May 30, 2024

Real Estate is Long Overdue for Operating Insights

Discover how data is revolutionizing real estate operations as we address concerns about implementation costs and complexity, emphasizing the necessity of standardized KPIs and data sharing for effective management. Looking ahead, we discuss emerging trends in smart systems, highlighting the importance of interoperability and seamless integrations.

Thru Shivakumar

Data-Driven Real Estate Operations: A Paradigm Shift

Imagine a world where real estate could operate as efficiently as a factory assembly line. Every human and building system works seamlessly together, boosting productivity, increasing value, and saving costs.This vision is quickly becoming a reality as data has transformed how people run their real estate operations.

With the rise of intelligent building software systems and IoT, building operations can now be monitored and optimized so real estate can run based on operational insights and market benchmarks. Until now, BOMA (Building Owners and Managers Association) was one of the few organizations that provided benchmarking per square foot basis for detailed operating costs. While very useful, this information is not real-time, gets stale quickly, and is self-reported and survey-based. In no other major business operation would expense benchmarking and be relegated to the sidelines. However, we do see it starting to come front and center. Understanding building operations through the lens of data is crucial for modern real estate operations and portfolio management.

An office building is a significant operating ecosystem comprised of thousands of people, hundreds of workers, and typically fifteen to thirty disparate, disconnected building systems. Yet, unlike other industries, real estate has been slow to adopt operating KPIs, focusing instead on only financial metrics alone.

What other sector would we neglect operating KPIs and still expect peak performance?

Traditional vs. Modern Real Estate KPIs

Let’s just briefly compare the typical operating KPIs of a manufacturing line to an office building to see the difference in an operation.

Key differences between manufacturing and real estate KPIs include their focus areas, metrics types, and time horizons. While, manufacturing KPIs concentrate on production efficiency, quality, and equipment performance, real estate KPIs emphasize financial performance, occupancy, and tenant satisfaction. Manufacturing relies on operational and process-oriented metrics, whereas real estate focuses more on financial and top line tenant-related metrics. Additionally, manufacturing KPIs often track short-term operational performance, whereas real estate KPIs may monitor longer-term financial performance and asset value. Commonalities between the two sectors include a prioritization of metrics that directly impact profitability and efficiency. For instance, downtime in manufacturing can be compared to vacancy rates in real estate, as both represent non-productive periods.

But the real question we need to ask is: Is this the best we can do?

We argue that it shouldn’t be. With real estate office sector headwinds Net Operating Income (NOI) performance has been negatively impacted by lease renewals at reduced rates, early lease terminations, and smaller tenant footprints, and rising costs. NOI for office spaces is projected to keep declining due to weakening market fundamentals, especially as more leases in demand-challenged markets come up for renewal. Thus, a tight eye on expenses and operating efficiencies should be a core KPI and focus. Fitch Ratings observed that in 2023 expenses grew 4.5x faster than revenues in the office sector. Additionally, new laws and operating norms will introduce new KPIs into all real estate, such as space utilization, people occupancy, staffing ratios, energy and carbon baselining and accounting, tenant hospitality index, etc.

Let’s look at some assumptions on what expense control can look like for property valuations in a declining revenue market. The below table assumes a 500,000-square-foot building in a market with a seven percent (7%) cap rate.

So What Now?

Traditionally, real estate operations have been highly localized, with little standardization across regions, countries, and portfolios. Decisions are made at the building level rather than the portfolio level. Currently, only financial data is standardized and consolidated, while access to clean, recent, operational data is severely limited. Smart building systems, IoT (Internet ofThings), human experience, automation, and data access are key concepts defining this new real estate management era. These technologies enable integrated systems that automate and optimize building operations and systems, creating a network of interconnected devices that communicate and exchange data. The quality of interaction between occupants and the building environment is enhanced, and technology-driven processes reduce the need for human intervention. Access to operational data is now more accessible, allowing for better decision-making.

The Future of Real Estate: Embracing Smart Systems

Smart building systems streamline operations by automating routine tasks, optimizing resource use, and providing real-time insights. Case studies increasingly show businesses that improved efficiency using operating KPIs, seeing better space utilization and resource management. The impact on productivity and cost savings is significant, especially as enterprises seek to understand their space needs and optimize usage. Efficient operations lead to enhanced productivity and lower operational costs.

Smart systems reduce operational costs through better energy management, predictive maintenance, and streamlined operations. Statistics show significant cost savings, such as $7.19 per user per month in savings or $0.12/ psf with software consolidation and a reduction of 1.9 full-time equivalent (FTE) in labor hours. The long-term financial benefits are substantial. The value of real estate can increase by 30-50% with the integration of smart building technologies, providing a significant return on investment.

Enhanced decision-making is another significant benefit of smart systems, as they provide actionable insights through data analysis.Examples of businesses making data-driven decisions lead to improved strategic planning and resource allocation. Enhanced strategic planning is critical for optimizing real estate portfolios. Companies that leverage data to inform their choices are better positioned to adapt to changing market conditions and maximize their investments.

Highlighting companies successfully using smart systems to improve their operations, such as increased energy efficiency and better space utilization, provides real-life examples of the benefits of adopting smart systems. Insights from these examples demonstrate the tangible benefits of adopting smart systems, including enhanced productivity, cost savings, and improved decision-making. However, shared concerns include the high cost of implementation and the complexity of integrating different systems. These concerns can be mitigated by adopting a centralized strategy for real estate operations. While each building is unique, standardized KPIs and data sharing can provide a cohesive framework for managing diverse portfolios. Understanding staffing ratios and service ticket volumes is essential for optimizing operations.

Overcoming Challenges and Embracing the Future

Emerging trends in smart systems focus on smart data and insights, emphasizing interoperability and seamless integration of all the various building, IoT, and software systems. Future developments in independent data products will enhance the ability of systems to share data and work together.Companies that adopt a strategic approach to their real estate and digitize their operations will be better positioned for success. Businesses can significantly improve efficiency, reduce costs, and enhance decision-making by focusing on operational KPIs. The future of real estate is smart. Businesses and REITs must adapt to this new world to stay competitive and maximize their investments.

Ready to get started? Explore smart system solutions today withCohesion and unlock the full potential of your real estate operations with data-driven insights. Give us a call, use the form below, or book a demo today.

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