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Operational efficiency is the key to maximizing profitability for any business or property owner. Top line revenue growth is important, but the bottom line is the truest measure of success whether you are a manufacturer or the owner of an office building. The most successful business and property owners are constantly looking for ways to leverage all the resources at their disposal to send as many pennies from each dollar of revenue to that coveted bottom line.

This is especially challenging when it comes to real estate investing and operating, where your gross revenue is often fixed for long periods of time. For a manufacturer, gross revenue can be increased in short order by making more of its products for immediate sale as long as demand is present. Not so for you as a property owner whose fully occupied building may be leased for years into the future with modest annual rental increases. That makes the efficient management of operating expenses the primary vehicle for profit growth in the near term. At a capitalization rate of 5%, every dollar saved in operating expense not only increases your annual net income, it adds $20 to the value of your property.

Frantic Pace

We all marvel at the rapid pace of advancing technologies in all aspects of our lives. You are probably reading this post on a smart phone or laptop computer, either of which has more computing power than the space shuttle did when it blasted off into space. Mind boggling new technologies are being invented every day and the pace seems to be accelerating with each new breakthrough. Imagine the likes of Amazon without technology. The truth is that there would be no Amazon with the numerous technologies that Mr. Bezos and company utilize to deliver your next purchase on the same day you ordered it. Uber would not exist, nor would Facebook or Google without technologies that we now take for granted.

Tech and CRE

So, where does the commercial real estate (CRE) business stand when it comes to leveraging technology? Our blunt answer: at the back of the line. The industry as a whole has been very slow by comparison to embrace technology, and has historically relied on the experience and skill of the people who are in the business as the primary resource for decision making.

“Whether deserved or not, the real estate industry has a reputation for being slow to adopt new processes and technologies. This may be due to the fact that the industry has always had a significant amount of pride in the importance of personal relationships, or because a firm’s superior proprietary knowledge is what set it apart from the competition.”
PWC & Urban Land Institute: Emerging Trends in Real Estate, 2019

What Amazon is to the digital age, CRE is to the days of analog. But, times they are a-changin’ and real estate investors, service providers and lenders are jumping on the tech train before it leaves the station without them. This is especially true at the enterprise level, meaning institutional owners, prominent brokers and property managers along with the major banks. New and innovative technologies are coming out of the Silicon Valley at an increasing rate, delivering new data driven software tools to increase efficiency for all aspects of the CRE industry.

In times past, a thermostat on the wall was the cutting edge tech tool to keep climate control costs down. Now there are sophisticated sensors connected to the internet of things (IoT) that constantly monitor and adjust to every watt of power being used in a building. Building managers are communicating with their tenants through sophisticated contact management systems in order to respond quickly to daily issues that impact the workplace experience. Institutional investors are using new software that harnesses massive amounts of property and market data to learn more about potential acquisitions in asset classes and markets that they have not considered in the past. Big data also speeds up the due diligence process making those investors who use it more competitive in their bidding.

Fintech & Proptech

The tech products available today break down into two major categories: fintech (financial technology) and proptech (property technology).

Fintech is all about aggregating data that can be analyzed in new ways to look for value and evaluate risk. As competition for quality assets is still on the rise, cap rates have compressed and investors have to look for new ways to add value during the hold period to achieve desired returns. That could include renovations, addressing deferred maintenance issues and adding amenities that will attract tenants willing to pay more to enhance the work environment for their employees.

Proptech is targeted at discovering and executing new strategies to reduce operating expenses and improve the workplace experience for space occupiers. The energy efficiency and building maintenance components of managing an asset are areas where proptech can be a real money-saver. It allows you or your professional property manager to drill down on the details to find ways to curb expenses and enhance the service level to tenants at the same time.

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Advances in fintech and proptech are ongoing and as more and more data is collected and analyzed, the more Artificial Intelligence (AI) will figure into the equation in the future. So far, AI is not front and center, but it’s on the way. So-called predictive analytics are beginning to help property owners, brokers and managers target prospective tenants by aggregating data and feedback from existing tenants. This is leading to more effective advertising and directs leasing professionals to identify companies that are the most likely to respond favorably to specific properties based on asset class, location and amenities. But, we are still a ways off from seeing AI optimized for the real estate industry:

“… machine learning for buildings is a surprisingly difficult challenge. Buildings are strongly influenced by dynamic forces such as occupancy, weather, and other environmental factors on a variety of overlapping cycles (intradaily, daily, weekly, monthly, and seasonal, to name a few). Most classic machine learning and data mining algorithms work poorly on time series data…
Emerj Artificial Intelligence Research

What You Can Do Now?

So, if you are a non-institutional owner who may not operate on a scale that makes these expensive and sophisticated tools feasible, what should you do? We think the first step is to learn more about products and services that are already within your reach, and that’s where we, the Kelemen Company can be of assistance. We can help you evaluate your current strategy and see where you might be able to invest in tools that can impact your bottom line without extraordinary cost. Our team is on the front lines in terms of building asset value whether you own a single asset or complex portfolio of properties in multiple product types. The key is to engage where you can as soon as you can and we stand ready to assist you in that effort. Contact us today via email or call us at (949)668-1110.