Enhanced data and analytics, along with new applications to streamline processes, are having a substantial impact on many industries as they work to create better value through process efficiencies. The commercial real estate (CRE) industry has historically been slower to adopt new technologies, but there exists a rapidly growing awareness of the impact transformative technology can deliver.
Technology venture capital investment in “PropTech” has been increasing like never before, and while a large majority of firms have benefitted from technology investments made over the past two years, a recent report from Altus Group found that CRE executives have clear reservations about the potential of new technologies to drive industry-wide change.
Emerging Disruptive Technologies Have Arrived
The 2017 Altus Group CRE Innovation Report surveyed 400 CRE C-level and senior executives globally and found there’s a big disconnect between what we’re seeing in the industry in terms of technology and innovation, and the level of understanding of what’s coming from the executives. When asked about six emerging disruptive technologies and their potential impact on the industry, only a minority of respondents recognized these technologies as having the potential for major disruptive impact:
- Smart Building Technology – 35%
- Artificial or Machine Intelligence – 28%
- Big Data and Predictive Analytics – 24%
- Augmented and Virtual Reality (AR/VR) – 18%
- Blockchain Technology – 15%
- Driverless Vehicles – 9%
While certain emerging disruptive technologies are not being recognized by industry executives as having the potential for major change, Smart Building Technology — which only a few years ago was perceived as largely future-state — is now seen by 35 per cent as being potentially disruptive and by 45 per cent as having the potential for significant cost savings. Interestingly, for Smart Building Technology to maximize its potential, it needs to be heavily enabled by Big Data and Predictive Analytics, turning raw data into intelligent information for strategic decision-making or for Artificial Intelligence (AI) and Machine Intelligence to automatically drive processes or improve systems.
Yet, only 28 per cent of executives surveyed believe AI and Machine Intelligence will create disruptive changes in the CRE industry while conversely 38 per cent said it will have little to no impact. Similarly, only 24 per cent said Big Data and Predictive Analytics will disrupt the industry while 42 per cent said it will have little to no effect. The responses relating to Blockchain are even more surprising with only 15 per cent of respondents stating that it will create disruptive changes and 62 per cent believe Blockchain will have little to no impact on the CRE industry.
Image via Altus Group.
Experts in these fields have warned of the disruptive impact that these technologies are already having on other industries, so CRE executives must take notice that these new innovations have arrived and are quickly gaining attention. Some of these disruptive technologies will necessitate a dramatic change in how CRE firms produce and manage their data, which has the chain effect of altering job responsibilities and in some cases, completely changing the roles for certain positions. Those that embrace what is coming will change the rules of the game by disrupting traditional CRE business processes, and at the same time will gain a competitive advantage.
Opportunities Abound for Process Automation and Performance Management
While CRE executives remain uncertain about the effects of certain game-changing technologies, a deeper look at four key areas reveals current opportunities and challenges CRE firms are facing: process automation, operational performance, integration and data, and skills and staffing.
The survey results show a significant opportunity for process automation to improve operational efficiency, with more than 50 per cent of executives stating that most major CRE processes and workflows can be significantly or completely automated. Several areas ranked high for automation potential, especially those with a large number of processes which can be delivered faster through automation, and firms are realizing the benefits that automaton can have on efficiency, and in turn on the overall bottom line. Executives identified Debt Underwriting (61 per cent), Capital Markets Brokerage (59 per cent), Property Management (54 per cent), Asset Management, Budget and Forecasting (53 per cent) along with Valuation and Appraisal (52 per cent) as processes which have the potential to be fully or highly automated across all processes and workflows. Many of these processes, such as budgeting, are really time-intensive, often requiring a great deal of coordination between different parts of the business, and this is a key opportunity for firms to use automation to their benefit and modernize their organizations. The survey also asked about Acquisitions and Dispositions (39 per cent) and Leasing (29 per cent), however fewer respondents believe these processes can be fully or highly automated across all workflows. The industry is ripe for automation to impact many areas, processes and functions – changing the way common tasks like financing and brokerage are undertaken today. This suggests a significant impact on the people associated with these processes while at the same time presents opportunity for resource reallocation to areas that will drive greater value.
PropTech Investment. Image via Altus Group.
Performance Management also represents a significant opportunity for CRE firms, as the report identified major gaps in benchmarking in terms of Operational Expenses as well as Leasing. While 56 per cent of executives confirmed they benchmark Valuations and 49 per cent benchmark Returns, only few executives surveyed said they compare their Operational Expenses (14 per cent) and Leasing (22 per cent) against competitors, the market or industry, indicating a significant performance management shortfall. However, 69 per cent believe there is substantial potential to conduct better benchmarking around Operational Expenses, and 80 per cent around Leasing. This suggests that a deeper analysis of property expenses is an overlooked area in terms of applying analytics and monitoring and has the potential to unlock greater portfolio value. Firms should look at better expense management as low hanging fruit to drive more value; with the growing availability of tools and data to better manage performance, executive respondents are right to suggest much more can be done with expense benchmarking – and the opportunity for value creation is significant.
Major Obstacles: Integration & Staffing
With the proliferation of new applications, there now exists a growing integration challenge that firms face in order to effectively implement new technologies. Executives already recognize data integration and standardization as key focus areas for driving operational improvements, and the increasing number of available apps will add complexity in achieving this. 58 per cent of survey respondents are using significantly more CRE-specific applications now than they were three years ago, but 59 per cent do not have significant integration between major management systems and applications. Lack of integration can negatively impact information flow and decision-making, particularly in areas such as Debt Underwriting, Valuation and Appraisal, and Capital Markets Brokerage, which were identified as functions that have the most potential to benefit from on-demand data access and analytics.
Image via Altus Group.
Lack of sufficiently skilled IT people is another key barrier that firms face as they try to make the most of their technology and data investments, as 50 per cent of executives surveyed indicate that their firms have a shortage of technology staff. The report findings also identified a continuing skills gap for both technology and business professionals: 69 per cent of IT professionals lack in understanding of the business aspects of CRE, and 66 per cent of CRE business professionals lack in understanding of technology/IT. While new technologies have huge beneficial potential, technical staff with in depth knowledge of disruptive technologies and who also have a working understanding of CRE business practices will be a differentiating factor for firms that successfully implement and integrate these new technologies.
Take Action to Embrace Transformative Technologies
Technological advancements are already starting to impact, enable and drive industry change in areas such as process automation and performance management. Looking down the road, many processes may be exclusively performed by artificial intelligence bots, but AI is already deeply engrained in many technologies the industry relies on today. CRE executives’ competitive imperative is to start looking outside their own firms’ boundaries to visualize and think of how technology advances will potentially change business models and even impact the industry as a whole. With the advent of so many new technologies, it’s becoming more important than ever before for executives to not just keep an eye on how emerging technologies may affect their own firms, but how they may change their interactions with the processes of other segments. Some emerging disruptive technologies may seem far away from having a significant impact on the industry, however the report found that Smart Building Technology is seen as having significant cost-savings and even further disruptive potential going forward, when it was considered largely future-state and early stage just a few short years ago.
Expense benchmarking is an area where firms can act now to better manage and track operational performance, and it should be a more important area of focus for both the asset and property manager. The deficit of technology staff should also be a focus area for executives as firms increase the amount of CRE-specific applications they’re using, to help ensure integration between systems and avoid data silos. CRE firms need to start looking at how their technology infrastructure will allow their processes, workflows and data to “digitally plug” into the technology advancements of the PropTech future that are now starting to come to market.
Michael Crook is a Senior Vice President of Product Management at Altus Group. See the full Altus Group report at www.altusgroup.com