Why a Lack of Data Impacts Real Estate Asset Decisions
In today's real estate industry, data is king. It helps to improve the accuracy of property valuations, minimizes risk, and drives better business decisions. But what if you don't have access to the correct data when it matters most? In this episode, you will explore why a lack of data in real estate asset management can impact your decision-making.
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Why A Lack Of Data Impacts Real Estate Asset Decisions
I'll give you a real-life example. I have quite a few properties and a particular one that comes to mind is in Texas. It's a struggling property. There used to be a swimming pool and for some reason, the prior sellers poured concrete over it. To this day, I still don't know why. My guess is maybe it wasn't up to code or maybe it was too expensive to maintain.
I don't know why but it's Texas and you need a swimming pool. I've been trying to figure out what I would do with this. I have asked property manager after property manager and other owners and I get so many different opinions. You hear things like, “Leave it as it is.” “Why bother doing anything with it?”
The other thing I might hear is turning it into a dog park because you have a lot of pets and people appreciate that. I want to take it a bit further. How much can I push my rent up by? No one can give you that. It's your property. You have to figure it out. I'll ask my management and it's the same story there. They're like, “We shouldn't do anything because people might congregate.” “Maybe you should turn this into a picnic area or pool area, whatever.”
In that simple decision, there is a lot. There are 2nd and 3rd other consequences of that decision. Let's say I want to put a pool back there, so I'll get a quote but there are all these unforeseen expenses and there's no real way to plan and measure that out and have everyone coordinate. These decisions can be draining and the consequence of getting it wrong is only sometimes my own way often because you don't have data at your fingertips.
That's why there's a stat production of the status quo. The first people you talked to you said, “Don't do anything. Leave it as it is.” That is one of the beginnings of this trend in real estate. Everyone asks, “Real estate is the largest asset class. Why hasn't it adopted technology in a more meaningful way?” What you said is exactly why. If the data were there to make decisions clearly, people would be out there making those decisions.
Because they don't know if a kid fell in that swimming pool and they were sued for a million dollars, they had this whole thing and they're like, “We're going to fill every pool in our portfolio.” Maybe it was the right decision for that owner but you're going to reposition this asset from a C to B or a B to an A. One of the best ways you can describe it as a luxury place is having a pool, having a dedicated lifeguard, and being able to do that. That can translate into real value for you and your investors as well.
Times have been good. Every real estate fund has been delivering fantastic results over the last couple of years. In some ways, it's hard to know what behavior and what actions have worked well versus having property, letting it sit there, and letting it appreciate because real estate comes in cycles. When we inevitably encounter a downturn or we encounter a tough period, it's at that point where someone has to draw on that experience. How do we add value to this asset? What is the game plan? It's hard to know what worked and what didn't work if you're not preserving, collecting, and measuring.
I would do a little bit further than that and say that the market we're in is unprecedented. People are regularly buying properties at a sub-3 % cap rate. If you're going to acquire properties at such an aggressive valuation, you need a differentiated pro forma or management plan or both, ideally. You need to be able to say, “I can confidently say that we can squeeze more NOI out of this property on this asset class, out of this repurpose and out of this value add.” What's valuable is that people know they're paying a high price. It's not that people have these blinders on them.
What is happening is people are becoming more driven by the data. They want to see better data, more interesting data, more unique data. One of the ways people have done this is, that more and more people are requesting demographic data from their property management system and trying to understand where they should market to, who they should market to, what are their best clients, and what are their worst clients. It creates this new culture of decision-making. It's the same reason virtual leasing has picked up. COVID happened and you couldn't give a tour. What is happening now is because of these sky-high valuations, you need the data to make a decision that is going to drive more value for you and your investors.
To make the right decisions, you need to measure things. You need to focus on metrics. If you think about the role of a property manager, what are the metrics that matter?
The way to think about that is not that I'm a property manager, what are the metrics that are important. You should say, “Look at this building. Look at the sub-market. Look at the strategy we're trying to execute. What are the right metrics for that?” There are all different kinds of owners and they all have different goals. If you're a small owner and you're trying to preserve cashflow, have some appreciation, bonus, and taxes, you may not have an aggressive plan.
That manager or owner is going to want a basic high-level occupancy, and low cost. As you get to more sophisticated owners, let's say, you're going to do a class A multifamily list like this new building in San Francisco. The thing you're going to hear a lot about is your traffic. You're going to think so much better. The most important thing to you is how much are we spending on marketing and how are we able to do that? What are the value concessions we're getting?
Real estate is the largest asset class. Why hasn't it adopted technology in a more meaningful way?
Almost all new buildings are giving concessions because the owner needs to meet some requirements from their lender. Likewise, for a value add, what's interesting is value add is probably the most commonly executed strategy in property management, which is you take a building and make it nicer. Those kinds of owners are focused on what's the rent growth, how much are we spending on CapEx? How long does it take to deliver these units? Those are ways to think about it to start.
There's a disconnect sometimes between what owners are measuring and what management is measuring. I've experienced too, how managers aren't necessarily the most financially literate. The difference between a regional and a VP sometimes might be the VP is able to take a more holistic portfolio-wide view and focuses on metrics that matter. What are some of the metrics that the onsite team might focus on versus the regional versus the VP versus the owner? Could you give us a breakdown of the roles and the metrics that each level of role focuses on?
Let's start at the owner level. The owner is going to have an asset manager. This asset manager can be the owner of the property or a dedicated role. This person is thinking about in terms of portfolio. What is the right time to sell the property? When did it achieve its business goals? A lot of times, we're going to look at NOI, they're going to want to have the highest potential rents, and they're going to pay a lot of pension to net effective breaths. Where are these trade outs? Compared to the last person, what's the new person paying? It’s basically said.
The next step in the value chain and the property management side, this is where it transitions, is the regional manager. This role of the regional manager, especially in the last couple of years, because of these rising valuations, it's become a blender goal. You can't be non-financially savvy. You have to be able to hold. This regional manager is paying attention to individual properties. They're trying to figure out which ones have the highest spiking expenses. They’re thinking a lot through which ones are able to meet the pro forma.
On the property management level, which is the person on the ground, on the site level, they're thinking about the most basic nuts and bolts, which is, how is our occupancy? How is our occupancy in 30 days, 60 days? Also, how are our work orders going? Did we go over budget a lot on any specific ledger? One of the challenges in this new era of more data, more information, and a more aggressive business plan is that we have to find a way to bridge what the property manager is looking at and both the asset manager is looking at. We need a more financially savvy way to get everybody lined around the same metrics.
Where does the disconnect usually happen between owner and manager?
It's hard to say because it happens all the time. Coming back to incentives, if you are a fee manager, meaning a property manager that manages for owners and investors, you're thinking about gross rents. What is the highest rent I can get? Am I going to get paid a percentage of that? That's a good goal to have because you would think that aligns there.
Where I see a lot of the disconnect is, how long has the unit been sitting vacant? If it's been 45 days or 60 days, is the problem the pricing? Is it where the location is? Can we offer a concession? Are we spending enough on marketing? That's where we start seeing the disconnect. Why is something happening? If there's a problem? Why is it happening?
The biggest problem is they're not using data effectively. Everyone has their own different ideas. The property manager is going to say, “It's our competitors. Our competitors are always here.” The regional lender is going to say, “We priced the unit too aggressively.” The asset manager is going to say, “It's got to be a problem with the property manager.” Once everybody has the data to make a clear distinction, we'll see more clarity between those parties.
Sometimes the issue is that you're flooded with a lot of data as well. As an owner, you have a hard time synthesizing this data, so you want to understand that sometimes this is why you have reports sent to you and then you'll have a weekly, monthly, or whatever performance review meeting. This is how some of my meetings go, “You sent me a mountain of data. What matters here? Where should I focus my attention because there's so much here, it is hard for me to keep a tab on one property?” This is something property managers should appreciate. Your owner might have a portfolio. For them to take one report and then another report and another report, there's a lot of context switching that needs to happen. Sometimes you need a narrative around the metrics. Can you tell us a bit about that?
Yeah, but before we get into that, if you don't mind me asking here, for context for everybody else, how many pages is one set of reports that you get end to end the total number of pages.
It varies between property manager to property manager. Sometimes you're simply dealing with one email with a table, and I've been pushing for bullet points that explain what's going on in the table. You'll get this series of PDFs or one Excel sheet and it's a monster Excel sheet with macros and everything, followed by 30 different tabs.
One of the coolest parts about real estate is the idea of narrative is so pervasive.
One tab relates to another tab and sometimes it’s so tactical. It’s like a financial ledger and it's overwhelming, honestly. You go back and you look at the high-level metrics and you're stuck. You're dealing with high-level metrics and then you click on it, and the spreadsheet gives you, “Row X in sheet tab this, tab that,” you can't correlate in your head. What's driving this? What are the key variables?
This is exactly the state of communication, metrics, and data-driven thinking in real estate, to push it a little bit further in the empathy piece here. You have 1,000 units, which is not a lot, for a lot of people, that might sound a lot, but in the world of professional real estate, that's not a lot. Each of those sends you a monthly packet with 50 to 75 pages and your expectation is to go through all of them. That's so much information to do.
Another challenge you described is if you're using multiple fee property managers, there is no consistency between what they're going to send. One of the biggest challenges is there may not be consistency on a month-to-month basis. If the property manager leaves and then there's this new one and they do it a little bit differently. Because they worked at Greystar and that’s how Greystar did it, sure that's helpful, but you cannot compare that information for this month compared to all previous months easily.
When we talk about data, the two most important things we need are unbiased regular snapshots. Here's the state of the business. This is how we're doing and then repeatable. Every week, you can see this. You can see this one went up and this one went down. You can make your own correlations and your own expectations, and you can build your own procedure. We talk so much about metrics, it's important that you brought up this idea of communication. Narratives are so important. Narratives are this idea on real estate that every single report should come with a one-paragraph or 3, 4 sentences saying why did this happen.
One of the coolest parts of real estate is the idea of a narrative. It's so pervasive. There’s so much you can learn from. You should consistently present data that is unbiased, regularly snapshot, consistently prepared over time, and give your best guess as to why it's changed. If you have your property manager copying and pasting information from their property management system, they don't have the time or expertise to go ahead and think about it, they're wasting all their time on reporting.
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Zain Jaffer is an accomplished executive, investor, and entrepreneur. He started his first company at the age of 14 and later moved to the US as an immigrant to found Vungle, after securing $25M from tech giants including Google & AOL in 2011. Vungle recently sold for $780M.
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