This article is sponsored by DealCloud
As equity continues to flood into real estate markets and pressure grows to deploy capital swiftly and at scale, investors and managers are demanding purpose-built technology that streamlines their workflow and enables them to identify and execute transactions with greater efficiency. Ben Harrison, president of financial services and founder at deal sourcing and fund management platform DealCloud, considers how apps will transform the working lives of deal-making professionals.
How have technology platforms that support real estate investment evolved?
I worked as an investment banker and then as a private equity investor until around 10 years ago, and having struggled with trying to use the old off-the-shelf systems available, it seemed like there must be a demand for specific technologies to support these sectors. The big tech companies are mostly focused on building systems for operating companies, stores that sell widgets or manufacturers of cars, because that is the majority of the economy. But that model does not work well for financial services professionals that do M&A and other transactions.
The complexity of a $100 million real estate investment is so great that the big tech companies were never going to focus on the institutional investment community, REITs, developers and private equity investors. That trend is reversing, and a lot of companies, ours included, have begun to focus on servicing this market. There is tremendous demand from real estate investors for technology that supports the digitization of their business.
According to research from EY and CRETech, more than $75 billion was invested in the space between 2015 and 2019, and that has accelerated to some $25 billion in the last three quarters of 2019 alone. In the landscape of tech providers many of the initial entrants were focused on communicating with, and distributing documents to, investors. Then we saw the development of a lot of systems to support portfolio and asset management.
The third leg of the stool is where DealCloud operates, which is the front office, working with business development and capital deployment teams that are doing fundraising, acquisitions and divestitures. The people who manage the ecosystem of stakeholders around a deal: the vendors, advisors, attorneys, lenders, equity providers; and if it is a development deal, the architects, builders and engineers.
Why use tech to support capital deployment?
There are underlying secular bull market trends for real estate investment. Over the past 10 years we have seen the institutionalization of the asset class, especially around the alternative sectors and the private markets. Many firms in the industry grew up as transaction shops, managing deals through Excel, email and sometimes on the back of a napkin.
“We have built algorithms and calculations around pipelines that allow real estate investors to take an informed look at assets to see if they will be a good fit based on the firm’s prior investment history”
However, today those companies are beginning to understand that they need to institutionalize how they do things and create digital transformation in their business so that they can scale up in an expanding market. With more capital to deploy, and attractive assets in those sectors that remain resilient in the covid-19 pandemic, sophisticated investors are realizing that they need to look at a higher volume of deals.
The challenge for each firm becomes how many opportunities its investment professionals can process so that it can identify the good ones and put its capital to work. With more efficient technology they can make sure that their people’s time is being used to source and close more deals. Then they can look at using that increased volume to leverage a sophisticated pipeline management system that tells them which assets fit best with their strategy, and which are likely to drive strong returns.
For example, in our platform we have built algorithms and calculations around pipelines that allow real estate investors to take an informed look at assets to see if they will be a good fit based on the firm’s prior investment history. Finally, these investors need technology to support the due diligence process and to ensure they get the deal closed as swiftly as possible.
How has covid-19 affected the uptake of new technology?
In the last eight months, firms across the capital markets industry have undergone two or three years’ worth of technological acceleration and digital transformation. Of course, investors in retail, hospitality and hotels have been under great strain, but in other sectors investors still want to do deals and they need infrastructure for digital collaboration because they can no longer sit in an office and do deals face-to-face. In our own business we have seen the number of new clients at record highs.
Why employ a single platform for multiple front-office operations?
The workflow and task management involved in taking a transaction from opportunity to closing is complex, and often confusing, especially for teams working remotely. These professionals raise funds, manage the deal pipeline, manage relationships with brokers, investors, attorneys, co-investors and lenders, manage insurance policies, do asset-level due diligence and some portfolio-level analysis.
By using a purpose-built tool, the investment professional does not have to log into or search for data across multiple systems, so it streamlines their workflow. They are in one mobile app and can manage the whole process on a single screen, with information from across the firm.
If I am on the road and visiting a property, one click into the app allows me to search for the address or deal code name and I have a preformatted tear sheet that pops up automatically and gives me a full view of the deal. Two clicks show me everything my firm has done around the transaction so far.
As a former private equity investor, I remember preparing for trips. It would take two days to get everything ready before going out on the road, pulling all the files so I would have that information consolidated for my different meetings. With a mobile platform I would not have to do that work.
Meanwhile, having a system that provides a single source of truth makes it easier for firms to maintain the integrity of their institutional database. Once that data is institutionalized, they can use it to inform their operations in particular geographies or asset classes.
For instance, if I am an investment professional in European student housing, I am able to harness the institutional knowledge my firm has gleaned in that asset class by analyzing all of the deals of that type we have previously done in the region. Much of the advantage of this kind of technology is about streamlining procedure and driving efficiency to put capital to work effectively, but the added benefit of sophisticated software at the back end makes you a better investor for future deals.
How will technology impact the way real estate deals are done in future?
We will see the fruition of the trend toward the convergence of data. Individual firms are gathering and managing the proprietary data of their operations – their relationships, their deals, their pipelines, the assets they own and the returns related to those – and beginning to combine it with third-party market data.
“The future of real estate involves a continued trend of digital transformation, of building and adopting new technology infrastructure”
If they can harness data in a sophisticated manner then layer in relationship intelligence and AI on top of that, they can gain insights into who to call at a specific time, which deals have the greatest likelihood of closing and which are the most prolific relationships that they should be spending the most time on cultivating. The future of real estate involves a continued trend of digital transformation, of building and adopting new technology infrastructure. It is already underway and it is just a matter of time before all real estate investors do it.
But, they need to start that process as early as possible because those tech platforms reach the pinnacle of their effectiveness when the data is large enough and deep enough to give firms true insights into how to identify and close better deals. The job of technology professionals like us is to move beyond this first phase and use AI and relationships intelligence to help clients become not just 20 percent more efficient, but 40 and 50 percent more efficient than they are today.
What is the advantage of employing real estate industry-specific technologies?
Real estate is a huge market with many sub-verticals and types of investors, strategies and asset classes. You can buy great technology from Microsoft, Apple, Oracle, SAP, Workday or Salesforce, but they do not appreciate the nuances of the real estate market in the same ways as platforms that are built specifically for it. For example, there is a big difference in the needs of a REIT and a developer.
REITs are usually directly invested in properties that have income and management fees, and are already well-established and mature. Their business is often quite formulaic, so DealCloud will often help them analyze the income streams and returns of those properties. But for an investor in a development, we might build multiple custom workflows around managing their development partner and the other parties helping them to construct the asset.
In one case you are analyzing returns and in the other you are running and managing projects. A real estate-specific platform should have functionalities to support each of those business models. Our platform accounts for that and hundreds of other industry-specific use cases that real estate investors won’t find easy to manage in other industry-agnostic technologies.