Combining AI and real estate expertise - How to change commercial real estate investment industry
If we focus on the real estate industry in general, prop-tech scene development is noticeable, especially in the last decade. However, a close look into the commercial real estate investment industry shows that the commercial real estate investment management process, developed through the several last decades, stayed more or less the same.
Many real estate companies went through very wide set digitalisation processes, focusing mostly on digitisation (turning paper into digital) and digitalisation (automating some existing processes), but very few did the next step when it comes to using the data they have and expanding the data sources in order to apply some more advanced analytics.
Although we have a wide range of technological tools enabling us to gather and process huge amounts of data, we could humanly ever do before, use of AI and the advanced data analytics is not part of the investment management process in the commercial real estate industry.
There are some companies focusing on residential real estate, which are already exercising the use of AI and other advanced analytics tools, but when it comes to commercial real estate, due to the limitations regarding the data frequency, there are not so many solutions in the market.
In this article we will go more in depth about what kind of data sources and data analytics we can implement in commercial real estate investment management and what are the challenges we to be faced in this process.
Processing huge amounts of data ( over exceeding human capacities)
If we would have to define the goal of data gathering - it would be to:
apply analytics respectively to get the answers we are interested in by using technology
to discover hidden patterns not detectable by humans.
When we talk about data gathering technology, it is enabling us to gather much more data, from different sources without being limited only to the available empirical market data. In order to keep the process efficient and not to get into "analysis paralysis" here it is really important to rely on real estate expertise and to identify those kinds of data and data sources, which are showing to have a decisive impact on the markets we are interested in.
Therefore, although we promote relying on AI and technology for getting deeper and more accurate answers, in the data gathering stage it is equally important to include the expert opinion about those local specifics of the market. This expertise is always a great starting point to get to know the market and its basic dynamics assumptions, which will be then further checked in the data analytics stage.
For example, when starting to analyse a portfolio of a company present in several countries, the first step is always to ask local experts what market parameters are in their experience connected and which between market connections and influences they have noticed over the years.
This is a great starting point which gives some local context and makes a basis for further research through the analytics, which is then in a way confirming or disconfirming those basic assumptions and quantifying them.
In this stage all kinds of quantitative and qualitative data can be gathered in unlimited amounts, for different kinds of parameters and their performance through quite long timelines. Besides official empirical data, in this stage we can also gather language based, qualitative data as any other data determined to have a relevant correlation with the market in question.
The importance of additional data sources is stressed also with the fact that the empirical data for the commercial real estate has a very low frequency. In order to overcome this limitation the quantitative part of analytics has to include additional analytical tools such as statistical modelling.
Applying advanced analytics designed for commercial real estate investment industry
Commercial real estate investment industry is a very specific one when it comes to the empirical data availability and therefore application of analytics such as machine learning or similar. Namely, when it comes to empirical data commercial real estate is one of the “slower” industries, where market data is available only every quarter which is too low frequency for tools such as AI.
However, there are tools available, such as statistical modelling, where also this kind of data can be in depth analysed and these results then combined with other kinds of quantitative and qualitative data in order to get a comprehensive picture of what is happening and what is likely to happen in the market.
There are so many analytical tools available for any kind of data source, so every kind of market impulse can help us to form a comprehensive picture of the risks and opportunities. Therefore, now we have tools to empower decision makers to make more objective decision making about commercial real estate investments by using advanced data analytics.
Providing with one point easy access to the advanced analytics via easy to use digital platform
One of the challenges in every industry and especially in those traditional ones, such as commercial real estate is to enable a wide circle of decisive people to use advanced technological tools in a simple way. Although they are warning us for years that in one or two decades programming and IT skills will be part of basic business literacy, the fact is that most of the decision makers in commercial real estate industry tend to do business “old way” and rely on the old processes, no matter how objectively inefficient they are.
Change is always hard and unfortunately digitisation and digital transformation processes have a reputation for being “time consuming” and something “nobody has time for”. Especially when we talk about introducing advanced technology, decision makers tend to conclude that this will be one more complicated system only a few IT and tech guys will know how to use. It happened often enough that a very good solution nobody knew how to use was implemented in the company.
Taking into consideration these facts one of the most important challenges of any advanced analytics solution should be simplicity of the use - only crucial information determined to have a decisive impact on the business in question should be presented in a user friendly interface connecting different commercial real estate investment decision makers.
This is the next generation technologies challenge every tech provider will have to solve in order to be able to change the way business is being made in a traditional industry such as commercial real estate.
Combining advanced analytics with lean commercial real estate investment management
A simple to use digital interface with the most advanced market analytics should be an independent platform used by anyone interested in investing in commercial real estate, but also a basis for connecting with actual investment management systems and portfolios of commercial real estate companies.
In order to measure how market developments are most likely to impact the portfolio, it is important for companies to set up a lean investment management system where only relevant key performance parameters are included. Setting up a lean investment management tool as a first step towards data driven investing is often a necessary pre-step, especially for companies which were growing rapidly and are ripe for portfolio restructuring processes.
Lean investment management system on the company side and AI powered market analytics on the other, enabled on one easy to access and easy to use digital interface will be a basis for a next generation decision making tools, which will bring decision makers and technology driven possibilities closer together.
And how are things done now?
Well, as they were always done! Mostly.
Market research companies have access to huge amounts of empirical data, which are every quarter presented in the usual market reports - analytical methods used are limited to simple sensitivity analysis and forecasting to best and worst case scenarios. Some market data owners are offering analytical solutions in a limited capacity, which are often not accurate and with a limited usability, especially for the commercial real estate part of the industry.
These reports and their underlying data are implemented in internal Excel sheets where simple business analytics is provided. These internal lists together with yearly valuations (which are done based on the same simple analytics principle mostly) will be a basis for the investment management reporting process towards decision makers. So, for every single investment decision makers will get only the overview of the basic market data and subjective opinion of the investment manager about what is to be expected from the market and how to invest.
Needless to say that subjective way of seeing the market depends on so many factors, one being the need to fulfil investment budgets. So it very often happens that risky investments are done based on a subjective common positive opinion about the market (consensus market forecast). The same is true for missing the opportunities deeper market insights could uncover.
What to expect from the future of the commercial real estate investment industry?
It is realistic to expect that the next step is in front of us and it will connect all the missing dots in the industry:
Allowing a wider range of data gathering combining quantitative and qualitative data sources
Combining local knowledge with with AI tools in order to get the most accurate results
Always expanding tech know-how in order to apply those kinds of advanced analytics which are optimal for the subject industry
Focusing on overcoming specific industry challenges with industry custom made solutions
Setting up lean investment management models which will be easy to connect with advanced data analytics results in order to have a comprehensive and instant overview of current and future challenges and opportunities.
Providing intuitive and user friendly interfaces in order to enable a wide circle of decision makers to use this tool in their everyday business decision making process.
Anything to add?
We have something - we are looking forward to the next stage in commercial real estate investment business!
For more info about D-DARKS solution for commercial real estate investment management pls contact us!