The tech adding value to real estate portfolios

Innovation is redefining value-add investment strategies across in-demand property sectors in new ways.

Technology advancements are having a growing impact in the world of commercial real estate, especially around value creation. From new building materials and changes in design to the proliferation of artificial intelligence and big data providing new insights into property usage and management, investors and managers looking to add value to their commercial real estate properties and portfolios have no shortage of avenues to explore. This is especially the case in sectors that remain the most in-demand in today’s investment landscape.

These new innovative technologies, from blockchain and data aggregation to augmented reality and management software, are providing new risks and opportunities throughout the value-add strategy that can help participants across the risk spectrum increase valuations through higher rents or operational efficiencies.

Technology has been transforming the world of real estate investment for a while now, but these days it seems the pace of change is faster than ever. Advancements in analytics, design, building materials, Internet of Things and virtual reality are reshaping traditional notions of value-add investments, adding value to properties by creating new services and operational efficiencies. Instead of basic amenity upgrades, cost-cutting or rebranding an asset with existing cashflow, technology is generating value for occupiers, investors and managers alike.

The traditional value-add playbook is a path well traveled: find an underperforming asset, renovate the property, raise rents and sell for a profit. The basic strategy involves creating value by executing a well-defined strategy to enhance the property’s income-generating potential by adding services or amenities that justify higher rents. New technology is providing a way to fundamentally change this dynamic, using better data and smarter operations to drive value and decrease issues with existing or perspective tenants.

Finding the right property is arguably the most important step in any value-add strategy. Across geographies and property sectors, a value-enhancing plan has to be backed by a good location, stable market fundamentals and potential increased cashflow. Identifying investing opportunities can feel like finding a needle in a haystack, but now there are better ways to look through that haystack: with an algorithm designed to analyze and categorize each individual piece of hay and identify that prized needle.

Modeling and predictive analytics powered by AI use advanced algorithms to analyze vast amounts of data, ranging from market trends to tenant preferences, to identify investment opportunities that optimize asset performance. Models can forecast future cashflow, assess risk and analyze historical leasing data to predict potential income, tenant turnover and market volatility. The nature of value-add investment elusiveness makes speed and scale particularly appealing since the best value-add investments are often found off the beaten path.

“The industry will be transformed completely by AI. One, the level of information we have for properties is different than what we had 10 years ago,” explains Emory University associate professor Sergio Gárate. As director of the real estate program at Emery’s Goizueta Business School, he has watched how data has changed the industry. “Aggregators like Trepp, CoStar and Crexi are collecting data that is tremendously valuable. All this data cannot be processed without the help of a computer. AI is going to make value-add strategy analysis better and easier.”

AI can enhance property valuation and financial modeling processes by automating data collection, analysis and reporting tasks. Once viable opportunities are found, analytic tools can analyze overall portfolio performance, market dynamics and investment trends to recommend optimal asset allocation strategies and diversification tactics. This enables investors to allocate their resources effectively and maximize the overall returns of their value-add real estate portfolios.

Internet of amenities

The proliferation of IoT-linked devices and sensors has given rise to a slew of new amenities and services that value-add investors and managers can utilize to enhance operational efficiency and occupant usage trends. The tech is streamlining management activities across every property sector and offering information to investors across portfolios large and small. Integrating IoT into an asset is an easy way to create new amenities that generate leasing buzz.

John Carlson, president of Arizona-based rental developer owner, and investment manager Mark-Taylor, discussed the issue of smart-home technology on his Multifamily Forward podcast: “The early adoption phase is over. Think about all the new supply nationally. Almost every provider is creating some sort of smart home package, so the question is how do you adapt to ensure your assets that are 3, 5, 10 years old are staying up with the Jones’s. A smart home is a big piece of that. No question it’s taken the industry by storm.”

Video intercom systems, Alexa smart-home integration, smart lights, automated blinds, programmed thermostats and keypad access control for amenity spaces can all be added to existing properties with relative ease. Smart switches, leak sensors, outlets and automated systems controlling everything from lights and HVAC to perimeter access control can help owners protect the value of their assets. Smart home technology also helps lower the cost of vacant units by giving property managers automated temperature, lighting and usage data and controls.

Offering the upgrades to tenants as a subscription or added fee allows properties to increase income revenue streams while boosting operational efficiency.

Already at over $2 billion in annual revenue, experts predict the smart door lock market to be over $8 billion by 2023. At this year’s Consumer Electronics Show, smart lock companies debuted palm reading technology, fingerprint readers, video doorbells and more, all capable of seamless retrofits into existing door hardware. Smart thermostats are an easy win for value-add investors in the commercial and residential sectors by lowering operating costs. In addition, studies show renters are willing to pay a premium on rent for smart space technologies.

App integration into a property can also help tenants feel more connected. Mobile apps can provide occupants with information such as space usage, seating, utility costs, building policies, community events, local providers or community forums. Targeting tenants with new services or deals is easier with online community hubs. Apps are also a great way for property managers to collect feedback on where the occupiers want value added. Responding to tenant demands is critical to any value-add strategy.

Managing the risks

Investing in commercial real estate with new technologies can offer significant benefits, but there are also several risks to consider when adopting new technology in commercial real estate value-add strategies.

“The industry will be transformed completely by AI”

Sergio Gárate
Emory University

Introducing new technology into existing properties can be complex and may require significant changes to infrastructure or systems. This could lead to unexpected delays, disruptions or cost overruns during implementation. Investing in new technology often requires substantial upfront costs. If the technology does not yield the expected returns or if market conditions change, these costs may not be recouped through increased property value or operational efficiencies.

The pace of technological innovation is rapid, and what may seem cutting-edge today could quickly become outdated. This risk is particularly relevant in the real estate industry, where assets are typically long-term investments. Integrating new technologies with existing building systems and processes can be challenging as well, especially with older stock. Compatibility issues between different technologies or systems could lead to inefficiencies or operational problems. In addition, some of the more cutting-edge technologies lack a proven track record in real-world applications, so investing in these untested technologies carries inherent risks.

Many new technologies in real estate aimed at helping owners and occupants involve data collection and connectivity. This raises concerns about data security and privacy, and mishandling or breaches of sensitive data could lead to legal or reputational risks. Similarly, implementing new technologies may impact tenant comfort and satisfaction. Some tenants may resist changes affecting their daily routines or privacy, potentially leading to higher turnover rates or difficulty in attracting specific tenants. New technologies may also be subject to evolving regulations and compliance requirements, and failure to adhere to these standards could result in fines or legal issues.

To mitigate these and other risks, investors should conduct thorough due diligence, carefully assess the potential benefits against the risks and have contingency plans in place.

Information is power

New technology is revolutionizing value-add real estate investments, reshaping the way existing assets are managed, marketed and monetized. Data analytics, smart building solutions and technology-driven innovations are enhancing operational efficiency, tenant satisfaction and investment returns.

While technology holds immense potential for value-add real estate investments, it also presents challenges and considerations that investors must navigate. Gone are the days of rinsing and repeating the same strategy at every newly acquired asset. Today’s value-add marketplace requires more from investors.

By providing investors and managers with better tools to find properties and unprecedented performance data and visibility, technology offers new opportunities to owners and occupiers. Using analytics to find the right deals and leveraging smart home devices to create spaces that offer tenants more value is creating a holistic approach to value-add investing that limits the risk involved.