The COVID-19 pandemic has been a significant driver of technological adoption across almost every industry, as knowledge workers adapt to working from home and doing business virtually. This shift to remote work has broad implications for the economy as a whole, but is having a particularly profound impact on the commercial real estate market—a $16 trillion asset class in the U.S. that is second in size only to public equities.
Laggard systems
Despite the importance and scale of this asset class, the commercial real estate industry still relies on outdated spreadsheet-based systems and static reports that lack the consistency, accessibility and the timeliness that investors need to make good decisions. While even the most novice individual investor has access to sophisticated reporting and data on platforms like E*TRADE and Charles Schwab, commercial real estate investors with billion-dollar portfolios are stuck with PDF reports that are typically generated manually from Excel. This analog system for investment management and reporting was stressed under normal circumstances, but with the entire industry now forced to conduct business remotely because of COVID-19—almost overnight—digital has become the currency of survival with intensified demands for real-time data and heightened transparency. In retrospect, we will look back on this pandemic as the catalyst that forced commercial real estate into the 21st century.
Increased expectations from investors
The uncertainty associated with the current market makes real-time access to information all the more critical to keep pace with investors’ expectations for greater transparency and frequent updates surrounding their investments. In a more predictable market, the speed of this communication was less imperative. But the market is far from predictable during a pandemic. Limited partners (LPs) are demanding more detailed data and insights into investment performance, rent collections, leverage and other key information that drives decision-making. They need a ‘one-click’ solution to access the full gamut of information possible, from return metrics to tax documents and everything in between, and they don’t have the luxury of time to wait for an email or call from their GP. The digitization of commercial real estate will completely transform the sponsor-investor relationship.
Scale challenges for sponsors
The burden of reporting has shifted in recent years from LPs to GPs, as LPs care far more about portfolio data aggregation and in turn task GPs with completing their custom reporting requirements. This dynamic has increased the volume of data entry and manipulation to an unsustainable level for manual reporting processes. GPs that manage their portfolios manually must aggregate and analyze data from many different systems across dozens or even hundreds of assets. Reporting must then be personalized to the needs of hundreds or even thousands of investors, multiplying the complexity and the stakes. Throughout the process, manually collecting, aggregating and calculating returns is time-consuming and error-prone.
Timeliness and accuracy of investor reporting serves both parties’ interests mutually. When you consider that investors today have more sponsor options than ever before, suddenly the caliber and quality of data becomes a crucial differentiator for GPs and a key decision driver for LPs. There’s upside benefit for the GP teams too, who may be working remotely across several time zones. By having a centralized hub that houses the data necessary for efficient investment management, sponsors can increase productivity and reduce administrative burden, freeing up time and resources to focus on what they do best—generating returns.
CRE’s digital revolution
What we are witnessing now is the technological transformation of commercial real estate. Just as public equities underwent a digital evolution over the past 20 years, now is the time for commercial real estate to do the same—only on a faster timeline. Those that continue to rely on PDFs and Excel will be left behind, while the investment managers who embrace technology will gain a crucial competitive advantage. The increased quality, frequency and usability of GP data and reporting will be the hallmark of a successful relationship between LPs and their sponsors. COVID-19 may have accelerated commercial real estate’s digital revolution, but it’s been a long time coming for the country’s largest capital market.
Alex Robinson is co-founder and CEO of Juniper Square, an investment management software firm.