Local talent. That was the primary metric, as it turned out,that Amazon was using when it was searching for its secondheadquarters. It was decidedly not, as many originally thought,using the typical site selection factors that a large firm turns towhen evaluating different locations.

Amazon's criteria for this investment is the perfectillustration of the changing way companies approach investment incommercial real estate—that is, they are taking into account newsources of data as they evaluate various choices, according to K.C.Conway, chief economist at the CCIM Institute. So too are somelenders as they underwrite properties, he notes.

One example: “the industry still values industrial CRE on aprice per square foot basis but the way companies are investing anddetermining value is on a cubic foot basis,” Conway says.Warehouses are getting taller, in other words, and a cubic footbasis is more appropriate.

Some lenders, such as those in the debt space, are using thesenew metrics in their valuations, Conway says. Others, though, arenot, namely the construction and traditional bank lenders. Thisdichotomy can be seen in other areas as well. Forward-lookinglenders, for instance, are also increasingly adopting newtechnology to help better source and service commercial real estatetransactions.

It is natural that the twain are starting to meet—new datasources coupling with the latest in such advances as predictiveanalytics. The result? A finance function that is getting smarterand smarter for both lender and borrower alike.

K.C. CONWAY Chief economist atthe CCIM Institute

In the case of the borrower, says Patrick Rafferty, vicepresident of Product at Reonomy, many are now better informed aboutwhich lenders could be the best to work with. “They might have anacquisition opportunity they are pursuing and are looking for apartner for financing.” New tech and data sources make it easy tosee who has made loans recently on similar assets.

Lenders, too, have a wealth of new options that deliverbenefits—benefits that eventually filter down to the borrower.

Reonomy, for instance, works with a number of lendinginstitutions and debt brokerages to identify leads at the top ofthe funnel,  Rafferty says. One product offers a view intoproperties that not only include such facts as square footage andprior sales price, but also offers insights tied to thoseproperties. “It understands the sales and mortgage history, forexample,” he says. “It knows who the key decision makers are thatsit behind that LLC. Ownership in commercial real estate can oftenbe obscure.” He adds that the company is starting to scoreproperties using that information to come up with insight into aborrower's proclivity to refinance, but that product is not on themarket yet.

Such technology is a departure from the traditional lendingmodel, which is still very relationship oriented in many quarters,focusing on a broker's network and the lender's brand, Raffertysays. As this technology comes into focus, “people will start to bemuch more proactive with lending.”

Many other lenders, even if they are not reaching for theseadvanced methods, are using more standard technology to changetheir lending behavior. For example, Rafferty says, many lendersare now using technology to expand downmarket. “Instead of justhaving high-powered sales people trying to facilitate financingthrough their networks there are also trying a few more approaches.These range from digital ads as well as inbound calls centers totarget smaller mid-market opportunities. “I don't know if anyonehas completely figured this out yet, but it is clear that theappetite to move downward is growing and people are trying outtechnology to facilitate that,” Rafferty says.

The ultimate goal for CRE finance technology—one that hasn'tbeen reached yet—is a dashboard that tells users how the market isbehaving and what it is likely to do next, Rafferty continues.

“We have introduced descriptive data into the mix. Soon we willsee prescriptive analytics applied to that data. This technologywill be able to make predictions that are based on the descriptivedata.” Rafferty believes the market is about five years away frompredictive scores that are accepted as industry standards.

We are starting to see signs of this trend already. Last yearHost Hotels & Resorts announced a joint development agreementwith IBM Research, designed to enhance the company's predictiveanalytics capabilities. The partnership combined Host's enterpriseanalytics platform with IBM's expertise in AI and machine learning,“to seek to maximize investment value across theportfolio.”  Earlier this year Sourav Ghosh, senior vicepresident of Enterprise Analytics at Host Hotels, gave the marketan update on that partnership when he told Nareit that the REIT'spartnership with IBM has allowed it to make better capitalallocation decisions, “whether it's from an investment perspective,from a disposition standpoint, or even when we're investing capitalfor renovations.”

Not all companies have the heft, or resources, to partner withIBM on such a project. The forward-looking ones, though, areaggressively tapping new data sources that can deliver anadvantage, CCIM's Conway says.

PATRICK RAFFERTY Vice presidentof Product at Reonomy

Consider the metrics used to evaluate the local job market. “Wehave been conditioned in our training that job growth drives demandfor commercial real estate and that the government's Bureau ofLabor Statistics (BLS) is the resource to consult,” he says in areport. “Due to dated methods, BLS struggles to accurately estimateemployment growth.” Companies have found though, that ADP's National Employment Report (NER), produced jointly withMoody's Analytics, and LinkedIn's Workforce Report with Skills-GapAnalysis are good alternative options.

ADP processes payrolls for approximately one-fifth of thenation's private payroll employment, and its monthly employmentdata is a credible estimate of private employment activity,according to the CCIM report.

LinkedIn's Workforce Report draws on employment data from themore than 190 million workers in the US with LinkedIn accounts.LinkedIn's monthly jobs report also includes skills-gap analyses atan MSA level stratified across 50,000 employment sectors, frombrokers to welders.

“Had Amazon utilized the LinkedIn Workforce Report withSkill-Gap Analysis before making its HQ2 split decision, it wouldhave known that New York ranked worst for available skilledworkforce—below even Seattle or San Francisco,” Conway says.

NEW DATA SOURCES CRE INVESTORS SHOULD TAP

CCIM Institute has compiled a list of new data sources thatcommercial real estate investors will find invaluable as theysource new deals. Following are excerpts from that report.

Global Business Intelligence

A good global resource is Trading Economics. Leveraging officialsources, the site offers verifiable data from 196 countriesincluding “historical data for more than 20 million economicindicators, exchange rates, stock market indexes, government bondyields, and commodity prices.”

A Proxy for GDP

A great proxy for GDP is the rail traffic data produced by theAssociation of American Railroads. Weekly and monthly rail trafficdata and the more comprehensive RTI report tell us what commoditiesand goods are moving, where they're headed, and at whatvolumes.

If you're looking for a comprehensive “CliffsNotes” to theeconomy, head to Calculated Risk, a finance and macroeconomics sitethat tracks and synthesizes all the pertinent economic news of theday, the month, and the quarter. Here you'll find just about everymacroeconomic data point and historical trend aggregated from theprimary sources—filled with prebuilt charts and rich analysis toput any economic metric in perspective and proper context. One ofthe site's most valuable tools is its Weekly Schedule that tees upeverything you need to know—from jobs and GDP to housing starts andthe Federal Reserve.

Small Business Metrics

Small and midsize business activity is critical to the health oflocal communities and commercial real estate activity and materialto leasing activity. The monthly Small Business Optimism Index fromthe National Federation of Independent Businesses is a must ifyou're conducting feasibility studies or market, valuation, andunderwriting analyses. With over 45 years of small businesseconomic trends data at its disposal, NFIB delivers insights oneverything from labor markets to capital spending to creditmarkets. For instance, the index reached a record high of 108.8 outof 120 in 2018, helping explain small business growth last year—andmaybe its decline to 101 in 1Q2019.

Supplementing this resource is the National Center for theMiddle Market, which promotes and supports the growth and expansionof middle-market companies. This business sector—companies withannual revenue between $10 million and $1 billion—represents 33% ofprivate sector GDP in the U.S. and is the third largest globaleconomy. Housed at The Ohio State University, NCMM is the leadingsource of research and data analysis on the middle-market economyand acts as an incubator for the next generation of unicornstartups.

Sector-specific Sources

Another noteworthy source is Dunnhumby,  a customerdata provider whose expertise in retail and grocery industry is ofparticular interest to commercial real estate. The company goesbeyond the general information offered by other organizations andtakes a deep dive into behavior and trends of the nation's top 56grocer brands.

The Association of General Contractors produces a monthly surveythat provides a thorough understanding of what general contractorsare experiencing and forecasting.

The Engineering News-Record offers a monthly periodical with aconstruction economics section and a 20-city index that detailscurrent and historical data on actual material and labor costs.

WILL VTS AND SIMILAR SOFTWARE ELIMINATE LEASING BROKERS?

Backed by investors led by the technology investment arm ofBrookfield Asset Management, with GLP, Tishman Speyer and venturecapital firm Fifth Wall, VTS is aggressively investing in andexpanding its software that helps landlords track and manage tenantleasing. It raised $90 million in a recent funding round in arecord CRE tech venture financing. The company stated the fundingwill continue to deepen its current software capabilities, andaccelerate the launch of its end-to-end commercial real estateleasing product Truva, which will go live later this year.

One real estate industry expert in the proptech spacecharacterized the crux of the VTS software as providing owners theability to do deals directly with the end users. “It's abouteliminating brokerage commissions. So, this is really bad news forJLL, CBRE, Cushman or other brokerage firms,” he said.

He explained with a hypothetical that if an owner can increasetheir net income by not paying commissions to brokers, the impacton the value of their portfolio would be much larger than just thedollar amount of commissions that were saved, because real estateis typically valued at a multiple of net income, called a cap rate.If a cap rate is 5%, each dollar of saved commissions increases thevalue of the portfolio by $20 dollars.

“If the real estate firm's portfolio is worth $350 billion, andthe firm increases net income by 6% by not paying commissions tobrokers, the impact on the value of the portfolio would be $35billion,” he said. “That's why the big property companies arewilling to invest big dollars up front. The software willdramatically reduce commissions. If I can invest $90 million in VTSand potentially make $35 billion in portfolio value from it, Iwould do that deal all day long.”

VTS allows pricing management where owners share information onrents. Through benchmarking, they can see what other owners arepricing. “There is no broker involved because it's owners sharingthat data,” he explained.

Companies like Brookfield have multiple people in buildings,including security guards and property managers. Once tenants getinformation online, they can directly visit the buildings. Thecompany employees could show the property.

Jonathan Kaufman Iger, the CEO of Sage Realty, the leasing andmanagement division of The William Kaufman Organization, says thathis company was one of VTS's first customers. He opined while noteliminating the role of brokers the technology will be enough of adisruptor to change brokers' jobs.

He said technology is the disruptor of the real estate industry.But he pointed out even with the flourishing of online resourceslike Trulia and Zillow, residential brokers continue to thrive.

Iger described the VTS software as “starting to provide tools totruly unlock data to make it unbelievably actionable for landlordsand operators.”

VTS landlord clients pay additional fees for modules thatprovide information outside traditional brokerage services,according to Iger. For example, VTS can indicate whether thelandlord is going to get a return on investment. The system tracksrents and TI costs, replacing more cumbersome record-keeping ofdeals on Excel spreadsheets.

But as to how it will directly affect brokers, Iger said,“Technology is making it more transparent and easier to find space.But that's not the only thing that brokers do.”

On one end, he described a hypothetical with a broker taking atenant to 10 spaces, trading paper on three or four, helping thenegotiations and handing it off to an attorney—maybe stayinginvolved in the negotiations for a couple more months. The brokerfinally receives a $500,000 check (gross payment), not from theclient but from the landlord. “I think 99% of the time if thebroker is truly being honest with you, they cannot say, 'Yeah, Iprovided $500,000 of value.' That's just the bottom line,” saidIger.

On the other end, he added that if you're JLL's Frank Doyle withan 18-month assignment to relocate Deutsche Bank into over amillion square feet of space, accounting for significant dynamicswith their relocation, their future growth or contraction, and howthey tie into base building systems, that clearly points to theadvisor's providing value.Iger says VTS and similar technology willmake brokers more service-oriented.

“They are going to need to provide financial analytics fortenants to make informed decisions on the terms of the lease thatthey sign,” he said. As an example of added value, Iger stated,“The broker can make sure that you're asking the right questions tounderstand with how you operate your business if it's the bestbuilding for you. It doesn't and it shouldn't come down to simpledollars and cents and whether I like the look of that lobby.”

The source who opined the software is more of a direct threat tobrokers, stated JLL and CBRE are clients who also use thesystem—because the landlords who hire such firms require thebrokers' participation. However, Iger also noted brokers can usethe VTS system as a tool to build tour books to show listings totenant clients.—Betsy Kim