Who would have predicted that excesses by commercial buyers and lenders in the '80s would cause a four-fold increase in the market demand for both debt and equity real estate securities?
The fact is that developers may be ready to build and lenders to lend, but traditional exit strategies like take-out loans and pre-sales are no longer reliable outlets for entrepreneurial risk. As both sides look toward securitization to deliver profits, the new real estate paradigm emerges: With an industry as vast as commercial real estate, the only way to securitize is to develop, accept and employ more sophisticated technology and more advanced information systems. That revolution is happening all around us.
From bookkeeper to adviser
Actually, the first indication of real change came a decade ago, first with Lotus, then as more complex operations-oriented software began automating the more mundane tasks of monitoring and record-keeping. Today, these programs are truly pervasive. The future is already well within reach as information services companies pour millions of dollars into the research and development of "bridge programs" that can make even the most non-conforming property management programs talk with one another. In the new paradigm, the reports demanded by institutional investors and the capital market investors are not only manageable but, with Windows technology, even a pension manager can point, click and review actual operating results real time -- any time, day or night. The revolution is really here.
Joining the property managers at the technology feast will be global investors, capital market makers from Wall Street and various institutional investors. With the coming level playing field of information, thecan be bigger and even more lucrative than ever -- and real estate will take the quantum leap to becoming a major player in the international investment arena.
As commercial real estate becomes a more attractive asset class, investors and underwriters in the capital markets want convenient proof that a publicly traded real estate company will perform as predictably as a manufacturing company. When real estate was a transaction-based industry, investing was an art form. Now it's becoming a management science.
Reporting requirements increase
Driving this technology evolution is Wall Street's rising level of expectations. Analysts are asking REIT owners and owners of debt portfolios questions they never even anticipated before. In the old days, property owners expected to manage the property and gain the big profit when the market turned hot. Today's portfolio owners must demonstrate how to increase shareholder value. Analysts want to understand and examine statistical proof of how an equity or debt portfolio may be proceeding toward stated five-year goals of increasing value based on cash flows.
Like the banks in the early '90s, real estate investment trust's now have a pressing need to develop more complete information systems that can monitor operational performance, forewarn lenders and analysts about potential problems and lower operating costs. But the long-term demand for information systems will not be limited to traditional owners of real estate portfolios. Institutional investors such as pension funds, life insurance companies and mutual funds -- as well as growing REITs -- will want to instantly verify sellers' claims about a property or portfolio, potentially creating as many new customers on the buy side as on the existing management side.
Yet, in many ways, this need for consistent, constant information goes against the grain of many real estate professionals accustomed to fly-by-the-seat-of-the-pants attitudes. Our entrepreneurial business by nature resists a framework. In addition, the industry has been built upon proprietary information. Sharing "industry secrets" has never before been seen as wise or necessary. These forces kept real estate out of the main stream investment arena typically held by other investments. This lack of information, combined with the industry's historically cyclical nature, has kept the biggest capital sources from viewing real estate as anything more than the ugly step sister to stocks and bonds.
Today, the real estate industry finds itself at a crossroads. We need financial resources to grow. Yet the same reasons that the industry has been reluctant to embrace technology may well be the solution to our problem.
Real estate joins the ranks
Soon, banks will be able to underwrite major loans in weeks instead of months. Investors will use up-to-the-minute information to buy and sell real estate just as Wall Street uses financial reports, market information and rumor to trade stocks. The liquidity of traditionally fixed property assets will increase, resulting in a higher volume of transactions and more income forof real estate.
The new paradigm is clear. The more reassurance that is provided through the standardization of information regarding real estate, the more capital from the public markets will be put toward real estate. Owners and investors will have more uniform, current information on which to base decisions; developers will be able to attract capital by quantifying the risk/reward equation of a new building; property managers will increase their values to owners and manage more real estate with less resources; and lenders will rely on specific investment-oriented analysis to make loans. In turn, commercial real estate will step up to the plate and join with stocks and bonds as a more widely accepted investment class.