How Technology is Changing the Real Estate Industry
By Percy Nikora, Owner, Co-Founder
What is Real Estate Technology?
Real estate technology is a broad, umbrella term that encapsulates many different types of emerging technology – from property management software, to smart home devices, and a range of tools enabled by the “Internet of Things” or IoT. What all these technologies have in common is that they are designed to make sourcing deals, processing transactions, managing properties, and delivering customer services exponentially easier and more effective.
Real estate technology delivers benefits to a wide range of users, including owners, investors and tenants alike. For example, owners are increasingly using virtual reality technologies to allow prospective tenants to take virtual tours of properties. This allows more prospects to see individual units, and those prospects who then request to see the unit in person or apply have already undergone some level of basic pre-screening. Prospects, meanwhile, benefit from the ease of “touring” properties from the comfort of their own home, which reduces the need to travel back and forth between apartment buildings. It’s a win-win for all of those involved.
Real estate technology has evolved rapidly over the past decade, with many subsets of real estate technology, from “prop tech” devices to cloud-based software. In today’s article, we look at the many ways real estate technology is changing various parts of the industry.
Property development, such as ground-up construction projects or the repositioning of buildings through value-add strategies, is one of the areas that is still ripe for transformation. Many real estate developers still use basic Excel spreadsheets to source deals, underwrite projects and track their budgets – a process that makes data prone to user error. There has not been significant standardization to date. A few early stage companies are trying to get into this space, but none have caught on to the point of widespread user adoption among different stakeholders: project sponsors, investors, lenders, appraisers, contractors and the like. This segment of the market is prone to disruption once property development technologies take root.
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How Real Estate Technology Changed
As noted above, property development has yet to see the same widespread disruption as other areas in the industry. There are certainly a few notable exceptions.
Augmented Reality (AR) and Virtual Reality (VR) experiences are still evolving, but the simplification of the property viewing experience has made it easier for architects and engineers to model how a project might feel upon completion.
There’s also a burgeoning market for construction-related technology that leads to cost savings for real estate developers. Frankly, construction has not changed much in the last millennia. The same basic techniques and materials are still widely used, and building continues to be a lengthy and costly process where manual labor is still the norm.
This is one area of the property development sector that’s ripe for disruption, with trends moving toward building projects that better integrate building information modeling (BIM), a digital representation of the physical and functional characteristics of a facility. BIM is essentially a shared knowledge platform that allows for better, real-time decision-making during the lifecycle of a construction project. BIM allows team members to make various simulations (e.g., construction, design changes, power consumption) and prevents the loss of information. It can also be used upon project completion to facilitate repairs and maintenance. Using BIM software helps property developers minimize waste, control costs, coordinate workflows and optimize labor needs. Increasingly, there are developers looking to integrate BIM applications with robots and other machines that may reduce the need for costly construction materials and labor.
Tools such as these, particularly once integrated with more optimal budgeting programs, will be wildly beneficial for developers seeking to better track things like CapEx spend, construction schedule, etc. This will help to ensure all parties involved in a transaction—the project sponsor, architects, designers, lenders, asset managers, and the like—are marching in the same direction using the same data.
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Property management is one area in which technology has already had a major impact. Both hardware and software tools have revolutionized property management.
Consider, for example, the range of hardware that can now be leveraged by property managers. Smart home devices, such as Nest thermostats, can be controlled remotely. This means the owner can set the temperature as appropriate when units are vacant, still allowing for utilities to be on if contractors need to be on site doing work. Smart water meters can be used to monitor leaks. For example, if there’s unusual water usage coming from one unit between the hours of 1am and 5am, this is most likely indicative of a leak. The property manager is immediately notified and can investigate the problem. Hardware sensors such as these helps to drive down expenses and increase the net operating income (NOI), which ultimately increases the value of the property by several fold.
Let’s look at how new technology can be used to implement a ratio utility billback (RUBS) system. For units where the water is not individually metered, the owner gets a single bill that can then be re-allocated across the units proportionally. Property management software can calculate the cost, per unit, using various algorithms such as unit square footage, number of bedrooms or number of tenants living in each unit. The software program automatically factors in things like vacancy and re-calculates what’s owed per unit, and then sends tenants a bill for their resulting usage. Software programs like these not only save property managers time, but also takes out any potential human error.
Software programs can also be leveraged to improve tenant communication. For example, some property management systems have built-in features to allow owners to send out text messages when rent payments are late or an email blast to all tenants with an important announcement, such as a planned utility shutoff needed to upgrade certain equipment. Tenants appreciate this communication (and those who want can easily opt out of automatic alerts).
How Real Estate Technology Changed
Property management is a highly segmented industry. Most management companies are mom and pop operators, and as such, still conduct businesses the way they have for decades. It was only recently that management companies began to integrate real estate technology into their operations. This has reduced the need for things like manual entry of repair and maintenance requests, hand-written work orders, and photocopied lease applications. Increasingly, management companies are moving all of these processes to the digital realm. And with good reason.
Those who utilize technology can better manage their assets. An owner can easily pull reports from the system and share that data with others as needed, including lenders, investors, and contractors. Owners can monitor communication between property managers and their tenants to identify areas for improvement: for instance, an owner can see how quickly the property manager responds to maintenance requests, or any concerns tenants have about things like property amenities or potential rent payments. Traditionally, owners had to rely on property managers to share this information. Now, owners can have this information, updated in real-time, at their fingertips.
Commercial real estate is a historically opaque industry. Unlike traditional free markets, buyers do not, in fact, have access to the same information. Those who do have access to certain information, have a leg up against their competition. This is where real estate technology is having a major impact. Software programs, like CoStar and Reonomy, aggregate robust public and private sector data for users to mine. This makes it easier to conduct selective outreach to potential buyers, potential sellers, and to find partners or investors who may be interested in your CRE deal.
Having data is not enough, though. Sponsors must know how to analyze that data for it to be useful. Artificial Intelligence (AI) will play an important role in this space in the near future. We’re using a variety of software programs, including our own proprietary tools, to analyze markets on a quarterly basis. We’ve lasered in on seven markets, so we monitor these areas for certain trends – like oversized job and population growth. Our goal is to use data to stay ahead of the curve and identify opportunities well before our peers.
At Penn Capital, we have developed software which lets us create our own underwriting and valuation models. We can then stress test deals using these models. For example, we can easily look at what happens if rents in a market drop by X amount. We can test lender interest rates to see what impact that has on deals. We can tweak occupancy rates. Our model helps us determine how a specific asset in a specific market will perform based on an array of criteria, thereby helping us to make more informed decisions about potential buying or selling opportunities.
How Real Estate Technology Changed
There’s a misconception that the role of the real estate broker is dying—that’s simply not the case, at least not as it pertains to commercial real estate. In fact, despite property and market data being more readily available online, broker contacts are still critically important. Brokers usually have access to the best deals, often off-market, and can help cast the widest net when investors are ready to sell.
Developing a relationship with these brokers is therefore more important than ever. To establish credibility in the marketplace, sponsors are paying more attention to their online presence. They’re utilizing specialized CRE photographs and videos, virtual tours, SEO and reputation management software to help promote their businesses.
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Real estate marketing has changed dramatically in recent years, largely due to changing technology. Owners and property managers are increasingly using high-tech software applications that integrate all operations – from marketing to leasing, property maintenance and more. For example, some property management platforms go so far as to integrate with ads that can promote apartment listings. We can see who is viewing the ads and then monitor and massage those leads as appropriate. We can even take rental applications, electronically sign a lease and then accept payments online, using this same system. To be sure, there’s a learning curve associated with marketing in this manner, but ultimately it makes all tasks more efficient.
There are other ways in which real estate technology has impacted apartment marketing efforts. Consider the use of smart locks, for example. Advances in smart lock technology have enabled prospects to tour properties on their own schedules, without having intricate coordination with a leasing broker. They can schedule an appointment to tour the property online, and after filling out some basic information, are then sent a code upon arrival at the property. This increasing the leasing speed of vacant apartments, and provides a convenience to prospects who can tour properties as early in the day or as late at night as they’d like (within reason). Tools like AR and VR, as discussed above, are also being used to market apartments to the masses.
It wasn’t all that long ago that people in search of an apartment would flip through the newspaper classified ads or scour an apartment guidebook found at the local grocery store. Today, most people look for apartments from the comfort of their own home. They used sites like Google, Craigslist, Facebook, Zillow and Apartments.com to find apartments that meet their specific criteria. The model for apartment leasing has entirely changed, and is perhaps the area where real estate technology has had the single greatest impact.
This evolution means that digital marketing is more important for apartment owners than ever before. Digital advertising is where companies get their biggest bang for the buck.
In fact, this is true whether leasing a single unit or marketing an entire building to investors. Recent changes to SEC regulations mean that owners can bring deals to the broader marketplace with ease. We’re seeing more people utilize social media, crowdfunding platforms and other digital tools to drum up interest in their deals. You no longer need to have a personal relationship with those people. Now, properties can be marketed to accredited and non-accredited investors alike. Web-conferencing tools like Zoom (zoom.us) are increasingly being utilized to pitch to investors without ever meeting those people face to face. This shift has been dramatic and will continue to evolve at rapid speed.
Technology is becoming ever more important to the commercial real estate industry. To be fair, CRE was a bit late to the game compared to other industries. Many people felt that software, in particular, could not dramatically change how we deal with real tangible, complex assets like an apartment building or other commercial property. We’ve come to realize the opposite is true: technology has the potential to transform almost every aspect of the commercial real estate industry, from how we find deals to how we attract investors, lease up units, manage the properties and eventually sell them.
With technology continuing to evolve at such rapid speed, it remains to be seen how else hardware and software will impact the CRE industry. But one thing is for sure—it will, and it will in many, many different ways. Those who are prepared to embrace new technology will find themselves ahead of their peers in short order.
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