The Waypoint Blog

Information Transparency - Using Data Analytics to Unlock Value


(This article was first published in the NAREIM Dialogues Spring 2017 edition)

IN OUR POST CREDIT CRISIS ECONOMY, institutional real estate investors have enjoyed consistent rent growth, increasing valuations, and strong returns. However, signs indicate a change in this trend. Greater liquidity through a friendlier regulatory framework may help to maintain cap rates, but the probability of Fed tightening increases with every quarter. As we enter the late cycle for commercial real estate, investors are now looking to exercise greater scrutiny over operating expenses as a tool to increase NOI. But how do you empower overextended, lean asset and property management teams to proactively improve operating expenses? Occupancy, lease negotiations, rental rates, capital improvement projects, refinancings, and dispositions typically supersede operating expenses on an asset manager’s priority list. In an effort to fine tune operating expense management and unlock new value, commercial real estate owners and operators have begun to turn to normative comparison by adopting a single system of record that enables information transparency throughout the organization.

The use of normative comparison to improve organizational performance is by no means a new concept. Professor Robert Cialdini famously established normative comparison as one of the six universal principles of influence. In simplest terms, normative comparison, or social proof, is the concept that “People will do things that they see other people are doing.” People are more likely to recycle if they know that their neighbors are recycling as well. Employees are more likely to arrive late to work if they see their colleagues doing the same. In commercial real estate, investors have always used normative comparison to some degree; at quarterly reviews, nobody wants to be the only person with a net operating income that is $300,000 under budget. Every institutional investor has a trove of financial information across their portfolio that can motivate managers to improve performance. The problem is that the dispersion of information across multiple systems and individuals, not to mention the added complexity associated with multiple asset types, limits the ability to effect portfolio-wide normative comparison.

Let’s say you manage the core fund for a multi-strategy real estate investor and want to compare property security expenses in Chicago across all funds and investment strategies. Depending on portfolio size, asset managers company-wide would spend days, perhaps weeks, of man-hours collecting detailed security expense data from property managers, operating partners, old emails, and pdf files. Given the limited resources of any asset manager, data collection is rarely the best use of time. Furthermore, these mandates must come from senior management due to the complexity and effort required for a seemingly simple task. Even if armed with the best intentions, a junior associate would be hard-pressed to aggregate the same information. And if she were successful, there would still be the risk of criticism for wasting resources if the effort failed to identify any meaningful issues. However, evidence of an issue should not be the impetus for the comparison of operating expenses across similar properties in the same market. Any asset manager should be able to easily compare his asset performance against properties held firm-wide. The challenge is the formidable task of collecting the data into a single source of truth.

Fortunately, recent advancements in real estate tech enable the housing of financial performance information in a single, accessible, company-wide system of record. This significant improvement to operational efficiency grants any user the power of instantaneous portfolio analysis, and removes the execution barrier for normative comparison. As Cialdini, Kallgren, and Reno wrote in A Focus Theory of Normative Conduct: A Theoretical Refinement and Reevaluation of the Role of Norms in Human Behavior:

“There is substantial evidence that shifting an individual’s attention to a specific source of information or motivation will change the individual’s responses in ways that are congruent with the features of the now more prominent source”

Competitive organizations foster competition through their managers. Competitive managers are now using new, easily accessible systems of record to assess, benchmark, and improve their relative performance against peers. Waypoint regularly works with investors to make portfolio performance data and analytics easily accessible, a powerful tool that motivates employees to improve operating expense performance. In one example, an asset manager single-handedly identified a $200,000 annuity savings that increased property value by more than $3 million. He unlocked this value by uncovering meaningful differences in cleaning expenses managed by the same vendor across similar markets. Opportunistic acquisition teams have used Waypoint’s platform to more accurately underwrite operating expenses by comparing their pro-formas to properties held in the core funds. And we have seen operations teams initiate annual operating expense benchmarking efforts that resulted in significant expense reductions portfolio-wide, without a specific mandate to improve property performance. In each case, a single system of record that easily enabled information transparency and normative comparison facilitated the achievement.

The benefits of tech-enabled information transparency are not limited to financial performance; commercial real estate owners can also enjoy better planning, greater collaboration, improved communication, and proactive problem solving. From a budgeting standpoint, an asset manager is more likely to develop detailed budgets on time if he knows his colleagues can review those budgets online once complete. Collaboration across any company arises out of a business need. If asset managers working in different offices and funds can easily see the overlap of their portfolios across markets, they are more likely to collaborate and develop strong working relationships – a substantial win for any company. Similarly, we have encountered clients who, after realizing the benefits of information transparency in their own companies, have decided to provide the same visibility to property managers and operating partners outside of their organizations. By providing these tools downstream to the day-to-day property managers, institutional investors have seen a shift from reactive to proactive property management.

Obviously, there is always resistance to the adoption of new technology, no matter the benefits. First off, managers often believe technology replaces people. But commercial real estate technology is enabling, not disrupting. Disruptive technologies, like UBER and Netflix, replaced entire companies, but nothing will ever replace the business acumen, industry knowledge, and personal networks needed to succeed in real estate. The problem in commercial real estate is that individuals are currently the custodians of information. How much time does your team spend tracking down emails, searching for old investment committee memos, and wrangling property managers for single data points? These smart, hard-working individuals were hired to make strong business decisions, not corral information. The more data readily available at their fingertips, the better decisions they will make. There are tools now that enable your teams to focus strictly on what matters – managing assets and improving property performance. The key is finding a well-designed solution that easily integrates with your current tech and requires minimal effort and training to implement. So why not start sooner rather than later?

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