiate themselves from the competition.
The bad news is that the information highway has no off-ramp. Keeping current technology will take a substantial investment of capital and human resources from now until the end of "cybertime." Management companies will be faced with the constant need to innovate in order to maintain a competitive advantage. Thus, investment in technology infrastructure will be a growing component in the operating and capital budgets of every property and asset management organization.
The above is a given. It is here and it is real. Full awareness is neither here nor real. Thus, there is a critical need to learn, explore, understand and utilize the components of a gigantic management and marketing revolution implicit in what is clumsily called the "information highway."