Commercial Real Estate Has Entered the Quant-Era
Commercial real estate is one of the world’s largest asset classes – roughly the size of the US. stock market. Yet it remains incredibly archaic in terms of how data is used to build strategies and make decisions. Given the unprecedented market challenges we now face due to COVID-19 and new technologies that allow for better data capture at scale, there has never been a more critical time to take a quantitative approach and embrace the use of data.
The problem with commercial real estate data today
As a former broker, I’m very familiar with the limitations of data in commercial real estate. The information owners and brokers have relied on to support investments across the asset lifecycle have always been backward-looking, incomplete, and inaccurate.
One reason for this is that commercial real estate data is hard to source. Private transactions, the length of time many deal negotiations take, and deal term-length all lead to the opaqueness of information throughout the industry. Also, until recently, we lacked the technology to make it easy for parties to capture their own data and aggregate it at scale to get a full picture of current market activity, creating unnecessary friction and risk across every stage of the asset lifecycle. This approach was begrudgingly accepted because it’s all the industry had.
Why COVID-19 changed everything
Pre-2020, the shift to a quantitative approach to decision-making was already occurring. “Data” was a hot topic on industry panels, many owners had projects to clean up their internal data, and the rise in proptech allowed landlords to centralize data from disparate sources like never before.
That said, COVID-19 was the catalyst for real change. The year began with an incredibly strong market for commercial real estate. But that changed overnight, and owners had no way of understanding what market demand looked like and how to navigate the wavering market conditions.
COVID-19 has exposed the countless deficiencies and that our old approach to data no longer works. The industry now grapples with historically low tenant demand, with fewer transactions taking place and an overall shift in fundamentals. According to the January VTS Office Demand Index (VODI), 2020 closed with national office leasing demand down 66% from pre-pandemic levels. Also, tenants’ needs have shifted – they’re not focused on the same space types or amenities they were a year ago. This means that we can’t rely on backward-looking data to make leasing and investment decisions. For landlords and brokers navigating this market, the need to understand what’s happening today has never been greater.
We’ve seen this play out in other industries
As we’ve seen with other industries that have transformed the way they operate by quantifying decisions, the benefits are significant. They’ve unlocked competitive advantages to increase speed to conviction – understanding activity today, getting ahead of trends, and ultimately predicting the future. Some commonly recognized examples:
- Baseball: teams have leveraged player statistics to identify the most promising athletes at the most competitive salaries, a process that began 20 years ago
- Finance: 40 years ago, hedge funds began leveraging historical stock market movements and unique correlations in the market in algorithmic trading to generate greater returns on investment
- Entertainment: Netflix began a massive data and machine learning initiative over 15 years ago, which ultimately led to their ability to leverage viewership data to identify trends to produce the right content for their viewers, bucking the Hollywood status-quo of making content based on intuition, financial backing, and connections
Why now is the time for commercial real estate to embrace real-time data
COVID-19 has created an existential threat for commercial real estate. While other crises in recent history have been devastating, such as the dot-com bubble burst, 9/11, and the Global Financial Crisis, none of them have caused us to fundamentally question the role of the office — is remote here to stay? Will we move to the suburbs? Is the open-plan office gone forever?
The only way to maintain an edge and navigate this crisis as a winner is with real-time data. Without it, landlords and brokers won’t be able to understand emerging trends until they’re well underway, at which point they’ll be playing catch up. That may have worked in a hot market, but in challenging times, data is the difference between your business surviving (and even thriving) or not making it.
For those early adopters in the industry, data has proved to be a pivotal tool in their arsenal, allowing professionals to make the most educated decisions with the best information available, giving a competitive advantage at all stages of the asset lifecycle. The investments in data made by leaders Blackstone and RXR are evidence of this — they are already experiencing the impact of data in their efforts to navigate COVID.
Now that we’re in the quant-era, what are the possibilities?
While it might have taken decades for us to get to the point we’re at today, now that the shift to quant-based decision-making has taken hold, the pace of change will only accelerate. Rapidly maturing technology and the growth of the cloud has enabled the capture of sophisticated data at scale, prompting a new way of thinking in the industry — how deep can our insights go, and what can we do with them?
Currently, our data is mostly descriptive of what’s happening today. We can better identify developing real-time trends, and use these insights to make decisions about investment or leasing strategies today. Considering where we’ve come from, this is light years more advanced than the lagging indicators we relied on very recently.
In the near future, as technology advances and insights go deeper, data insights will mature and move to a predictive model — giving us an educated assessment about the future state of the market. Informed by real-time data and predictions, leasing, asset management, and investment teams will be able to make decisions in the present based on future anticipated market conditions, putting them in a far better position to outperform their peers.
Netflix CEO Reed Hastings once said, “If the Starbucks secret is a smile when you get your latte, ours is that we adapt to an individual’s taste”. If data’s value-add for Netflix is providing the capability to adapt to changing preferences, CRE’s is that data gives you the ability to modify strategy in a rapidly evolving market.
Commercial real estate will always be somewhat of a blend of science and art. The new information landscape will enable the industry’s best to become even better through big data and the insights it provides, allowing additional time to focus on strategy — built on more informed decisions. Commercial real estate will always require significant human skill, and data is no replacement for that, however, it supremely assists in evaluating the industry. There’s no doubt that the data revolution is underway and will deliver substantial benefits for those who embrace it. And what will happen to those who fail to enter the quant-era? We only have to look at other industries that experienced similar advancement — in all likelihood you and your business will be left as relics of commercial real estate’s past.