This article was sponsored by RealPage. It appeared in the Technology Special Report alongside the December/January 2019 issue of PERE magazine.
Managers know that data analysis will play an ever more vital role in managing real estate investments, but often feel overwhelmed by the sheer volume of information potentially at their disposal. Stuart Watson listens as John D’Angelo, managing director and leader of the US real estate team at Deloitte Consulting and Alan James, senior vice-president for asset and investment management at RealPage, consider how technology platforms can be used to help turn big data into higher returns.
Meeting the data challenge
John D’Angelo: There is a great deal of data at the asset level that managers ought to have at their fingertips, but don’t at the moment. There is a baseline issue about getting data that is complete, accurate and trusted and in an agreed-upon place where it can be found and used. The good news is that there is a growing appreciation in the real estate industry of the value of information. It can be used to help make decisions about where to spend capital, in understanding risks at an asset or portfolio level, in identifying high-performing assets that might not be obvious, and in separating out the effect of what is happening in the market from the value added by the manager.
Alan James: The problem is not that there is a lack of data, in fact the quantity of data can be quite onerous. The issue is having the right data at the right time in the hands of the right person. For the GPs and asset managers I have spoken to the issue is trust. If they do not trust the data, they revert back to their old ways of doing business, which unfortunately is Excel spreadsheets, so a lot of data ends up siloed and inaccessible to the people who need it.
JD: The big driver for investing in data is the realization among managers that they need to get better at this. There is a generational sea change within management firms, with people coming into positions of authority who have a greater sophistication around data and analytics. Some investors are beginning to take a look in their due diligence at whether managers have got their data act together, but that is not yet the crucial factor. However, investors will increasingly scrutinize that area, just as they have done with sustainability, and that will put pressure on those managers that do not understand the value of data because capital will vote with its feet and go to those that do.
From data collection to data analysis
AJ: There are a number of stages in the cycle of managing data: you start by collecting it; then apply technology to it so that you can provide visualizations of the data for stakeholders; and only after that do you get to the fun stuff, the predictive and prescriptive analytics. Many of the organizations we are talking to are still just collecting and reporting, as opposed to using artificial intelligence and advanced analytics.
JD: You have to go through those steps as a manager, but you don’t have to figure everything out about data to get value from something. We are getting clients to think through what are potentially the most valuable questions that they could ask in terms of understanding opportunities, potential threats, or the factors that drive returns, and then work backward to figure out the data that helps them to answer those questions. That pragmatic approach can help to build confidence within an organization that data analytics initiatives actually pay off.
AJ: When you sit down with the managers of big real estate firms what do they say is the greatest challenge to the adoption of technology within their enterprises? What is the difference between a firm that adopts it, embraces it and gets a return from it, as opposed to one that does not? Is there a magic bullet?
JD: The magic bullet is leadership mindset. The leadership team need to agree that investment in technology is essential to being a better real estate investment manager. The key change is that they make it clear that it is no longer okay for the company’s processes to be driven by anecdotes or stories. Instead they need to be analytical and data driven, more disciplined around data and use of analytics, so it is not acceptable anymore to squirrel away data in spreadsheets as an individual asset. For every firm at that stage there are 10 still waking up to the opportunity, but which haven’t quite got there yet. Asset managers need to learn a whole new set of work habits that may seem more difficult at the time, but provide benefits in the long run. Putting in place the right technology solutions can help with that behavioral change. There are many more tools available now that can help with that problem.
Utilizing technology platforms to manage data
AJ: Five years ago, in real estate we had a bunch of technology solutions that did a little bit of something – one did valuations, another some form of business intelligence, something else did accounting, and another tool was for investment management. There are platforms available today that provide technology for use across the investment lifecycle, with the ultimate goal of providing a 360-degree view of the entire process. At the moment, many asset managers are spending at least as much time collecting and harnessing data as they are actually analyzing or reviewing the results.
The role of an asset manager is to work the asset and generate value, so if by embracing and implementing technology they are able to spend 75 percent of their time doing that rather than 50 percent it can have a significant impact. Human capital is real estate companies’ biggest expense and technology enables better utilization of that resource to serve the investor community. If you ask any asset manager whether they would rather collect data or use it to drive value and they will all answer the same way, but many of them are still stuck in the data swamp.
JD: Not long ago if you were a real estate investment manager and you wanted to have great data aggregation you had to figure it out yourself. You had to get people to design the data scheme and work out how to present the results to businesspeople in a meaningful way, and that is not a trivial thing. The amount of money spent by the industry as a whole on data and business intelligence initiatives that failed and ended up being written off is tens of millions of dollars.
The good news now is that managers can buy licensed technology instead. That has made it more possible, particularly for small and mid-sized managers, which have the same problems, needs and opportunities as large managers, to find solutions, whereas before it was financially impractical.
How data will change the industry
JD: Managers can use new datasets to identify opportunities in markets that may not have shown up on the radar before. Being able to understand weak signals that point to potential investments and getting there before the next guy by using data and greater analytical capabilities is where the opportunity really lies.
AJ: For example, one investor chose to acquire a particular apartment community because they were able to prove by using data that it would achieve higher rents because it was within walking distance of a Wholefoods and a Starbucks. Another institutional owner actually employs a concierge to organize events at their California apartment block because they can see through the data that throwing pool parties leads millennial tenants to stay longer and pay more rent. There are already firms that are using data strategically very well and you can tell by their results.
In future, investors will place their capital with managers that are able to respond quickly to requests from their investors with quality information.
Firms that cannot do that will find it more difficult to raise capital. Everyone knows there is going to be another downturn in the market some day and when that happens investors want to be in a position to make decisions much more quickly than they did in 2008.
With greater utilization of technology will come a move to more outsourcing of non-core competencies and non-strategic activities such as collecting data. That will accelerate the adoption of advanced analytics because managers will have more time to spend on reviewing the data. It could also provide an advantage for the small and mid-market players because they will end up getting to use the same technology as bigger players at the same price points, but on a smaller scale.
JD: We are going to see a bifurcation between managers that understand the importance of data as an asset and a skill set, and those that don’t. And those managers that don’t believe it is important or fail to keep up with the skills needed to use data to drive the value of assets are going to be hurting. It would surprise me if that doesn’t happen within the next decade. n
How more frequent valuations are driving the need for tech solutions
JD: The big driver of more frequent valuations is the increase in the number of open-ended funds, in particular daily priced open-ended funds that allow capital flows in and out on a more frequent basis. For them, valuation matters a lot in calculating what is now, in a lot of cases, a daily net asset value. A valuation is dependent on data, so it is one of those cases where technology will really be able to help. In the coming years we will see a lot more application of machine learning and artificial intelligence to big data sets to aid with valuations.
AJ: Traditional private equity is accustomed to daily pricing in some of their markets and real estate is following suit. With high levels of liquidity markets are moving at greater speed, and investors want to know that if they execute a transaction – whether it is to buy, sell, or refinance – what they will get out of it based on today’s market conditions. There is a change of expectation in the marketplace and technology is needed to make that happen.