It’s no secret that the commercial real estate (CRE) industry has lagged in embracing technological innovation, and still struggles with basics like accessing research data, financial reporting, and transaction workflow tools. As Rick Sharga of Ten-X noted to BisNow, “Transaction-oriented aspects of the business are still overwhelmingly handled in-person or through paper trails, as was done traditionally.” Most notably, in an era where the most dynamic companies are embracing the flexibility and collaborative benefits of the cloud, CRE tech remains decidedly on-premise.
This is untenable for a number of reasons, not the least of which is that decisions are currently based on a process that’s error-prone and, due to the siloed nature of information and absence of collaboration, lacks the critical perspective and insight of all the necessary parties. Furthermore, upcoming regulations from Freddie Mac, Fannie Mae and Sarbanes-Oxley Compliance (SOCs) will make current systems even more obsolete by requiring the ability to track and analyze every material change to the underwriting and valuation process.
Clearly, the industry can’t carry on in this fashion, but in order to address the problem, you first have to understand why it exists in the first place. What is it about this industry that makes it averse to tech change?
Why does the CRE industry lag in tech adoption?
Researchers Michael Berman, Barry Libert, Megan Beck and Jerry (Yoram) Wind looked at this phenomenon and provided a few answers for Wharton School of Business. For starters, they say, real estate is somewhat unique in having created about $50 trillion in wealth, roughly half of which is commercial real estate, with minimal reliance on technology. Sharga correctly observes that, “The more successful they’ve been at doing things a certain way, the more reluctant they are to change.” This sentiment was echoed by security tech expert Arvind Sathyamoorthy, who noted a challenge of adoption: “Since things are already working, why change, and more importantly why spend money to change.” He points to “skepticism on the efficiencies that could be gained” and a natural inclination to spend money on proven practices or concrete assets.
The industry, according to Berman, et al., is grounded in concepts dating back to the 19th century, such as the emphasis placed on location, and the assumption that growing the business means acquiring hard assets, one at a time. These, they say, have “hard-wired” CRE veterans in a certain direction. The authors point out that “the financial statements of most firms do not even count data and networking as assets”. But Berman and his co-authors emphatically assert the need for change, and for the industry’s incumbents to “pivot their strategy and leadership today or lose value to nimbler, technology-first firms”. A new type of leverage, they say, will emerge based on intangible assets, which I would describe in general terms as CRE data (about the tenants, properties, locations/geographies, trends, etc.). CRE industry leaders, they say, must shift their mental and business models to “put digital at the center of everything they do.”
The current state of affairs
For a transaction to occur, the numerous participants in the value chain must understand the associated risks, but currently most of the software and information resources which offer calculation capabilities and data analysis are siloed and mutually exclusive. The CRE industry typically uses on-premise software like ARGUS or Excel to construct financial models for buying, managing, selling, and valuing properties–solutions that require a lot of training, are costly to maintain, and further contribute to siloed decision-making. It’s also important to note that, as is the case with a lot of on-premise software, they’re mostly the domain of large firms–small firms and individual investors can’t afford them, and are almost entirely left out of the tech loop when it comes to valuation and analyses.
Even companies with the resources to leverage these technologies suffer from numerous inefficiencies, and lack a cohesive, centralized way to underwrite commercial real estate purchases. This drives up the cost of analysis, with an average model audit taking 195 minutes and the lack of ability of stakeholders to check models producing a high number of errors (in no small part due to version control issues).
Ripe for disruption
This can’t go on–the industry needs cloud-based solutions that offer repeatable processes that mirror the simplicity of CRM and marketing automation platforms. Fortunately, there’s widespread agreement that the CRE industry is ripe for disruption. Real estate attorney Andrew J. Giorgiann points out that “This new focus on analytical data has fueled the rapid creation and adoption of new tools and processes that will help today’s commercial owners, brokers and occupiers tackle the modern challenges of sales, leasing and asset management” adding that “Gone are the days of the old guard hoarding information based on who knows who in a particular CRE space.”
With all this in mind, we believe that the Assess+RE platform plays a pivotal role in this great, industry-disrupting transition, taking a huge step in the journey toward what Giorgiann predicted will be “a new level of clarity in transactions”. We’re offering financial analysis where assumptions and outcomes are combined with statistical analysis in the cloud to deliver true and complete business intelligence to end users. Additionally, we’re opening up the playing field to all of those small firms and individual investors that have, until now, been left out in the cold when it comes to effective CRE technology.
I predict that within the next several years, the CRE industry will see an explosion of new cloud-based technologies, like Assess+RE, that feature an intuitive, automated experience, and streamline the time, cost and resources associated with real estate investments. These are exciting times indeed!