Great expectations won't be realized overnight in quest for tech acceptance

Early reports chronicling the death of technology in commercial real estate appear to have been greatly exaggerated. Okay, so it's true an earnings-befuddled Corporate America has temporarily shelved any technology investment plans while the Nasdaq continues to sputter. And yes, any business professional who utters the words “dot-com” in a business setting is sure to draw a snicker or scowl. But it appears that this current chapter in real estate technology is not the beginning of the end, but the end of the beginning. To sort out the current state of affairs in this roller coaster sector, NREI assembled an “A” list of panelists during the Realcomm show held at the Adam's Mark hotel in Dallas. Items up for discussion included lessons learned from the Internet Gold Rush era, data standards and assorted other issues. NREI Editor Matt Valley and SCW Managing Editor Brannon Boswell co-moderated the event held June 15. What follows is an edited transcript.

NREI: What lessons have we learned from the dot-com crash that we can apply to future technology endeavors, and how are you trying to incorporate those lessons into your own business?

Mark Rose: One of the lessons that we always knew is that investment in infrastructure is right whether the Nasdaq is up 100% or down 50%. Over the last few years we've seen the rise and fall of the dot-coms. The lessons learned are to stay on task and invest in infrastructure. We have an industry that has a great deal of cost in it, we need to take the cost out. We have the paradox of clients who want to take fees down, but costs are rising in an inefficient market. You must continue to invest to be more efficient and increase productivity.

At the same time, I think the learning that now comes to the forefront is that this doesn't happen overnight. Change is hard. Most of this change is behavioral change. As we keep saying, with all do respect to technology companies, it's not about the technology. The price of admission is good technology. It's the behavioral change to use the technology that actually has been a greater challenge than anything else. So, we're just spreading our time-lines a bit, saying it doesn't happen tomorrow.

Douglas Curry: I would have to reiterate what Mark said. The changing behavior I think is the biggest key. One of the things that we should have all learned is that we're not going to redefine the industry. We're going to take what happens in the industry now and make it more efficient, and bring the processes to an electronic platform. As long as it does that, it probably adds value. But if we're trying to create a new process that's completely different or a new way of doing business, it's probably a little bit more radical than what behavioral changes will allow right now in the commercial real estate industry. It needs to mirror and create efficiencies in the processes that already exist rather than be some new business model that changes flow from.

John Scheibe: Whether it's this industry or any industry, it's not the technology. We know that commercial real estate has been rather slow at the outset of new technologies. Trying to pick the technologies and processes that make sense for the culture and the adoption rate of people that have to use them is not easy. Trying to go from not knowing how to fly to putting someone in the space shuttle and expecting you to be able to function right away is not going to work. At Staubach, I'm trying to not only identify what technologies are appropriate for customers but also to determine what they're able to adopt in the short term. And then we can slowly work up the chain as more of the tools start to come to the market and mature.

NREI: A lot of companies that were here at Realcomm a year ago are no longer in business. Are you surprised at that rapid change, or did you expect that?

Scheibe: It didn't surprise me. A lot of the business models that the dot-coms were based on basically were trying to create a new channel to the customer, but they were trying to do it as an entirely separate company. I think the dot-coms that are proving to be more successful are marrying it to other aspects of the business model. In other words, if you have a bricks-and-mortar component and you marry it [with a dot-com initiative], the Internet becomes another channel to attract the customer. I think those are proving to be more successful in the long term rather than trying to create a stand-alone entity with one particular niche. The fact that a large percentage of them are basically running out of money because the marketing budget is drying up doesn't surprise me.

NREI: Mark, Co-Star is a big survivor. What's your perspective on lessons learned?

Mark Klionsky: For CoStar, our business is not technology, it's information. The technology affects how we deliver the information. It provides tools that we can use to enhance the information that we provide. If you go back when CoStar started 14 years ago, it was a print office directory. Then we went from the print office directory to floppy discs, then from floppy discs to CD-ROMs, from CD-ROMs to the Internet. All of these stages of development have added value to our customers and allowed us to deliver better information faster. Technology is going to impact our business in that way as long as we view technology as a tool.

What happened last year and the year before was that you had all these dot-coms coming into the business, and they were all going to change the way everyone did business. And the users of the technology looked at them and said, “Oh yea?” And they proved a point. The good thing that's come out of this is a tremendous focus on developing technology in commercial real estate right now. A lot of the technology will be useful and valuable when it's aligned in the right way. When you walk around the show floor, think of the different pieces of technology as rail cars. They're all great rail cars, but they're not going anywhere unless they're hooked up to a locomotive and they're lined up in the right order. That's something that hasn't happened yet, and it's probably going to take a few years for that to evolve.

NREI: Dan, in the midst of all this change CapitalThinking has altered its strategy and today really is an application service provider (ASP) model in the online lending arena. Can you talk about lessons learned and what prompted you to change your strategy?

Dan Woods: In our business-to-business exchange model, we were trying to be an intermediary between brokers and lenders. We found that there was a huge opportunity for making things more efficient. The kinds of things that we noticed were that the data within an organization got re-entered five or six times, first into an origination system, then into a pipeline system, then into the securitization system, then the servicing system. That just didn't make any sense.

The problem is that most Internet companies swung for the fences, and they were way overcapitalized for the actual business opportunity that was available. In our case, we realized that the business opportunity that we were capitalized to pursue was not going to work out. What we needed to do was to take our assets, which were technology and domain expertise, and move them into a software business. This idea occurred to many, many of the B2B exchanges in all of the industries. They reformed themselves as ASPs.

The problem is that when you reform yourself as an ASP, you have to actually have software to sell, and you actually have to have expertise in delivering it. We have that, and I'm happy to say that our reincarnation has borne through. J.P. Morgan Mortgage Capital Inc.'s “ezquote” site is launched with our technology. PNC Real Estate Finance is launching its conduit business at the end of the month. We have a site for them. We have an internal site for Cohen Financial. PNC's portfolio business is also going to be run using our software.

I think that it's like what Bill Gates said a couple of years ago. People were overestimating what the Internet would do in two years and underestimating what it would do in 10 years. I think that's true.

I've been studying to see how technology has changed the residential real estate market. There was development of a bunch of obvious ideas to automate. It turned out that 80% of those ideas were wrong or not useful. But within it was the really good idea of having Fannie Mae and Freddie Mac provide an automated answer based on a sufficient amount of information, a standard description of the asset. The automatic answer program turned the process of underwriting into clearly standard information.

Commercial real estate is going to have a similar thing go on. It's just that there are a lot of factors that make the technology less an urgent need. The volumes are smaller, the assets are more complex, and the legal structure is more difficult.

NREI: What lessons have we learned in e-procurement?

Chris Hartung: What's fascinating about lessons learned is that some of them are just so fundamental. First, human behavioral history repeats itself time and time again. Second, business fundamentals haven't really changed that much in a couple thousand years. The fact that you get caught up in a lot of this other hoopla is interesting because we always forget about what happened.

One of the fascinating things I see now, though, is that the pendulum has swung again, but too far in the other direction with human behavioral history repeating itself. You get very infatuated with technology, with societal changes. Then comes the reaction, “Oh, this isn't what was promised and everyone overpromised.” Now everyone has swung back to the idea that it's not the technology, it's all about the people and how we do business. That's wrong, too.

Everyone has now sped things up. I was talking with someone yesterday and that person said, “I can't believe it. We moved offices and the office manager expects her PC to be up and running within an hour after they're in the new building.” Why is she thinking that? She's thinking that because all the processes have sped up. If you are saying that technology hasn't impacted how we we're now thinking what we can do and the possibilities that are out there, we're all missing the point. If you focus on the middle ground, you focus on what's practical and reasonable. You go back to President George Bush and the prudent aspect of how you deliver solutions, it's a mix of everything. It's a mix of execution; it's a mix of what the technologies can do for you.

Dan mentioned the ASP form. Four years ago, you could not deliver an ASP model, and without the ASP model you cannot deliver appropriate technology solutions to the real estate industry. With technology and how it's changed, with pipes into buildings, we now can deliver technology solutions to an industry that is dispersed, fragmented and not centrally controlled.

We now can actually go places where we haven't been able to go, and that's why you see so many technology companies that are still around. There are new opportunities to deploy solutions to the real estate industry that we couldn't before.

With regard to e-procurement and using that history as a guide, of course it's going to be more difficult than any of us thought, particularly in an industry that doesn't have any type of data standards or information standards. And so, there is progress that people are making on the first stage of enabling the online buying of goods and services, but to truly get to the ultimate value proposition there is a lot more work that's going to have to be done on the back end.

Woods: When you look at standardization in almost every other industry, a large player has driven it. In the residential industry, you've got Fannie and Freddie, and they didn't even agree until Fannie's form turned out to be more accepted and Freddie just adopted it. The lesson from it all is that there are some structural differences between the commercial real estate industry, which is highly fragmented, and the other industries that have been faster to adopt technology. I think that the biggest barrier to the adoption of technology in real estate is that the volumes are low. If you are a big lender how many loans do you do, 200?

NREI: Jim, Chris talked about the pendulum swinging. You are president of e-commerce and corporate development for Trammell Crow. A few years ago, a person in that position may have been viewed as a savior. Has the perception of technology changed within the organization?

James Groch: I don't think it's changed that much. What we need is some time, commitment and focus. In general, across the board it's going to take a lot more time than most people think. Everyone is becoming more realistic, but for technologies to take hold and become standards within the industry it's going to take a lot more time.

NREI: How many years, five, 10, 20?

Groch: How long did it take e-mail to become a standard, 10 years? The e-mail platform, which people use daily, is fairly simple. I think the basic technologies that are adopted by chunks of industry will be those that support what people do on a day-to-day basis and that hopefully will provide some critical mass.

John Scott: One of the interesting things that I saw over the last 18 months was a continued acceleration and professionalization of the real estate industry that, for me, really began in the early 1990s. This question of technology, its potential and what it could mean to this industry was really thrown in here with the dot-com boom. I think that one of the great lessons of the last 18 months is that everyone has had to turn around and think about their individual business processes, how those processes should be conducted and how they want to do business going forward. When you do that, you're then in a position to use technology and use it efficiently and effectively. Having the leaders in this industry adopt and begin to think through the implication of technologies has been a very good thing for this industry. In the next three to four years, you'll begin to see people actually know how to leverage and deploy technology effectively in their businesses.

John Brewer: There is an old saying in the high-tech world that technology products are bought, not sold. The only time you are going to be successful in a technology sale is when the prospects, the customers, understand exactly what the benefit is to them. They basically drive the sale. What we found at workplaceIQ is that there is a difference between “improve” and “change.”

If you change the way people do work, there is a longer period of time for people to improve and accept a changed paradigm. But when you are improving something that people do already, you have the opportunity to go in and have the customer say, “This is something I want and need and I'd like to have in my world today.”

The psychology of improving someone's work process today and then adding in change, or a new paradigm, is really the right way to proceed. I think folks who tried to short-circuit that process by going directly to a brand new way of doing something face a long, uphill battle.

NREI: Dan and Chris touched on the topic of industry standards. How important is it to develop a standard for commercial real estate data, and with so many regional standards can we have one common standard?

Klionsky: Can you define real estate data because there are probably seven different subgroups that all have their own definition for their needs? If there is a data standard in the industry it is CoStar because CoStar is the only company out there with a significant, solid base of customers using its data. The broad issue of data standards applies to the appraisal industry, the transaction industry …

Hartung: It's everything. The nice thing about real estate is that we actually have a lot of interested participants trying to take up the ball with data standards, whether it's the Data Consortium or others. The bad thing is that it is a fragmented industry and there are so many different standards. There are over 500 different XML data standards, period. Every industry is having the same issue as we are with respect to data standards. I think that the confusion, though, is that whenever standards are deployed and agreed upon, it's always either user-led or software-vendor led as far as standards. It's usually not trade-group led. And so what's missing here is some big parties, whomever they may be, sticking their initial foot into the standards world and saying, “Here is my data standard.” And then you have the natural evolution of the markets that will decide the standards.

Woods: I have a different take on it. Standards are a pre-condition to automation but nobody is excited about standards until they beat someone in a deal through automation. So, the important thing is for companies such as CapitalThinking, iBuilding and everyone else around the table to help their customers do business so that they actually beat their competition. And then setting standards won't be this boring thing we're involved in on a three-hour conference call, but it will be a desperate need to get going.

NREI: If you don't have standards, what kind of confusion does that create in the marketplace? What's the significance?

Klionsky: Lack of trust and a lack of credibility, and that's probably why you have the greatest demand for standards on the institutional investment side with CMBS underwriters and the investors in CMBS. In the pension fund industry, PREA [Pension Real Estate Association] has been talking about standards about five years ahead of everyone else to give institutional investors a comfort level.

Curry: The Appraisal Institute is also working on a standard because of the obvious relationship with the banking industry. A lot of appraisers and the brokerage industry differentiate themselves in how they interpret the data, and they view that differentiation as a competitive advantage. Whereas the residential industry is focused on the service side, not the data, the commercial real estate industry has always been about how I differentiate myself on this proprietary way I report the data. So, the idea or the notion that we're all going to agree on what that standard is, is almost ridiculous.

Rose: Let's not forget that there is a very large amount of money being spent in this industry, and I would say a good number of people around this table and this industry thrive on the fact that there are no standards. Right now, we can tackle some standards in some places. But if there were a standard lease, the millions of dollars taken out of the system would be so extraordinary that you wouldn't know what to do with yourself. But attorneys are not about to tell their clients, “Don't use us.” They have a vested interest in the 100-page lease vs. the four-page lease that we probably all think could work.

Klionsky: It's interesting that although Equity Office came out with a fast-track lease, CEO Tim Callahan told me that the problem is that the three-page lease came back with 13 pages of changes. So there is no adoption there either.

NREI: What are the big issues regarding standardization? Is every field of information contested? Is it rents?

Hartung: How do you define a property? It's ultimately everything and nothing at the same time. Why do you need standards? In an age of systemization, automation you need applications to be able to easily talk with one another, otherwise you end up with huge integration costs. You need standardization around certain data elements so that systems can talk with one another. You can have that complete transparency of data so that what comes out of iBuilding can ultimately go straight into CoStar, CapitalThinking or The REALM or vice versa, two-way. But again, you don't need to have 100% of data elements all decided upon. You need to focus on some of the critical elements and get business successes out of that, which is incredibly important. Then you'll get some [meaningful] standards around larger business success points.

Scheibe: Standards are the Holy Grail we're all looking for, but on the other hand we still have needs today that we have to implement. I'm trying to strike a balance. I'm going to bring in systems, even though I know I don't have standards that can operate between them. I have to take on some of that integration responsibility but at the same time how do we get the vendors in the industry to agree on what is critical?

Scott: From where we sit as a technology company, there is a tremendous lack of leadership on the issue of standards. What's clear is that when you do have standards in a complex information environment, you have gotten rid of a lot of weak information. Some of the debates and some of the fields of data are simply irrelevant. They may be relevant to you from a cultural point of view, or from a personal company perspective, but I can tell you that when standards do emerge it's because we've decided that certain information is strong and certain information is weak.

With the rise of real estate being valued as IRR (internal rate of return IRR) and risk-adjusted cash flows compared with alternatives, we've got to think about what standards make sense and leave for a later time someone to pick up the other fields of information. We need some real strong business leadership on this, and it has to come from many different perspectives.

Curry: John, who should drive that? Who should take the lead, the vendors?

Scott: I think it has to be the users and the technology companies. People pay for technology and use technology because it makes it them more efficient. Adoption will create standards. And so I think you have to focus on that particular community. I'm not saying that community can't drive, and should not ask for, input from a lot of different sources. But I think our approaches so far have really been vested business approaches from our particular viewpoint of our business, how we'd like to control standards.

I think we need an industry consortium that very much is focusing on a few simple goals. If we focus on the value of cash flows and just get standards around those basic things, everything else will be a downstream piece of information to that cash flow. Let's take the top of the hill first and worry later about getting to the bottom.

William Cocose: The brownfield industry is far less mature and less sophisticated than the commercial real estate industry. If you really understood what was going on, you'd be amazed. We're introducing an ASP model because so much of the brownfield activity you see is public-sector oriented, and the communities range in size from small towns to big cities with the sophistication of Chicago. We are trying to help bring a standard of 10 to 20 data fields because at the end of the day it's not the environment that is the engine driving the train. These are real estate transactions. At the very least, we're trying to bring the standardization to a point where people get some uniformity in property information.

From that standpoint, it's almost impossible to achieve a standard because we have so much at play. You have the federal government at play with EPA and national standards. And every state has its own regulatory issues and its own regulatory brownfield programs.

Our goal is to not only let the development community know that these properties are out there but also to develop a national database. For example, someone may be developing a Walgreen's and may be searching for a certain demographic. Abandoned gas stations are a great spot for a retail use by a Walgreen's or a franchise because these sites have great demographics. But it's very difficult for the development community to find these properties or to understand that these properties are available.

The other challenge is that each and every community offers its own incentives, but at the local level there's no standard. There are also certain national incentives that are available, including grants and tax incentives. We're trying to create a model that both standardizes information and allows individual communities or users of this ASP model to expand on whatever those issues or opportunities are that are unique to them. It's a daunting task, but there are some tremendous properties available.

Scott: We have simply moved ahead to develop a standard between property management systems and financial analysis and discounted cash flow systems. We have an XML standard that we've created between the applications that we own, and the Data Consortium is looking at it. Hopefully adoption will help drive some standards.

This roundtable is also available by logging onto nreionline.com

Participants in 2001 Realcomm roundtable

John Brewer
Vice President of Marketing
workplaceIQ

William Cocose
Spokesman
Brownfields.com

Douglas Curry
CEO and Co-founder
Xceligent Inc.

James Groch
President of e-Commerce and Corporate Development
Trammell Crow Co.

Christopher Hartung
Chief Strategy Officer
iBuilding

Mark Klionsky
Senior Vice President
CoStar Group

Mark Rose
Chief Innovation Officer
Jones Lang LaSalle

John Scheibe
Chief Information Officer
The Staubach Co.

John Scott
Executive Vice President
Product Distribution
The REALM

Dan Woods
Chief Technology Officer
CapitalThinking