It is often said that management is more art than science. Consequently, it seems fitting that the National Association of Real Estate Investment Managers (NAREIM) convened its 2017 Asset and Portfolio Managers Conference in the shadow of the Denver Art Museum. The venue gave the group some inspiration for a day of professional education and thoughtful conversation. Here are three questions that stuck with me from the day:
1. Does your real estate company need a Chief Information Officer?
This question stems from an interesting conversation about who exactly within a property company has the mandate to seek out and adopt new technology. Several of the participants noted that there often is not a specific C-suite leader with the responsibility to evaluate, procure, and operate high-impact, cross-cutting information technologies. This leadership gap exacerbates the property industry’s tendency to lag behind others in the adoption of new technology.
More than just a gripe, this conversation led to the interesting observation that property companies may need to reconsider the role of the Chief Technology Officer. In many companies, the Chief Technology Officer is dedicated to making sure that basic information technology hardware, such as computers, phones, teleconferencing, and printers, are available and up-to-date. In our discussion, it was pointed out that this role, while important, is not the same as executing a vision to collect, analyze, and leverage information as an asset to the business. Ideally, this is the role of a Chief Information Officer, something that remains rare among leading property companies.
While many companies have plenty of hardware technology deployed in their offices, most companies have not yet figured out how to make data-derived insights a real part of their value proposition.
2. Is health the new sustainability?
Joanna Frank, Executive Director of the Center for Active Design, opened her remarks with the headline, “Health is the New Sustainability”. This provocative statement might be considered boosterism from the operator of the influential new Fitwel rating system, but she had a more profound message. By saying “health is the new sustainability”, Joanna was reflecting on the role that sustainability has played in the property industry since the 1990s. Sustainability has emerged as a mark of quality and a source of competitive differentiation. We continue to see sustainable properties — often those receiving designations like LEED, BREEAM, GreenStar, and similar certifications — with higher resale values, faster leasing, lower vacancy rates, and, sometimes, higher rental rates.
The benefits of sustainable design and operation are not going away, but the success of sustainability in the property market has necessarily reduced the marginal benefit of sustainability as a source of competitive differentiation and comparative advantage. Going forward, health offers a chance to realize some of the same opportunities companies have enjoyed with sustainability. Demonstrably, health-promoting properties are likely to have higher resale values, lease faster, lower vacancy rates, and, perhaps, command higher rental rates. If this happens, we will all be better for it, and we can truly say that health is the new sustainability.
3. Where will we be in five years?
After nearly an hour of dialog about health and real estate, Ed Novy from American Realty Advisors closed our panel with a big question: Where will we be in five years? I believe that the real estate industry is grappling with a generational change in expectations about transparency and performance. This is happening at the same time there is a pervasive emphasis on reductions in the size and cost of corporate real estate portfolios. For me, the convergence of these trends points inevitably toward pressure to deliver a smaller amount of better property, where “better” is defined by objective, operational measures of human experience, and environmental performance.
These trends suggest that investors and desirable tenants will demand property that demonstrably delivers superior conditions for people, along with clear reductions in operating expenses and environmental impact. These conditions will become synonymous with investment-grade real estate. Properties that cannot not keep up will trade at a discount, if they can trade at all. These trends also suggest that human experience — health, well-being, productivity, and performance — will be a primary source of value creation and differentiation, while superior environmental performance will come to be expected.
Moreover, success in managing these issues will not be graded by intention or effort. Rather, owners and managers will be expected (or compelled) to provide operational performance data. This may take the form of personal monitoring devices carried by tenants, public energy efficiency benchmarking, or increasingly sophisticated predictive models. One way or another, performance data will get out, and it is increasingly clear that top tier investors, owners, and managers will need to have the technology and skills necessary to create, manage, and analyze their own performance before others do it for them.
These reflections only scratch the surface of the conversation in Denver but the bottomline is clear: Asset and portfolio managers are operating in a dynamic environment. They are dealing with the traditional business challenges of growing net operating income to keep ahead of rising cap rates. They are doing this with a sharp eye out for economic, technological, and social disruptions. This can take the form of new apps, breakthroughs in sensor technology, or changing preferences and expectations. One way or the other, the industry is on the move.
by Chris Pyke, Chief Strategy Officer