 By John D’Angelo, CRE®Managing Director | Deloitte |
For the 25 years that I’ve been a management consultant helping companies in the real estate industry improve their operations, an inconvenient truth has been pervasive; as an industry, real estate significantly underinvests in technology and process. Although the tools and technologies used by real estate operators and investment managers have evolved significantly over the last couple of decades, the use of Excel as THE system continues to be widespread in the industry. That’s not to say that interesting and valuable new tools aren’t being developed and deployed to the market, but analytics, storage and reporting on information are still widely done in Excel. We are, however, at a tipping point that’s likely to see Excel put in its place, new tools emerge, new institutional muscles built, and a new age of transparency in our industry.
What’s behind this? There are a host of drivers, but let’s examine a few important ones.
One of the drivers is the generational sea change occurring as Gen X ascends to leadership positions and Millennials take increasingly senior roles. These generations have lived a digital life and they’re impatient or intolerant of manual processes and effort that can and should be automated. It’s exactly this intolerance that has led to the formation of entirely new technologies in recent years that have disrupted and automated processes that had historically been very manual and laborious.
Another driver in institutional real estate is the increased demand for transparency from investors. During the Global Financial Crisis, investors realized they didn’t have very good information at their disposal to understand investment performance and risk. They also realized that many of the managers with whom they’d made investments weren’t capable of responding to their requests for granular information. As such, post-GFC, investors and their consultants have demanded significantly more reporting of asset-level and portfolio-level information. After investing more human resources to this typically manual and laborious task, managers are finally realizing that they need to invest in technology and process to help bring down the cost of the task and reduce the time it takes to respond to investor requests.
A third driver of change in the institutional world is investors using the results of operational due diligence as qualifying criteria before they invest with a manager or operating company. In addition to track record and other historically important criteria, investors are increasingly asking if the manager or operator has their operational act together. Investors want to be sure that the manager or operator is a good steward of risk, that they are able to consistently gather important financial and operational information about an asset, that they can demonstrate that they’re putting that data to work to identify risks and opportunities at both an asset and a portfolio level, and that they would be able to effectively meet reporting demands. In some cases, no matter how great the track record, if investors can’t get comfortable with the results of operational, tech and data due diligence, they’re not making the investment.
So how are we seeing the applications of technology paying off? A great case study comes from an investment manager with a portfolio well over $50 billion in assets under management across pretty much all property sectors. As is the case with many large managers, this company realized that their dozens of asset and portfolio managers were spending, on average, 35% of their time every month wrangling data before they spent any time thinking about what that data meant. That’s right, approximately 70 investment professionals spent nearly two days a week fetching data from external parties, aggregating it, reviewing it to make sure it made sense, and otherwise manipulating it to make the data useful. Further, the asset managers spent roughly a month every year drafting the annual asset plan and hold/sell analysis, which involved manually compiling information from a variety of systems to a paper-based format. When the manager realized how much time and effort was being spent, and how limited their capabilities were in performing analytics, they designed and implemented a solution to automate and streamline the effort and add capabilities.
Today that same manager uses an external service provider to gather data from external sources to make sure it’s correct and delivered in a consistent format. They also implemented a system that houses an aggregated set of data for each asset, presents it in an easy-to-digest format, and enables robust and flexible analysis and reporting without extraordinary effort.
And, importantly, all asset strategy and plan information is contained in the system; no more having to compile and assemble information from multiple places. Instead of being heads-down looking at paper, the asset review process is done on-screen in the same system that the asset and portfolio managers use to perform their day-to-day duties. Plus, since the effort to compile information has been almost eliminated, the manager is performing more frequent reviews. The two days per week that are freed up are now being spent managing a larger portfolio with the same number of people and those people are able to perform more analysis and ask more questions that should result in greater returns.
Besides the obvious business benefits, there are a couple of things to note about this case study. When they partnered with an external service provider, a “big 4” firm in 2014, they were the only one on the market providing these services and had only been providing them for a few years.
Today there are multiple service providers and methods to get data. Also, this company started out wanting to buy a packaged system to meet their needs, but they couldn’t find an existing system that sufficiently satisfied their requirements. Accordingly, they designed and developed a front-end application and single back end data hub to meet their needs. It’s likely that if they did the same search today, they’d find more than one application that would meet their business and data requirements from a software vendor, and new solutions seem to be cropping up regularly while existing solutions keep getting better. Finally, while this client’s solution and current vendor offerings are based on traditional database and application development tools, blockchain-based solutions are ideal for many applications in the real estate industry where information is distributed among many service providers and needs to be delivered to multiple owners. I’m hardly the first to make this observation, but don’t be surprised at the positive disruptions coming to our industry!
Whatever the drivers, know that if you or your clients are conducting business with widespread manual processes or using Excel for more than analytics and modeling, your world is going to change, and this change is good. The big question about significantly greater automation in institutional real estate isn’t if, it’s when. •
John D’Angelo, CRE®, provides management consulting services to the real estate industry with a focus on operating model design and improvements for investment managers and institutional investors.