Real estate money managers have begun to invest heavily in information technology, and are even using a version of the target tracking technology used in the Gulf War.
Through the use of technology, the managers want to change what they seen as an alarming trend in investor perceptions of real estate following writedowns that hit hard in the early 1990s. Among the largest 200 U.S. pension funds, the percentage of assets invested in real estate fell to 3.7% in 1995 from 4.9% in 1990 (Pensions & Investments, May 13). In the mid-1980s, many plans talked about having 10% to 15% of assets in real estate. Those projections seem lofty now.
To make institutional investors comfortable with real estate once again, the managers are opening up once highly private databases, providing more information about conditions affecting properties and improving forecasting of trends in real estate.
Carl A. Gowan, senior real estate investment officer for the $60 billion California State Teachers' Retirement System, said "to the extent data is shared and used as information, it is helpful." But he warned the data needs to be in digestible and relevant form.
Signs of the technology changes under way include:
MetLife Realty Group, White Plains, N.Y., licensed electronic mapping software to analyze properties and the surrounding areas. The software, which overlays demographic and other information graphically, is so powerful that a different configuration was used by Tomahawk cruise missiles during the Persian Gulf War to locate Iraqi targets.
About 80% of the data in the world has a numerical component, such as a zip code, said Steve Trammell, real estate vertical marketing manager for Environmental Systems Research Institute, Redlands, Calif., the maker of the mapping software.
Demographic information is often critical in spotting trends affecting real estate, such as a decline in household income near a shopping mall.
Teleres, Dayton, Ohio, a national online commercial real estate information service, added Citibank Realty Investment Advisors, New York; Aldrich Eastman Waltch, Boston; Equitable Real Estate Investment Management Inc., Atlanta, and Alex. Brown & Sons, Baltimore; as clients after Teleres began operation in May. Teleres has extensive databases on real estate and demographics and uses 14 news feeds, some from one of its owners, Dow Jones & Co. Inc., New York.
Teleres is adding BGI Research data from Black's Guides, Gaithersburg, Md., an electronic database on 40,000 commercial properties, to its extensive real estate information bank. Teleres is completing work on a product for the Internet.
The national real estate practice of the consulting and accounting firm KPMG Peat Marwick L.L.P., Chicago, established a strategic alliance with Dyna Software & Consulting Inc., Clearwater, Fla.; KPMG intends to acquire the firm within a year. Dyna writes software that, unlike many other packages, includes tax and disposition strategies. KPMG Peat Marwick will use the software in its own consulting work and market it.
The National Association of Real Estate Investment Trusts, Washington, is having RealPage Communications Inc., Dallas, build a World Wide Web page and a vast intranet system. An intranet is like a private Internet with links to the public Internet.
NAREIT's intranet will hold a huge database on real estate investment trusts that can be accessed by investors. Some areas of the intranet will be for NAREIT members only, allowing them to exchange information online.
The Pension Real Estate Association, Glastonbury, Conn., and the Urban Land Institute, Washington, also are having RealPage create an interactive electronic access of information libraries.
E&Y Kenneth Leventhal Real Estate Group, Los Angeles, added 15 new people to its information technology group and plans to hire 75 more as a result of demand from real estate managers and investors on how to improve their technology. "We are on a major expansion of practice nationwide," said Steve Nelson, national director for the information technology group.
The move to produce more information about real estate is being driven partly by the concern among real estate managers that institutional investors perceive real estate as an unpredictable asset class compared with stock and bonds, where information is more plentiful.
The managers want the technology to improve their decision-making and to repair sometimes shaky institutional investor confidence in real estate.
Yet, price declines on real estate purchased in the 1980s discouraged some investors. Some defined benefit plans have reported making major cuts in real estate asset allocations.
The Atlantic Richfield Co., Los Angeles, reported its percentage investment in real estate fell to 5% in 1995 from 8% in 1990. Exxon Corp., Irving, Texas, reduced its investment in real estate to 4% from 11%, and The State of Connecticut Trust Funds, Hartford, cut its investment to 8% from 16.5% in those same years.
Real estate managers and consultants attribute declines to the perception among institutional investors that information about real estate is seriously lacking.
"Far too much money was being thrown loosely at real estate" in the mid-1980s, said Carl Kane, national director of real estate consulting for KPMG Peat Marwick.
Investors didn't evaluate the downside of the market, didn't change their assumptions, didn't do market studies, didn't focus on portfolio yield and didn't do proactive management back then, said Mr. Kane.
What they did do was focus only on their next purchase, and that was the wrong thing, he said.
Institutional investors went through a period of huge overpayment for real estate in the mid-1980s as well as a credit crunch that hurt real estate in the early 1990s, said Mr. Kane.
The frenzy for real estate has stopped, he said, and investors can look at real estate in "the cold light of day."
With more information and more tools, investors can do what-if analysis and analyze assets lease by lease or work up liquidation strategies, said Mr. Kane.
Many real estate firms are developing databases that can match demographic data with specific information about tenants, said E&Y Kenneth Leventhal's Mr. Nelson.
The new software, said Mr. Nelson, can help investors quickly see their risk exposure in different situations, check real estate and demographic trends in different regions, track information about properties and monitor project performance by tenants, property type and industry.
"During the mid-'80s, a lot of pension funds got burned by their investments in real estate," said Mr. Nelson. Back then, he said, cash flow analysis was often done only once on properties. The analysis took a long time and was contained in a package presented by the broker of the property.
In the near future, said Mr. Nelson, investors will be able to get information about property in a "dramatically compressed" period of time because of online databases.
Many investors felt misled about properties they acquired in the mid- to late '80s, said Phillip Jennings, chief executive officer of Teleres. Pension fund officials believed investment managers didn't anticipate the effects of such events as tax changes or the savings and loan crisis, said Mr. Jennings. Poor forecasting "left a bitter taste," he said.
What investors want is the same abundance of information they get on stocks. "I don't really envision investors will get a ticker service on real estate prices in real time," said Mr. Jennings. However, he said real estate companies now believe they need to make their databases available so investors can make real estate decisions as they do about stocks and bonds.
"It's going to be a gradual process to build this online environment, but the plan is to allow institutional investors to query and retrieve specific information of interest to them in a more conventional manner," said Mr. Jennings.
"My heart goes out to them (Teleres). I know it is not easy to find real estate information; they are doing a good job," said Barry Oxford, an associate analyst at Alex. Brown, an investment banking firm that uses Teleres.
One factor that will help make information about properties easier to obtain is the consolidation of real estate into the hands of institutional investors like banks and insurance companies, said KPMG's Mr. Kane.
With the changing environment on real estate information, regional brokers who depended on using information nobody else had are "going to find it harder to make a buck," said Mr. Nelson.