Information technology (IT) is having a profound and long-term impact on the commercial real estate industry. But how? And why? Industry insiders give us their views on IT and what it means to them.
Editor's Note: In the last five years, real estate has been inundated by the new Information Age. The tools of information technology are now part and parcel of our daily lives -- laptops, modems, CD-ROMs, the Internet. But how does this tangible called real estate move with the times? We decided to ask some of the industry's leading experts in each of the five major commercial property types of hotels, industrial, multifamily, office and retail to give us some of their own insights. We've backed that up with opinions from five major consulting firms.
Our lead-off introduction is by Larry P. Roches of Quantra Corp., a Northbrook, Ill.-based provider ofmanagement systems to the real estate, insurance and financial services industry.
Information technology is clearly a beneficial new frontier for the real estate industry. Perhaps the benefits are more meaningful to companies now, relative to the benefits they could once derive from directing their spending elsewhere. Today the commercial real estate industry is far more competitive and people have to look for alternative ways to maximize processes and profitability.
Take productivity. The productivity factor is a crucial benefit, but many people view it incorrectly. They want to reduce the number of people in their company by employing technology to reduce staffing levels. The key objective is to get more from current levels of resources and minimize the incremental cost as a company grows and expands, and the number of people that you have to add. That's where the productivity benefit comes from when using information systems.
The organization that directs investment toward information technology in their business contrasted to the one that does very little, as both those organizations grow, you would see a distinctive difference in the "cost of doing business" and the people cost of doing business. That's cost-avoidance.
One of our clients recently told us that the information technology expenditure that they were about to make was the largest capital expenditure they've made in 15 years. The real estate companies -- especially the service companies, the advisers, the property managers -- are not capital-intensive businesses. Information technology is a major capital item that's getting a lot of attention because it has major financial impact. And it comes to the industry almost as a "pay me now, and you'll get the benefit later" arrangement. Rather than pay-as-you-go, many companies have to put in new infrastructures. They might even have to invest in a department that's going to be responsible for IT, which is something they've never experienced before.
Another benefit area is in the service levels that companies are able to deliver to clients, which affects their competitiveness. I've seen real estate companies begin to feature their information technology capabilities as a way to create distinction between themselves and a competitor. Think of the airline industry before reservation systems were around, and the first company that developed a reservation system. The early-adopters of advanced application systems will realize benefits over their competitors.
The application of technology within the organization is a key to success. You might need a more efficient way to keep records of your tenants. So you're going to find a tenant registry application that houses information in your computer about tenants. Then you might need to bill your tenants and collect receivables and account for this, so you're going to find a system that does all of those things. Then you might need a system to do your cashflow projections.
So what you find are these so-called "islands of automation." Or, on a more efficient level, you could view your enterprise as seamless and requiring information to flow freely. That demands a totally different approach.
As an example, you might have the case where the leasethat you need to model cashflow has to be created and entered into your cashflow modeling tool. Yet those leases, and the information about those leases to bill tenants, is already in your accounting system. And you may have a third area, a lease marketing area. But a common database that ties these areas together is a level of integration that this industry has yet to experience. There is great opportunity, and the benefits increase exponentially as integration increases. You have a lease database that acts as the system of record -- for leases, for properties, for tenants, for a client -- and that level of integration is currently being learned by the real estate industry.
Today we're at a good juncture, which the manufacturing industry reached years ago. That industry has achieved very high levels of systems integration in its enterprises, through the whole supply chain. For example, when there is an order placed with Wal-Mart to a supplier, it's delivered electronically, everybody knows about that order, the visibility of it is present throughout the whole enterprise, it's tracked and monitored, and everyone's systems are speaking to each other and exchanging data. I think that the commercial real estate industry will behave similarly in adopting integration.
Furthermore, the institutionalization of real estate is evolving. That dynamic is essentially creating a new type of client that the real estate industry serves.
Let's assume you are a real estate service business. The characteristics of your investor client are changing. They are a more sophisticated investor. They're a more experienced investor in other asset classes, such as securities. And they have a certain appetite for information about their investments. And a certain expectation of timeliness and performance. So now they get interested in a new investment class called real estate, and they don't lower their expectations or their appetite for information. To serve a client like that, you need to recognize that they are expecting a whole different level of information than what you may have been able to provide them in the past.
Another important trend is emerging among the institutions. One of our real estate clients recently told us that 50% of the information that one of their institutional clients wanted from their service provider was other than financial related. That is a significant trend, and has major implications for the real estate industry.
Information systems are not only moving in terms of timeliness and completeness and analysis capability, they're moving outside the traditional accounting realm. Institutional clients want more information that is non-accounting related, because with real estate, information is king. They want to know the strategic plan for properties. How will the space be leased? What are the goals for the portfolio? Who is looking at the space? To meet these challenges, systems have become more forward-looking.
Of course, it must be remembered that real estate is another asset class for these investors. The frequency of the information, the timeliness, accuracy, completeness, and analysis of information -- all of those expectations will remain constant even for real estate.
To get greater investment allocation, let's say from the pension funds into the real estate asset class, I think the firms that advise and service those kind of institutional clients are going to have to demonstrate the worthiness of real estate for greater allocation.
Many institutions, for example, understand the value of the Internet. The more we view the Internet as a resource of information delivery, the more powerful it becomes. It doesn't displace the storage of information and the processing that has to occur. It's just a very efficient means of communication, and the Internet will continue to play a substantial role in the conveyance of information.
Look for practical applications and ensure that your systems evolve in a way that takes advantage of the Internet.