Can the Industry Keep Up with the Demand for Information as the Economy Stalls? Survey Shows It’s a Struggle.

The economic downturn is greatly impacting the way the commercial real estate industry is operating these days. Some insight into this new mode of operation can be gleaned from a recent survey conducted by Resolve, completed by over 50 representatives of investment management firms, REIT’s, and private equity firms.

Survey results show that demand for information has been growing as the economy has been slowing down, with over 80% of the survey respondents saying the frequency of demands for reports and information is either significantly higher or higher now compared to a year ago.


At the same time, the survey shows that most companies are struggling to provide the needed information and measure many of the key risk parameters in a timely manner. One example is tenant exposure. While the risk of tenants going out of business has risen dramatically in the past year, most companies still measure it only quarterly or even less frequently.

In addition, the survey shows that most real estate investment companies have trouble generating portfolio and fund-level reports, evaluating debt management strategies, and projecting future debt compliance.

70% of the survey respondents consider Loan-to-Value (LTV) and Debt Coverage Service Ratios (DCSR) either highly important or important to their financial and operational decision making. This should hardly come as a surprise as property values and projected income continue to decline. Yet over a third of the respondents indicated it takes them several days or weeks to calculate future DSCR for a portfolio of assets, and almost half of the respondents need that amount of time to calculate future DSCR for their entire fund.

Another example is what-if scenarios that are used to evaluate future decisions, including strategies for managing real estate debt. Only a third of the companies responding to the survey use what-if scenario to evaluate their debt strategies on a monthly or weekly basis, while 41% do it once a quarter and 22% only once a year or less.

While risk management has become a paramount concern to investors and investment managers alike, the survey clearly demonstrates the struggles of the industry to keep up with the growing demand for timely information and the need for proactive, forward-looking risk management capabilities.

As we can see from the survey, most companies still rely on custom-built Excel spreadsheets as the primary tool for measuring risk and running what-if scenarios. Excel is just too cumbersome. It doesn’t allow companies to do their analysis quickly and frequently enough. Companies managing commercial real estate investments in today’s market need to be able to analyze and understand their metrics on a daily basis, not monthly or quarterly. There is an urgent need for better information infrastructure and analysis tools to enable the industry to step up to the required level of operational competence.

The complete survey results are available for download on the Resolve website.

Resolve's Client Summit

September is my favorite month of the year. The weather is beautiful, leaves are turning colorful, and the Red Sox are fighting for a pennant. Most importantly, though, it’s the time our clients gather in town for the Resolve Client Summit.

Taking place at the beautiful Liberty Hotel, this year’s summit was once again an opportunity to get a read on the pulse at some of the leading real estate investment management organizations.

Those who have said “may we live in interesting times” are sure getting their wish come true these days. With the world’s financial markets in turmoil, managing real estate investments has become challenging in ways that were almost unimaginable just a couple of years ago.

The “good old days”, when you could make money in real estate blindfolded and with both hands handcuffed, seem far removed right now. Today’s environment is much less forgiving. Investment managers must be constantly on-guard and ready to take action. The need for visibility, accuracy, proactive thinking, and quick reaction has never been greater. In this tough market, you can no longer tolerate being handcuffed by outdated data, inaccurate calculations, and limited access to information.

At the same time, we must remember that cycles come and go. For the past several years, the focus was on growing investment portfolios. Now that many of us are forced to take a pause, it is an opportunity to catch up on building up the organizational infrastructure required to manage these portfolios in the most effective and responsible manner.

Although the industry is facing some difficult times, I was pleased to see that our solutions are making our clients better equipped to deal with the challenges ahead—with better access to timely and reliable information, better tools to proactively manage risk and returns, and a structured framework for real estate investment management.

RealcommEDGE

I would like to commend RealcommEDGE on an impressive first issue of what is shaping up to be a most useful resource for every commercial real estate professional. I found Anthony Nazzaro’s article about the economy’s effect on real estate decision making especially telling. One of the things that strike me in my many conversations with real estate companies these days is the willingness to continue and even accelerate investments in technology. Having gone through a number of down cycles, many executives understand that a downturn could actually present an opportunity to gain competitive advantage, and are stepping up to the plate to make their companies more strongly positioned for the eventual upswing.

The Coming of The Data Czar

Over the last 6 months, we’ve been hosting a number of webinars. As part of the attendee sign up, we ask people to list their job titles. What has become very interesting is that one role rarely seen years ago is beginning to show up with greater frequency, and that is the custodian of the data in the organization. The titles vary, but have included Data Czar, Data Business Manager, Data Quality Manager, and Data Governance Manager.

With information growing exponentially, senior management is recognizing its significance to the operations and performance of the business. Managing data means understanding it, making sure there’s confidence in it, that people have access to it, that the information people are getting matches what they are asking for, and last but not least, making sure that the processes around the movement and the use of the information are streamlined and efficient.

With the role of data custodian quickly becoming mainstream, the industry has formally acknowledged that one of the keys to success, both in decision making and investor reporting, revolves around strong information management.

The Current Economy & Information Demand

Resolve has recently been hiring a lot of people and the question that always comes up is how the credit markets and real estate current events are affecting demand for our product. Having lived through 2 real estate cycles, I believe my answer is based on experience. And that is, that when people are making money, they're less inclined to ask questions and dig deep. The opposite holds true when investors, especially institutional ones, are losing money. When this happens, people want to know what is going on, and thus, in a worsening economy, the demand for information grows exponentially.

A recent conversation with one of our clients confirms this:

"It’s a bit of a Request renaissance around here...Lots of people asking for reports and data. As the market goes down it causes people to want more data. I am very busy building dashboards."

Related to this topic, we're hosting a webinar March 20th on Managing Your Real Estate Investments in the Face of a Debt Crisis. Outside experts will discuss market conditions, go forward options, and the effects of different strategies on investor returns and compliance. To register, click here.

Portfolio vs. Investment Management

The term portfolio management is widely used throughout the commercial real estate industry. Investment management, while at the top of portfolio managers’ and CFO’s minds, is not a term you hear or see often.

There is a difference between managing a property or even a portfolio of properties and managing an investment. For the most part, investment management takes place “below the NOI line”. In addition to the performance of the properties, the myriad of factors that affect the investment include capital structure, refinancing options, buy and sell pricing and timing options, reserves and distributions…essentially all decisions that have an effect on profit and investment return.

Until recently, the real estate industry lacked the tools to support investment management. While a few of us would imagine operating our portfolios without a property management system, investment management is still predominantly done in Excel spreadsheets that are error-prone, difficult to manage, and create silos of information.

The reasons investment managers have turned to Excel to begin with is understandable. It is an easy place to throw the data that comes from a number of different sources such as asset management, accounting, and finance. Excel might have been a decent quick fix, but has outgrown the requirements of managing investments in today’s real estate environment.

As Josh Herrenkohl, Senior Manager in Ernst & Young’s Business Risk Services Group recently said:

“Modeling tools that were sufficient in the era of smaller funds are no longer sufficient and that the proliferation of new funds, combined with the prospect of lower returns, creates the need for new competitive advantages.”

Resolve has devoted years of research and development to building solutions that focus solely on the needs of investment management—automating and integrating processes that are commonly done today in separate Excel files. By integrating all investment-related data and providing managers with advanced analytical capabilities, decisions can be made based on up-to-date information and their impact on future returns.

Investment management can finally be performed with the appropriate tools of the trade. The real winners are the Portfolio Manager/ CFO and investors. Allowing senior management to be strategic and proactive, investment returns can best be maximized.

Information Driving ROI

Since I last posted, lots have been happening. Specifically, the sub prime mess has hit, many financial service firms are still not sure how much they’ve lost, credit markets have tightened, and subsequently real estate prices have been affected. What is apparent is that the need for accurate and timely information is paramount.

This brings me to our annual summit, which we hosted several months ago. The Summit is a great opportunity for our clients to share their company’s information challenges and strategy with each other, both in informal conversations and through formal presentations. The overriding theme was that the amount of information a company collects is expanding at an exponential rate and that companies have to successfully harness it to maintain and improve operating efficiencies, profit margins, and competitive positioning. (scale, grow, and manage risk).

The discussions were very exciting and focused on the many ways in which clients are using Request to improve business processes. Here’s what we heard:

- Increasing the data set that resides in our warehouse;
- Providing third party data contributors with the means to populate Request directly;
- Providing third party information consumers ways of directly accessing Request;
- Streamlining other process solutions to reside within Request so that they are made more efficient and to bring more eyes more often to Request…reinforcing the goal of Request being the single source of the truth and the one place to go to get all information on investment and portfolio level data.

Two specific examples that were focused on reflect the above thinking:

- A client’s 3rd party property managers contribute key information to the owner’s annual asset plans. The property manager’s information is delivered through excel spreadsheets and word documents. Before this information gets keyed into the asset plan, their write ups must be approved by both the asset and portfolio manager. This results in a lot of back and forth communication between all 3 parties. This time consuming and cumbersome process was streamlined by our client creating input forms for the third party property manager to fill out that then go through a work flow/ sign off process and then get automatically integrated into the asset plans. The benefits are many: no reentering of data, the visibility to see at any one point, what’s been approved and at what stage, the introduction of a consistent process throughout all property, asset, and portfolio managers, and overall…time savings.

- Another client has integrated SharePoint into the Request dashboard. The client uses SharePoint for document management and asset specific content. This information can now be accessed from the Request, with the goal of making Request the one stop shop for asset, portfolio, and investment level information.

This is all driven by the value of information. I was talking to a manager of a large open-ended fund, who stated that one specific report that Request provides could save him a million dollars. Now this is what I call ROI!