R&I 2016 Meeting Report: Data is Here. Are We Ready For It?
“Research is creating new knowledge” – Neil Armstrong
NAREIM Research & Investment Management Meeting
February 17th 2016
for a print version, click here
“Humans are really good at seeing patterns,” said Gunnar Branson of NAREIM in his introduction to the third annual research and investing meeting in Chicago. “It might be difficult to decide on an umbrella based on the statement ‘there is a 60% chance of rain’, but with an animated map of the radar data, the decision becomes far simpler to make.” Unfortunately, real estate is not as sophisticated as weather visualization when it comes to data. We still rely on brokers to recommend an acquisition based on their experience of the market. Our pro-formas still rely on assumptions based on interpretations of previous performance, comparables, macro-economic and market trends to decide on multi-million dollar investments. Is it any wonder that our proformas rarely describe what actually happens in the years to come? “Big data is not just for high-tech companies. It could map the actual real-time economic activity in and around buildings and show the patterns that lead to more informed decisions, better investments, and ultimately better management and pricing of risk.”
Where is the Data?
Everywhere. But we have to learn how to collect and analyze it.
“It’s time to get the data out of the silo,” exclaimed Chris Happ, CEO of Goby, “If you do, you can access behavioral data to tell you when a tenant might leave, when they might expand and how a building’s cash flow might be optimized.” As an example, Happ pointed to the case of a 16-year-old girl who was bombarded with advertising for products related to pregnancy. Her father became furious. He eventually called the advertising company
and demanded that they stop targeting her because she wasn’t pregnant. She was, in fact, pregnant and had not told anyone yet. But her on-line behavior, tracked by the advertising company had revealed that she was. As creepy as this might be, it reveals that if one is able to collect large amounts of data on people’s behavior, it’s possible to better predict what they are likely to do. “There is a lot of data generated by people’s behavior that isn’t being looked at by real estate owners. Whether it’s parking, energy use, deliveries, or purchasing behaviors, users of real estate leave behind data patterns. For example, a reduction in simple item like toilet paper can tell you something about how many people might be using a given space – which likely is an advance sign that there may be a change in their lease requirements when the lease is up.”
“There are 2.5 quintillion databytes created each day,” declared Constance Freedman, Principal of Moderne Ventures, “if you stretched pennies to Saturn and back that’s about 2 quintillion pennies. Most of this data is unstructured. We only analyze .5% of it.” Just imagine what kind of behavior we could predict if we start using that data. There is effectively a crystal ball out there and we just need to learn how to read it.
“Real estate needs to become more comfortable with probabilistic thinking. If we can increase certainty, even from 40% to 60% that a pro-forma will be accurate, that translates to a lot of money,” claims Branson. The future is uncertain, it’s impossible to predict everything that might happen, but the more data you collect, the richer the model you can create, the higher your probability of accurate forecasting – just like the animated weather maps.
“Commercial space is not a commodity. You can have a company that is having a great year but there is a new building going up and they want to move there,” says Emily Slovitt, Investment Manager at Principal Enterprise Capital, “it’s idiosyncratic.” These arguments, however, are not mutually exclusive. While it is unequivocally true that we will never be able to tell the future with 100% accuracy, improving our current accuracy by as much as possible is a no brainer. “I’m just surprised by how much low hanging data fruit there is out there, and all it takes is the will to use it,” says Branson, “The security desk downstairs knows how much we use our office space, but the building managers and leasing agents have no idea.
What is Big Data?
“I’ve never really liked the term ‘big data’, says Craig Hancock, CEO of RealMassive. “It’s meaningless and confusing and only represents potential value to the owner. Big data requires interpretation by an analyst, data scientist, tool or algorithm to derive value, to look for signals.” So it’s not really big data as much as it is big analysis of that data. “Right, it’s about turning big data into actionable insights that drive business. Until that happens big data is nothing more than an underutilized asset.”
“I think the biggest problem with the analysis we have so far is that it’s extremely backward looking,” says Rene Circ, Research Director at the CoStar Group, “we need to move to real-time analysis.” What happened last year or last cycle is interesting, but only insofar as it can tell us what is going to happen next cycle, or at least what is happening this cycle. “The behavior of the real estate community is knowable because of internet searches,” claims Circ. There is a long chain of behavior that occurs before someone decides to move into a new space and “that behavior is track-able.”
Comp sets are a particularly interesting example of this. Most sets are put together by compiling a list of data from buildings around the building in question. “But that’s very subjective,” says Circ, “and extremely vulnerable to confirmation bias.” A seller isn’t going to include a comp that lowers the value of the property and will only consider that which supports their theory of value. “A more accurate way to look at comparables would be to compile all the internet searches that that include your building.” This method allows the potential buyer to tell the seller what their comp sets are, rather than the other way around. “The goal should be to remove as much subjectivity from the equation as possible.”
“There’s significant opportunity on the table as the industry learns to work with more data,” says Hancock. “Closed, disconnected data systems have long restricted data flow, impeding the velocity with which the industry moves. Opening access to old and new data sources establishes a foundation that empowers the industry to accelerate deal flow. It’s time to let the data speak.”
How Is eCommerce Affecting Retail?
“Nothing has been more disruptive in the last 15 years than advent of eCommerce,” according to Doug Herzbrun, the Global Head of Research for CBRE Global Investors, “It’s been great for the industrial market and has increased demand for warehouse space, but it’s been very difficult for bricks and mortar retailers. The test now is how many can capitalize on omni-channel retailing.”
In the beginning there were traditional retailers and online retailers and ne’er did the twain meet. “There were very separate channels when eCommerce first occurred, and most online retailers were just online. They didn’t have physical stores,” says Alan Billingsley of Billingsley Interests. Now there is a great deal of cross-pollination. “Retailers really don’t care where the sale comes from and currently about 10% of all bricks and mortar sales happen online.” But if the question was: Will online kill physical retail? The answer is obviously not. They are mutually beneficial. But it does change the rules a bit. “Pricing is extremely transparent so the ability to compete on price has really gone away. These days a Macy’s pretty much has to match an Amazon.” Which begs the question: If retailers aren’t competing on price, what are they competing on? “It comes down to fulfillment; the ability to see or try the product. The goodies that come with each buying experience are getting more important,” says Billingsley.
“There is less need for square footage, but the square footage they do use is worth more,” according to Billingsley. If people are looking in person and buying online, then the more showroom spaces you can cluster together the better. “Street front retail is growing. I’ve lost count of how many high end storefronts are popping up in urban spaces.”
“As high street retail is looking to replace the traditional shopping mall experience, what do you think about pedestrianizing streets?” asked Margaret Harbaugh, Vice President at Morgan Stanley. This phenomenon is especially visible in New York with the closing of much of Times Square to automotive traffic.
“I don’t think cutting off all traffic is the grand solution,” argued Billingsley, “the more inviting you make a street the better – but it might depend on where you do it. Time Square worked, State Street in Chicago 30 years ago didn’t.” With cars or without, urban retail districts will rely more and more on high value “showrooms” as e-commerce increases its ability to replace big-box retail fulfillment.
How can we find and recruit researchers for real estate?
Real estate researchers are somewhat unique. Finding people who can bring the right combination of analytical rigor and in-depth practical real estate knowledge is not easy. Dan Gathof, Principal of Olympia Solutions had a suggestion as to how to better find the right people, “Try to find good overall people first then deconstruct the roles you have to see if they can fit in there.” If you are hiring for strategic ability, it’s essential to look at the roles differently, and to understand that every great strategist doesn’t come from the same path.”
Jimmy Hinton, Managing Director at HFF noted that, “from the beginning of the recruiting process to the end of the process, the job description often completely changes.” He warned that, “There is a lot of underlying bias that goes into what an employer thinks are the necessary qualifications for a role.” Be it one’s Alma Mater, major area of study, or even one’s home state, the reasons we consider people tend to be highly subjective. The more they are like us, the more we like them. Most of the skills called for in job requirements are vague at best and include phrases like ‘Self starter,” “great organizational skills,” or “entrepreneurial.”’ “But what is unique and relevant to our function in research has changed. Is it more important to be quantitative, or is it more important to have an analytical mind?” asked Hinton.
“Yes,” replied Will McIntosh, Global Head of Research for USAA, “I put priority on qualitative skills and an analytical mind and they’re usually not in the same person. You’ve got to have people that can write so that anyone can understand the benefit of the research, but you also have to have people with really strong analytical skills.”
“Most clients don’t have a clear view of what they are looking for. They usually just describe the person who has previously been in the role and ask for another person like that,” noted Gathof, “and two to three years later they find themselves in the same place.” If you do the same things you’ve always done you’re bound to end up where you’ve always been. “We have to look at the data differently.” So instead of following the subjective description in the job listing, try finding candidates based on more objective job strategy. Just like a real estate investment.
Subjective vs. Objective. Gut feel vs. hard data. David vs. Goliath. But which one is which? If most people make decisions based on intuition and we are only analyzing .5% of the data we have collected, then it’s clear that subjectivity is the present Goliath that Data David must slay. However, if you can stretch 2 quintillion pennies to Saturn and back to represent the data collected every day, then data is clearly the Goliath, it just doesn’t quite know how to fight yet. Rest assured, when it learns, little subjective David is going down.
The future is not going to be shaped by how we have always done it.
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