I know you have heard it before. Data is the new [insert valuable asset here]. But while this makes for a catchy headline, it ignores the unfortunate truth when it comes to technology: every detail, down to the keystroke, matters. Way before we can establish statistical significances, find correlations and run predictive analytics you have to be get data you can trust, in a format you can use.
Data accessibility and transparency has grown leaps and bounds in many industries, such as the hotel and residential real estate sectors, allowing consumers to make informed decisions that enable a much faster and efficient transaction. However, commercial real estate has yet to fully adopt this digital transformation, resulting in a murky process with significantly slower transactions. Despite movement by many companies towards data accessibility and transparency, commercial real estate still encounters several complex hurdles before it can make huge strides into the digital revolution.
To examine the impact and future of data accessibility and transparency in commercial real estate, we chose data accessibility for this year’s Metatrends campaign. Luckily we were able to convince Candyce Edelen, founder of PropelGrowth, to write a great essay about her thoughts on the topic based on her past life as a securities trader.
The article was so popular that we wanted to keep the conversation going so we invited Candyce, Amy Millard, Chief Marketing Officer for VTS, Michael Mandel, Co-founder and CEO of CompStak, and Ron Rossi, Vice President of Business Development for Investor Management Services (IMS) to participate in an in-depth discussion on the topic.
In her article, Edelen states that if commercial real estate can successfully follow the example of the securities trading industry, which increased data transparency by creating the Financial Information eXchange (FIX) in in the 1990s, it has the potential to transform the industry, bringing about reduced transaction costs, lowering fixed costs, enabling data transparency, and ultimately spurring innovation and increased investment.
Who Wants Data Accessibility in Commercial Real Estate?
At the outset, the panel examined why data transparency and accessibility is a concern in commercial real estate today for each of the parties in a transaction. For tenants, their primary focus is running a business, people, and operations, not deeply understanding the complicated commercial leasing process. Millard notes that tenants have told her that transparency should not only involve pricing, but also process. When tenants begin to navigate this the leasing process, a lack of transparency—into, for example, leasing prices and the various terms a landlord throws at them—leads to a lack of trust between a tenant, landlord, and broker that can slow or even kill deals. “Even though they selected the tenant broker,” Millard notes, tenants “didn’t fully trust them the whole way. And while I’m sure they were provided the best service the tenant didn’t understand it.” With transparency in not only real estate pricing but also process, a level of trust can be established that makes tenants comfortable with efficiently leasing or buying a property and moving onto their primary business.
For landlords, data transparency revolves around understanding the performance of their portfolio in several different ways. First a landlord wants to understand the performance of their portfolio and teams, but also needs more. As Millard suggests, transparency is not only the performance of portfolio and teams—comparing this team versus that team—but how they’re performing versus their peers. Without transparent data, a landlord may be able to complete a deal with a tenant, but they have no idea whether their portfolio is competitive in the industry, thus clouding the health of their business.
From the investor perspective, software is a crucial element to their business operations outside of real estate. As Rossi notes, “tech is driving access to information and transparency. There’s a demographic shift of younger generations that is certainly looking to do more with technology. They don’t want to have to call you on the phone to see if this is a good investment, they want to be able to do that online.” Investors need to understand the performance of their investments real-time, so they can make informed decisions. Without this technology in place, commercial real estate will not attract as much investment capital as competing investment markets. In Rossi’s opinion, using tech is fundamental to building trust with investors. To build trust, these data tools must deliver information in a transparent manner and deliver it to stakeholders in as close to real-time as is possible.
Why Would Data Accessibility Help?
Mandel argues that CompStak is “unabashedly a data company” that focuses on “creating transparency in commercial real estate to lead to more fair and efficient deal-making.” While data has been accessible in commercial real estate for decades, brokers, landlords, and investors have typically been the repositories for that information, while tenants have been in the dark. This information asymmetry can lead to distrust among these market participants. By increasing transparency and accessibility, ultimately, it will be good for the market by creating fairness and efficiency.
The Problems of Data Accessibility in Commercial Real Estate
While the panel agreed that transparent and accessible data is key, there are issues with achieving this digital transformation. First and foremost, access to valid data is challenging and often tenants obtained old or inaccurate data that painted an unclear or incorrect picture of the market. According to Millard, 30% of the lease pricing data they received from homegrown accounting systems was inaccurate. Without clear and accurate data, comps on a property would like comparing apples to oranges. To avoid this scenario, increasing transparency can improve data by exposing it to larger markets for review and analysis, building more trust among industry actors.
An additional problem is that the commercial real estate market does not have complete uniformity in terminology from market to market, causing challenges for generating a composite data set of commercial real estate information. For example, San Francisco landlords quote prices in square foot per year, but in the greater Bay Area, prices are quoted in square foot per month. If a broker walks into a landlord’s office and quotes square foot pricing per year in a “per month” market, it is unlikely they will get their business. Edelen then asked if there was the potential to standardize data fields across the entire commercial industry, but each panelist expressed doubts this could be achieved. Millard noted that while a business standard offers benefits in other industries, currently no real benefit for commercial real estate at this point, so it won’t be done. “Until there is money to be made,” Mandel agreed, the standard will not be established.” This discrepancy means that APIs must map out information for different types of commercial real estate markets—such as San Francisco and the greater Bay Area—independently so stakeholders can understand how their commercial partners do business. However, compiling this data for disparate markets is a limitation that will be challenging to overcome in the near future.
But Rossi notes that data transparency didn’t help all actors in capital markets at first, but did eventually help access and bring down cost of capital, by leveling playing field. Mandel sees a future where data transparency and accessibility could create new markets—like an NYSE for commercial real estate—that increases transactions and creates more liquidity on a deal by deal basis by buying marginal shares in real estate like investors buy shares in companies. Despite the challenges faced with data transparency in commercial real estate, the benefits will likely outweigh the risks.
The Future of Real Estate Data
The panelists concluded by theorizing where data accessibility in commercial real estate will be in five years. Millard believes that commercial real estate will be incredibly transparent like hotels and residential real estate.
Rossi thinks that commercial real estate will adopt machine learning, leading to better insights and data that will be given directly to participants for actionability, making stale data a thing of the past. Mandel believes that commercial real estate is already moving quickly on the path to data transparency, driven by competition. “People may not even know what they want to do with this data, but others are doing it so they want to as well.” With a move towards transparency, innovations will increase and this data will be more easily accessible—on apps and phones—soon in the future.
Although some market actors benefit from data asymmetry in this day and age, data transparency is the future. Countless other industries have adopted data accessibility and thrived, so market participants will demand it in commercial real estate. If landlords, brokers and investors don’t push for transparency, it will still happen. “You can either disrupt yourselves or be disrupted,” says Millard. “But either way the disruption is going to happen.”
It is clearly in the best interest of (most) commercial real estate industry players to embrace data transparency, and reap the benefits that will follow.