Real Estate Technology - Venture Capital

Commercial real estate investing/management and technology have historically operated in two different silos, with almost no overlap. A major reason for this, in my opinion, is the reluctance for change in a top-down industry. 60-year old portfolio managers aren't reading Hacker News looking for an edge.

The inverse is also true, a 22 year-old software engineer doesn't have any experience/interest with the business needs of a real estate professional. Interestingly enough, research on "real estate technology" and the associated conferences almost entirely revolve around residential real estate. This is decidedly not my field, but it's worth contrasting the rapid technology adoption in a bottom-up industry, fueled by buyers, sellers and residential brokers.

These names, for example all revolve around residential real estate.
-Zillow
-Redfin
-Trulia
-Apartment List
-Zumper
-Lovely

Which is great. The American housing market is the largest US asset with an estimated value over 27 trillion (1) so there's plenty of room for growth.

But where's the Commercial Real Estate technology? 90% of the world's data was created in the last two years (2), and I'm still calling brokers for 6-month-old rent comps, looking at concentric circle demographics from Claritas (gross), checking listings on Dumpster-Fire-Loopnet, or evaluating performance by gut-checking expenses with a property manager? The fund I work for paid up for nice computers, but I'm not sure why because all of our tools would run on Windows 98.

Having said that, it appears the institutional perspective on RE technology is changing. Venture funding for RE Tech start-ups increased from $241mm in 2013 to $605mm in 2014.

http://techcrunch.com/2014/10/28/venture-investors-splurge-on-real-esta…
http://techcrunch.com/2015/02/10/the-impending-opportunity-in-real-esta…

TL;DR there's a tremendous amount of opportunity around:
- Lending analysis and underwriting
- Internet of Things (sensors and automated controls)
- Research
- Property Management

Interested to hear what other monkeys - RE or VC - think about the shift.

GP

Sources
(1) http://www.businessinsider.com/us-home-prices-in-2014-2014-12; I've also seen this number in the 23-25 trillion range but you get the idea.
(2) http://www.ibm.com/smarterplanet/us/en/business_analytics/article/it_bu…

 

Commercial real estate technology data analytics is limited by a strong cultural preference toward privacy in the market. It's difficult to obtain operating expense comparables because few people want to give up that information. It's difficult to obtain good apartment rent comps because property managers don't like giving their competition an edge by divulging rental rate and occupancy trends. Commercial lease comparable data is difficult to find because landlords strongly prefer confidentiality because if a tenant negotiates excellent terms and that information gets out then it puts the owner at a decided disadvantage with the next negotiation. Cap rates are hard to find because sellers/brokers take care with private information (in this case, revenue and expenses of their properties). Sometimes finding the true owner of properties is difficult because owners use LLCs and shell companies to limit their liability and to maximize their privacy.

When I was looking for roof top lease data a few months ago, getting ANY information was like pulling teeth. Nobody wanted to divulge any information about their leases. Finally, I got an appraiser to send me some information. When he asked for some reciprocal information (our rooftop lease data), well, let's just say the owners of my firm didn't respond in the affirmative--they highly value their private data. Lenders struggle desperately to get their borrowers to send in annual information. Borrowers routinely parse the wording of the loan documents to assert their rights against sending in annual information.

I don't think technology can "solve" the issue with lack of information in commercial real estate. The technology is there but the platform doesn't really exist in a robust manner because this information is very, very difficult to obtain. You can set up a sweet platform, but without good information it's just a sweet platform.

Array
 

This discussion reminded me of a relatively new company called Pavonis, a start-up founded by Marc Kingston (formerly the CEO of Argus software). Pavonis group offers an "unparallel access to all facets of the real estate industry — from owners, investors, lenders, asset managers and developers, to consultants, valuers, brokers, solution providers and virtually every commercial real estate player in the world." Although they are relatively new to the industry, I feel these guys are a good example of a "first mover" and their company is one to watch out for.

http://new.livestream.com/wab/realcomm/videos/54257291

I agree that there are huge inefficiencies within the commercial real estate space. Such a tremendous opportunity for someone to exploit these inefficiencies and make some serious cake.

 
Best Response

Like what specifically? You can automate models but they won't be worth shit when deal specifics change every other day, or someone figures out how to unlock value from trying something a different way... I've been thinking about this topic for a while as well, and I think it does come down to what VT4ever was talking about; people with the ability to change and create technology dont really understand the industry from the top level, and vice versa.

I feel like its not a function of someone finding a industry disrupting tool, but that the industry itself is not especially complicated, its just very nuanced (correct use of word?). ie it takes years and years of experience to understand what kind of value you can unlock, and that value is sometimes only realized when you leverage relationships or other team members' experience to find it... interesting topic, I want to see others' thoughts

 

It is easier to bring residential into the digital age because the national Realtor Association brought a lot of centralization to the residential market. The Realtor Association owned MLS controls so much of the nations residential sales market that it is easy for places like Trulia, Redfin, Zillow, etc. to operate. You plug into the MLS API, write an algorithm, throw up a website, add some pretty banner adds and poof, instant income!

CRE is still very decentralized and people like it that way. Rich people and investment firms don't like their business out there for just anyone to see.

Besides that, if you centralized information, you level the playing field too much. Everyone is trying to get the best return possible (given their specific business plans). The best way to do that is to take advantage of the potential arbitrage opportunities. If everyone has the same information, you crush the entrepreneurial spirit of the market and make it strictly transactional in nature.

I've worked in the debt space for almost the entirety of my career and every place I've worked all has some sort of proprietary database to try and take advantage of that imperfect information situation (and hopefully an arbitrage opportunity)

The information available/how well it is built out is dependent on the place, but take my current company for example: The database has decades of historical property information from every loan that has ever been originated (which is decades of information). We have not only yearly financial data, but for the last 5 years or so, quarterly financial data for 97+% of our loans (the portfolio is in the $10+ billion range). Rent Rolls are sortable and searchable; they show steps, expense calculations, free rent periods offered, TI packages (basically as much information as possible).

Beyond that, you can overlay information from any property that the equity group manages including tenant rent rolls, operating statements, recent appraisal information (including rental and sales comparables provided by the appraiser) as well as overlay information taken from recent OMs (new financings or acquisitions) sent to us by brokers.

There is a workflow tool that helps with day to day tracking of ticklers (notifications of major events in loan documents for the assets you are managing), automation of tasks during the closing process and for borrower requests, etc. These tools also help streamline communication with third party vendors and aux groups (accounting, middle office, valuation, etc).

I really think that there is a lot of technology that is popping up in the CRE world, but that it is on a firm-by-firm basis (which is where it will stay because firms won't ever share information unless identifying data is redacted).

 

I'm at a large life co (Met/Pru/TIAA).

I can download basic loan data from any loan we have ever made. Yearly property financial data from approximately 2000-2006 and quarterly data starting around 2006.

Appraisal/OM data is selectively scraped (there is an offshore team who inputs this data) and the records are all tagged to the document it came from so you know which appraiser/broker provided it. We are only capturing OM data from stuff that we have an actual interest in; we don't capture data just to capture it (that is what CoStar and LoopNet are for).

Over the last 5 years, we have been overhauling systems. I know of three other major AMs that have implemented custom systems in the last 3-5 years trying to tie their debt and equity platforms together. Also, several other smaller life cos are currently upgrading systems due to the recent RBC rule changes (if recent conversations at conferences are to be believed).

One of our competitors recently demoed their system for me and I actually think their system is better than ours. They have some really cool mapping software and report visualization tools that I immediately demanded that we get, but they won't tell me who consulted on that part of their project until he is finished building everything out for them...

 

Young Gunner - off the top of my head

  • Advanced statistics on demographics for multifamily properties, like evaluating tenant profiles based on social media scores (similar to new lenders evaluating credit score off Facebook/Linkedin)
  • Identifying foot traffic trends fora retail portfolio with dropcams (some gruops are already doing this)
  • Automated sensors and Internet of Things for bench-marking energy consumption / equipment efficiency that will impact Property performance, as well as expensive R&M
Fill the unforgiving minute with 60 seconds of run. - Kipling
 

When I worked for a national appraisal firm right out of college, they had a massive national database of rent comps, OpEx comps, detailed sales data (ya know, with OpEx/cap rates), etc. One day I naively pitched the idea to one of the key principals that we could create a secondary income stream by marketing access to our database. Needless to say, my idea was met with what is worse than derision--complete and utter ambivalence. In hindsight it is obvious that they had no desire whatsoever to lose their upper hand--information--to their competitors. Their information is why they could justify charging $7,500 for an appraisal, $5,500 for a market study (or whatever the number was).

Players in this biz just don't want to give up their hard won information.

 

I think everybody above did a great job of explaining why.

For comparison, if there's a large, cheap/free database of strip mall operating expenses .... then there should also be a large, cheap/free database of annual expenses related to operating a staffing business .... or a large, cheap/free database of annual expenses related to operating a cement mixing company .... I'm being a little silly to make a point, but real estate or not, we're talking about privately owned assets with private operating budgets and privately negotiated lease terms.

It's not like a database of homes for sale where every seller wants every consumer in the world (or every consumer on the internet) to know everything about the house.

 
 

These are all good points, but it's not like operating financials/leases are the only data worth crunching. Take a look at the business model for HouseCanary (http://www.housecanary.com/).

HC uses machine learning to factor in hundreds of variables:

  • micro/macro fundamentals
  • crime, schools, amenities
  • public data like foreclosures, starts/permits, sales volume
  • construction data
  • demographics

and more, to come up with predictions on where home values are going. Granted, single family homes are more homogenous, but nothing I just listed precludes analysis for commercial real estate

Fill the unforgiving minute with 60 seconds of run. - Kipling
 

Agree. Demographic trend analysis data is important too. If you don't know how the demographics of your market are going, you shouldn't be investing there.

The data from HouseCanary could probably easily be tweaked to be applicable to CRE. I'm sure it would just be a matter of re weighting their algorithm to be commercial focused v. residential focused to make the predictions more meaningful for the right audience.

For example, while a residential client may care about school districts and amenities, a commercial client may be more concerned about traffic flow, median household income in the trade area or total number of households.

 
Gene Parmesan:

These are all good points, but it's not like operating financials/leases are the only data worth crunching. Take a look at the business model for HouseCanary (http://www.housecanary.com/).

HC uses machine learning to factor in hundreds of variables:

- micro/macro fundamentals
- crime, schools, amenities
- public data like foreclosures, starts/permits, sales volume
- construction data
- demographics

and more, to come up with predictions on where home values are going. Granted, single family homes are more homogenous, but nothing I just listed precludes analysis for commercial real estate

The problem with this sort of application, and all the other ones like it is that it works for homogenous neighborhoods and properties.

If you're an investor, who is interested in generating 25-50% returns off of flips, you have no idea what's inside each property comparable. Check out the sample report here: https://www.housecanary.com/images/HouseCanary-Value_Report-SAMPLE.pdf

These companies are pulling public data and telling you "123 Main St. is 95% similar". May be true, however, there is no analysis completed on the condition of the property or any other non-public metrics. Is there a tenant who hasn't been paying rent for the last three months, and the landlord hasn't taken care of the property? Is the landlord dying to sell the property and has been Googling "How to sell my rental property". The property that's 95% similar could be a beautifully decorated Tudor house or Santa Barbara styled house. It could be a hoarder house that has termite issues, a 35 year old roof, broken HVAC, mold, etc.

Again, with stocks and bonds, you can get INSIDE companies. Businesses show their 'insides' through financial statements, which are pretty good at showing what's exactly going on. You can then compare the derived data to other similar companies, and do some more qualitative analysis.

But in real estate, I don't think you'll ever truly get inside 'properties' - databasing non-public data. But the CRE world looks for totally different things than residential RE. And all the demographic, school, etc data is already utilized by CRE firms in their analysis.

 

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