An Earthquake Investors Can Love

Underlying business factors are generating an IT revolution in commercial real estate

At first blush, no old-economy industry would seem to stand more immune from the drivers of current economic upheavals, globalization, and technology than commercial real estate. After all, you can import or digitize all sorts of things except one: land. That observation, and the diffidence that real estate entrepreneurs generally have had toward computers and information processing, have kept the industry in a technological backwater. The prospect for IT investment in the commercial real estate sector, however, has grown recently. Capital markets (consider the impact of transnational capital flows), have caused real estate firms to behave more like conventional businesses. The deal frenzy that in the past has often characterized the industry is now cooling because less money is available to make deals (particularly true during the credit crunch of 1998). Today, owners and operators can no longer just rely on clever transactions to make money; they have to be keen operators and more efficient managers, eking out profits on the basics: good tenant retention numbers, prudent capital improvement ratios, and proper alignment between customer service and headcount.

Other players — such as advisors and investors — are now experienced participants in the financial sector, fully acquainted with the power of information. For them, IT is not just another process they can bolt onto the old ways of doing business. Instead, it is part and parcel of their strategy to have the best information in the shortest time in order to stay ahead of the market. Also, the cost of IT is declining, new business models for the software industry (such as renting software over the Internet) are emerging, and we have broadband and other developments. In short, commercial real estate is ripe for innovation.

The implications are noteworthy for two reasons. First, we are talking about a trillion-dollar industry that crosses several categories of product: office buildings, industrial parks, research and development centers, retail malls, and multifamily (apartment) dwellings. Second, we are dealing with an industry that can prove to be a gateway to a variety of B2B services and products.

For years, companies relegated IT’s role in commercial real estate to the back office, as firms first pursued tools to improve their bookkeeping and accounting functions. Increasingly, the attention has been on the front lines. For example, a multitude of independent software developers have focused on work-order programs wherein a tenant emails a request for, say, a light bulb change. The system manages customer service when it notifies the appropriate building employee and tracks meaningful statistics, including how many calls a particular job received or the average response time in one location vs. another. Some companies have begun using software to monitor the leasing process (noting when the prospective tenant visits or tours the site, when the firm’s proposal or leasing contract goes out). Corporations also use software to manage customer call databases for tenants and brokers. Other application arenas are attractive, too, including those that help firms manage and close their deals. Argus Financial Software acquired Dyna last year in its bid to be the first on the block with a “soup-to-nuts” financial offering, namely, software that individuals can use for detailed valuation and portfolio analysis, construction development, debt structuring, and mortgage broker applications.

In the past, small, private firms have dominated the field of core transaction system and property management products, but that is changing. Serious money is spilling over into other areas as well. Bidcom Inc. received a $46 million investment from Internet Capital Group, an Internet business holding company; Hines, a Texas-based worldwide real estate developer; and Oracle. Its product helps manage the costs and build-out of large construction projects by facilitating communication across the spectrum of parties involved with a deal — architects and contractors, as well as the real estate developers. Cephren Inc. a head-to-head competitor, got about $41 million from Goldman Sachs Inc., Bechtel Inc., and GE Capital. Co-Star, Propertyfirst, and Loopnet, also backed by major investors, are among the services with national and international ambitions that will list space that is available for lease or a building that is ready for sale.

And, of course, there is the world of “smart buildings,” including automated heating, ventilation, and air conditioning (HVAC) services. Although millions of everyday “smart” devices have already been installed around the world — including motion detectors, valves and pumps, refrigeration units, and light switches — the Internet will attract the next wave of services and cause customers and vendors to take a new look at what constitutes the basic level of information needed to run a business. It is a variation on a current truism that the kinds of services and products that Internet connectivity will enable across control devices — let alone basic financial and management systems — are difficult to imagine now, but they will come.

All in all, I get the sense that we are at a rare moment of confluence among factors that create opportunity — an opportunity to recast the revenue offerings, profit formulas, and management tools of yet another industry by application of intelligent technology and processes.


Nicholas Imparato (imparato@hoover.stanford.edu) is a professor of marketing at the University of San Francisco, the editor of the forthcoming Public Policy and the Internet (Hoover Institution Press) and chairman of Prime Wave Solutions.