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Traditionally slow to adopt new concepts, the real estate industry is finally embracing technology and using it to leverage its power. One element of technology that has taken off like wildfire in the industry is big data, which can be defined as “extremely large data sets that may be analyzed computationally to reveal patterns, trends and associations, especially relating to human behavior and interactions.” In the highly competitive, fast-paced world of commercial real estate, big data is one method companies are using to form strategies and target end users—and it’s been quite effective.
“When combined with high-quality real estate data, big data can elevate the decision-making process for businesses and their customers,” Daren Blomquist, VP for real estate data firm ATTOM Data (formerly known as RealtyTrac), tells Real Estate Forum. “For instance, Ten-X, an ATTOM Data Solutions customer, is mashing up data from the ATTOM Data Warehouse with real-time user behavior on its website, as well as from Google search trends, finding relationships between the two data sets and using that as a foundation to forecast housing-market conditions.”
Sheridan Hitchens, VP of data products for Ten-X, tells Forum that access to big data simply makes a real estate professional’s life easier in a variety of ways. “This doesn’t just mean transactional- and asset-level information about specific real estate properties—which is our traditional understanding of real estate data—but also includes encompasses access to demographic, school, neighborhood and broad economic information. This data isn’t limited to numeric figures, either; photos, videos and other multimedia all represent major informational leaps we’ve been able to make in understanding an asset or market.”
At a high level, the data movement can be divided into three components, says EquityMultiple CEO Charles Clinton. “First, there’s organizing and presenting data we already have in more useful ways. Second is capturing data that individual users or companies are already producing and then aggregating and sharing it to create a fuller picture. The final component is seeking out new data sources and tracking them for the first time.”
On a broad level, big data has the power to increase insight across the real estate industry by giving players a better ability to capitalize on information and identify trends, ResiModel’s CEO, Elliot Vermes, tells Forum. This applies across the industry, from the acquisition teams to financing to property management.
“In terms of property management, big data can help you analyze demographic and supply/demand trends, which will ultimately influence various management decisions,” says Vermes. “For example, if you anticipate population growth in an area, you can take the risk of pushing rents higher. On the other hand, if there are negative demographic trends, you’ll know that retaining tenants is the highest priority, since attracting new ones will be challenging.”
Big data’s impact on investment may be even more significant since it helps acquisitions teams gain deeper understanding of the key financial information at hand, enabling them to make better investment decisions. “The more confident they are that they know what is going to happen, the more aggressively they can bid on a deal,” says Vermes.
Like other forms of investing, real estate investment is all about attempting to predict the future, Vermes points out. “When making investment decisions—be it a venture-capital firm, an individual buying stock in Apple or Google or a real estate investor—in essence, you’re asserting confidence in your ability to determine how those assets will be valued down the road. In short, big data’s value stems from its ability to help you predict the future with more accuracy.”
Big data is also useful in sussing out assets’ true value, Joe Derhake, CEO of Partner Engineering & Science, tells Forum. “Tenants demand ‘quality real estate,’ but what exactly is that? A tenant sees an office or residential building as the sum of its different features: its location, finishes, amenities, common space, Internet connectivity and energy efficiency, etc. Of course, the market makers can track the effect of location on real estate prices easily, but the data set gets more complicated when you try to account for how tenant demand for various building features plays into the equation. As owners, investors and lenders are able to collect and analyze big data more carefully, they will be able to tease out the value created by the other important variables and ultimately make smarter business decisions.”
Big data is also being used to monitor building systems, says Norm Miller, Hahn Chair of Real Estate Finance at the Burnham-Moores Center for Real Estate within the School of Business at the University of San Diego. “It has become cliché that you ‘can’t manage what you can’t monitor,’ so real-time measurements through sensors and temperature readers, air-quality monitors and motion sensors allow a wide array of new building-information management systems to come to market and into play.”
The financial side of real estate and real estate lending is data rich, and big data represents a critical opportunity to capture and utilize available information comprehensively, creating much better insight into the commercial real estate marketplace, David Tobin, founder of Mission Capital Advisors, tells Forum. “Essentially, big data is bringing us close to having the ability today to examine all loans, borrowers and tenants and the associated trends simultaneously. This will bring real estate further into the institutional-investment arena and allow for more informed decisions.”
Big data can help determine the creditworthiness of prospective tenants and their ability to pay rent, close on a deal or qualify for a loan, says Morgan Stewart, a senior attorney with Manly, Stewart & Finaldi. “Big data also enables the real estate industry to analyze market trends and predict performance of specific markets and product types,” he says.
Of course, there are drawbacks to every industry advancement, and big data is no exception. While sources for this story are extremely positive about big data’s positive attributes, they also point out the caveats to this type of technology.
“We at ATTOM Data Solutions tend to believe that more data is always better,” says Blomquist. “The big asterisk on that axiom is that the data needs to be curated with care so that it provides a reliable foundation for any decision. We’ve found over the past four years in the data licensing business many examples of other operators providing public-record data that is in disarray and extremely difficult to digest—especially for smaller companies without an army of data scientists. If that is happening in the world of public-record real estate data, just one slice of the big data universe, it is likely happening in other parts of the big-data universe as well.”
SIDEBAR: CYBERSECURITY’S ROLE IN BIG DATA
Big data on market trends doesn’t necessarily have a negative impact on the real estate industry unless the information compiled is invalid and used to wrongly advise clients/investors, Morgan Stewart, an attorney with Manly, Stewart & Finaldi, tells Real Estate Forum. But data collected on clients or consumers, however, is a whole other story. “Real estate brokers, property managers, mortgage brokers or any other industry entity that collects information on individuals or businesses are legally responsible for protection of information collected.”
Stewart says security breaches of sensitive information can not only damage a company’s reputation and the confidence of its clients and employees, but it can also be costly. “Both state and federal agencies hold businesses that collect consumer information accountable for protecting that information, and noncompliance subjects a business to heavy fines. Therefore, you should clearly understand the extent of your legal responsibility to safeguard a tenant’s personal information. The Federal Trade Commission Act, for example, requires businesses to protect and properly dispose of information they collect.”
The result of the Gramm-Leach-Bliley Act, the FTC’s Safeguard Rule requires financial institutions, as well as business that provides financial services or products—even tax preparers, real estate appraisers and property managers—to have measures in place to keep customer information secure, Stewart elaborates. “Failure to comply with this rule carries civil penalties of up to $10,000 per violation for officers and directors personally liable, and up to $100,000 per violation for a business. Having disclaimers against guaranteed protection of customer information is not a defense.”
Additionally, the FTC’s Disposal Rule applies to any business or individual that uses a consumer report for a business purpose. “This rule requires businesses to take appropriate measures to dispose of sensitive information,” says Stewart. “Noncompliance results in a $50,000 fine. For example, if a landlord throws a consumer’s credit report in an unsecured dumpster or a business computer containing a consumer’s credit report, social-security number or other identification, credit card or banking information is stolen, the landlord can be fined.”
Under both FTC rules and state consumer protection and privacy laws, fines can be levied regardless of whether the compromised information results in an unauthorized use, Stewart points out. “So, unless your customers’ personal information is scratched into ledgers with quill and ink or maintained on a non-networked computer—an avenue taken by many companies—it is critical to shred paper documents and ensure business laptops and other technology have encryption software that protects consumers from identity or financial theft.”
There are various areas of vulnerability with big data in the real estate industry, according to Jorge Rey, director of information security and compliance for CPA firm Kaufman Rossin. “In some areas (e.g., multifamily investments), property managers may obtain sensitive information—such as financial accounts, credit reports and government-issued documents—from their tenants or potential tenants. Property managers may store and/or maintain information that could be targeted by cybercriminals (e.g., driver license, bank accounts, address or credit reports). Currently, cybersecurity is a concern in the commercial real estate industry, but is generally not being prioritized as a high risk in the way that some other industries, such as financial services and healthcare, have been managing that risk. As such, commercial real estate companies that have not considered cybersecurity risk as a top priority may find themselves ill prepared to detect or prevent data security incidents. As the sophistication of cyber criminals continues to increase, the companies within the industry should respond accordingly and consider ways to bolster their defense against cyber threats.”
Cybersecurity is critical for any and all transactions involving the transfer of financial and confidential, proprietary information (as well as other types of information, which may not play a role in a CRE transaction), Michelle Schaap, a member of Chiesa Shahinian and Giantomasi’s media and technology, construction and corporate and security practices, tells Forum. “In some cases, a firm’s acquisition, sale or lease of property may be part of a larger transaction—which could have positive or negative connotations for parties beyond the real estate component. While the ultimate deal closing may be of public record (by the recording of a deed or lease), keeping this information confidential until the time of the closing may be critical to either or both parties to the transaction—and is likely a requirement in the deal documents.”
For example, if a firm is planning to close its operations in a specific location, advanced notice of the pending sale of the offices may create issues for that company, Schaap says. “If a company is expanding into a new market, it may want to keep this information confidential until it is prepared to announce the move publicly. And if the real estate deal is part of larger transaction, e.g. the sale of a company, confidentiality prior to the closing may be paramount.”
Were either side of the transaction or its advisors to experience a cybersecurity “event,” the use of this confidential information by a third party could materially adversely impact either or both parties to the transaction in a variety of ways—including its stock (if it is publicly traded), its customer relationships and its employee relationships, where an office closing had not yet been announced, Schaap points out. “A breach may also reflect a broader security issue which could impact a larger overriding transaction, such as a merger.”
Further, where payment instructions are transmitted electronically, cybersecurity is paramount, Schaap adds. “There have been several cases involving the loss of closing proceeds due to false wiring instructions after the original electronic transmission of correct wiring instructions. Using insecure means to transmit or confirm wiring instructions opens the door to a bad actor accessing credentials or information and then sending new instructions that seem to be authentic. Too often, people accept such changed information without verifying the source by telephone, thus allowing millions of dollars to be stolen through reliance upon misinformation.”
Schaap adds, if the real estate transaction is, in fact, part of a larger transaction, and one of the parties has a security breach, it would likely need to be disclosed to the other party, which could significantly impact the deal terms and purchase price.