Institutional Real Estate, Inc.

NAREIM Dialogues: Spring 2017

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NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT MANAGERS 20 INFORMATION IN OUR POST CREDIT CRISIS ECONOMY, institutional real estate investors have enjoyed consistent rent growth, increasing valuations, and strong returns. However, signs indicate a change in this trend. Greater liquidity through a friendlier regulatory framework may help to maintain cap rates, but the probability of Fed tightening increases with every quarter. As we enter the late cycle for commercial real estate, investors are now looking to exercise greater scrutiny over operating expenses as a tool to increase NOI. But how do you empower overextended, lean asset and property management teams to proactively improve operating expenses? Occupancy, lease negotiations, rental rates, capital improvement projects, refinancings, and dispositions typically supersede operating expenses on an asset manager's priority list. In an effort to fine tune operating expense management and unlock new value, commercial real estate owners and operators have begun to turn to normative comparison by adopting a single system of record that enables information transparency throughout the organization. The use of normative comparison to improve organizational performance is by no means a new concept. Professor Robert Cialdini famously established normative comparison as one of the six universal principles of influence. In simplest terms, normative comparison, or social proof, is the concept that "People will do things that they see other people are doing." People are more likely to recycle if they know that their neighbors are recycling as well. Employees are more likely to arrive late to work if they see their colleagues doing the same. In commercial real estate, investors have always used normative comparison to some degree; at quarterly reviews, nobody wants to be the only person with a net operating income that is $300,000 under budget. Every institutional investor has a trove of financial information across their portfolio that can motivate managers to improve performance. The problem is that the dispersion of information across multiple systems and individuals, not to mention the added complexity associated with multiple asset types, limits the ability to effect portfolio-wide normative comparison. Let's say you manage the core fund for a multi-strategy real estate investor and want to compare property security expenses in Chicago across all funds and investment strategies. Depending on portfolio size, asset managers company-wide would spend days, perhaps weeks, of man-hours collecting detailed security expense data from property managers, operating partners, old emails, and pdf files. Given the limited resources of any asset manager, data collection is rarely the best use of time. Furthermore, these mandates must come from senior management due to the complexity and effort required for a seemingly simple task. Even if armed with the best intentions, a junior associate would be hard-pressed to aggregate the same information. And if she were successful, there would still be the risk of criticism for wasting resources if the effort failed to identify any meaningful issues. However, evidence of an issue should not be the impetus for the comparison of operating expenses across similar properties in the same market. Any asset manager should be able to easily compare his asset performance against properties held firm-wide. The challenge is the formidable task of collecting the data into a single source of truth. TR ANSP By Joe Vellanikaran Director of Strategy & Market Development, Waypoint Using Data Analytics to Unlock Value

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